EA Part 1 Session 3 Flashcards
Net Investment income includes:
a) Interest income, except Municipal Bonds, b) Dds and capital gains, Rental and Royalty income c) No qualified annuities, d) Income from trading of financial instruments or commodities, Income from businesses that are passive activities for taxpayer like limited partnership.
Net investment income doesn’t include Earned Income or Pension Income,
MFJ $250,000
MFS $125,000
Single $200,000
Note: Calculate the NII when MAGI is higher than the threshold above.
It would be the lesser of excess of MAGI threshold or the total NII multiply by 3.8%.
Additional Medical Tax Form 8959
only apply to Earned income rate of 0.9%. The tax is assessed on Earned Income in excess of the following:
MFJ $250,000
MFS $125,000
Single, HOH, or QSS $200.000
The employee (or self-employment) is the one paying not the employer.
Deductible Interest:
Qualified interest payments are deductible as itemized deductions on Form 1040, schedule A. Deductible interest includes:
1- Home mortgage interest ( Personal home for primary residence)
2- Late fees on a mortgage loan: If someone paid a late fee because the paid their mortgage late = late fee and can be deducted. EXAM
3- Point on a mortgage loan
4- Investment interest expense (any interest incurred on loan used to purchase taxable investments. NB: this is up to the amount of Net Investment Income not more. Even if the Investment interest expense is higher than NII go by the NII amount.
NB: If you don’t have investment income you can carry the investment expense for the following year.
A taxpayer can deduct the mortgage interest on up to 2 personal homes.
If taxpayer pays off their mortgage early. the taxpayer may have to pay a mortgage penalty. The penalty is deductible as mortgage interest on Schedule A.
Taxpayers can deduct mortgage interest on a main home and a second home.
CHARITABLE CONTRIBUTION
CHARITABLE donations of appraised stock are usually valued at the FAIR MARKET VALUE OF THE STOCK ON THE DATE OF THE DONATION.
Contribution to appreciated property is 30% of AGI limit.
Any noncash Charitable Contributions ‘donation’ over $500 must be described on Form 8283
For donation of less than $250 to a qualified charity you need as documentation: a cancelled check, bank or credit union statement, credit card statement, or a receipt that shows the name of the qualified organization, the date of the contribution, and the amount of the contribution.
The value of a person’s time and service is not deductible
Child and Dependent Care Credit:
This is for: a) Care for a child under age 13 or b) Care for a disabled dependent or a disabled spouse of any age.
ADOPTION CREDIT Form 8839
Is not refundable, nut any amount the taxpayer cannot claim on the current year’s return can be carried over for up to 5 years.
For adoptions finalized in 2023, there is a federal adoption tax credit of up to $15,950 per child. For an adoption of a child with special needs, this means that you can claim the full adoption credit, even though your actual expenses are much less.
A foreign child with a disability would not qualify for the special-needs adoption credit.
Costs for adopting a step-child, or the child of one’s spouse, are not qualifying adoption expenses. The costs of a surrogate parenting arrangement also are not deductible.
Child Tax Credit and Other Dependents:
In order to qualify for the Child Tax Credit or Additional Child Tax Credit, the child must be under the applicable age limit (which is 17 in 2023) at the end of the tax year. There are no exceptions.
The maximum Other Dependent Credit ‘ODC’ is $500 for each
dependent.
The maximum amount of Child Tax Credit is $2,000.
NB: ODC can be claimed for
a) Dependent of any age, including those who are 18 or older
b) Dependents who have social security numbers or individual taxpayer identification numbers ‘ITINs’
c) Dependent parents or other qualifying relatives supported by the taxpayer.
d) Dependents living with the taxpayer who aren’t related to the taxpayer.
In order for the taxpayer to claim the Child Tax Credit, the child must have an SSN that’s valid for employment and issued before the due date of the return (including extension).
Additional Medicare Tax
Note: Higher-income taxpayers must pay an additional Medicare tax.
The additional tax rate is 0.9% of employee income, and applies to “earned income” like wages and self-employment income. Once earnings reach $200,000 in a calendar year, ($250,000 for MFJ and $125,000 for MFS) the Additional Medicare Tax will apply.
Married Filing Jointly $250,000
Single, HOH, QSS $200,000
Married Filing Separately $125,000.
If your income exceeds the threshold you will owe both Affordable Care Act taxes The 0.9% additional Medicare tax and the 3.8% net investment income tax
