Federal Taxation V: Individual Issues and AMT

Question 1

Dependents: Qualifying Child Tests

Answer 1

1. Relationship Test (natural/adopted/step/foster child, sibling, step-sibling, descendant of these)
2. Residence Test (> 1/2 year)
3. Age Test (< 19 unless student, then < 24)
4. Joint return test (dependent can’t file married-jointly)
5. Citizenship/Residency test (citizen/resident of US or resident of Can/Mex)
6. Not self-supporting test (must not have provided > 50% of his/her own support)

Question 2

Dependents: Tiebreaker rules

Answer 2

1. If parent, parent claims exemption unless another eligible individual has higher AGI
2. If both parents want to claim: one who child lived with the longest wins
3. Same as 2, but child lives with both parents at the same time, higher AGI wins
4. If no one is parent, highest eligible AGI wins.

Question 3

Dependents: Qualifying Relative Rule

Answer 3

Relative = all common relatives except cousins.
Must meet:
1. Support test (>50%)
2. Gross Income test (taxable income must be less than the exemption amount for the year)
4. Joint return test (dependent can’t file married-jointly)
5. Citizenship/Residency test (citizen/resident of US or resident of Can/Mex)

Question 4

Phaseout of Exemptions Shortcut

Answer 4

All exemptions phased out when AGI is $122,501 over trigger ($122,501/$2,500 = 50 steps). Since each step results in a 2% reduction, 100% of exemptions are lost.

Question 5

Tax Calculation Formula

Answer 5

Adjusted Gross Income
- 
Itemized Deductions or Standard Deduction and
Personal and Dependent Exemptions
=
Taxable Income
x
Tax Rates
(determined by Filing Status)
=
Gross Tax
-
Tax Credits
\+
Additional Taxes
=
Net Tax

Question 6

Earned Income

Answer 6

Income generated by personal services as opposed to income generated by property

Question 7

Kiddie Tax

Answer 7

Designed to discourage taxpayers from giving income-generating property to children in order to have the income taxed at the child’s low tax rates

Question 8

OASDI

Answer 8

Old age, survivor and disability insurance (social security)

Question 9

Self-Employment Tax

Answer 9

Consists of two parts imposed at 2x the OASDI rate

1. (SS portion) 12.4% on first $118,500 of SE ceiling. If wages earned higher than that, ceiling is reduced by wages subject to OASDI.
2. (Medi portion) 2.9% on all SE income

Question 10

Self-Employment Income

Answer 10

1. Gross income from SE less deductions associated with the activity (which are FOR AGI)
2. SE income must be > $400 for SE Tax to apply
3. Calculate SE Tax by 92.35% b/c 1/2 of SE Tax is deductible FOR AGI

Question 11

Nanny Tax

Answer 11

Taxpayers, who employ domestic workers, must w/h FICA if cash wages exceed $1,900 (2015)

Question 12

Payroll Taxes

Answer 12

1. SS: 6.2% of first $117K
2. MEDI: 1.45% on all wages
3. Employer matches

Question 13

Hospital Insurance Tax

Answer 13

Additional .9% hospital insurance tax applies to:

1. Joint filers with wages > $250K
2. Single and head of household filers with wages > $200K
3. SE income above these limits
4. Applies only to employees/not employers

Question 14

Alternative Minimum Tax

Answer 14

Separate tax system that calculates broader tax base by modifying taxable income. Mods generally serve to increase taxable income and disallow deductions

Question 15

Formula for computing AMT

Answer 15

Regular taxable income
\+/- Adjustments
\+ Preferences
= AMT Income
- Exemption
= AMT Base
x Rate
= Tentative Minimum Tax before Foreign Tax Credit
- Certain credits 
= Tentative Minimum Tax
- Regular Tax Liability
= AMT (if positive)

Question 16

AMT Adjustments

Answer 16

Often represent income/deductions used to defer taxation of economic income (many are just timing differences that will be reversed)

Question 17

AMT Adjustment: Deprection

Answer 17

Applies to MACRS 3-, 5-, 7-, 10-yr property that is depreciated using 200% declining balance method. AMT adjusts to 150% method.

Question 18

AMT Adjustment: % of Completion

Answer 18

Income over completed contract Income

Question 19

AMT Adjustment: Itemized Deductions

Answer 19

1. No phaseout of itemized deductions
2. Medical deduction only allowed on amount exceeding 10% of AGI
3. No deduction for taxes (must be added back to taxable income)
4. No 2% Misc Deductions allowed
5. Home mortgage interest deductible only if the loan proceeds are used to acquire/improve home

Question 20

AMT Adjustment: Exemptions

Answer 20

If personal exemption or standard deduction was used, must be added back

Question 21

AMT Preferences

Answer 21

Always increase AMT Income

1. Tax-exempt interest on private activity bonds
2. % Depletion in excess of cost basis on certain mineral properties
3. 7% gain excluded from income under qualified small business stock provision
4. Gain on sales of qualified small business stock (9/27/10-1/1/14 and held for 5 years)

Question 22

AMT Exemption

Answer 22

1. (2015) $83,400 if married/joint. $53,600 if not.
2. Phaseout if > $158,900 if married, $119,200 if single
3. Phaseout rate: 25% of amount over trigger
4. If kiddie tax, AMT exemption cannot exceed sum of child’s earned income plus $7,400
5. AMT Tax Brackets: 26% and 28%

Question 23

AMT: Tax Credits

Answer 23

1. Foreign Tax Credits and all personal credits are allowed
2. Preferential rates on capital gains are available for a net capital gain
3. Taxpayers pay > of AMT tentative tax or regular tax (before credits)

Question 24

AMT Credit

Answer 24

1. Created by amount of AMT paid due to timing defferences between regular taxable income and AMTI
2. Can be used to offset regular tax liability in future years
3. Can be carried forward indefinitely

Question 25

AMT Refundable Credit

Answer 25

Greater Of:

1. amount of AMT refundable credit for preceding tax year
2. 50% of long-term unused minimum tax credit

Question 26

AMT: Long-term unused minimum tax credit

Answer 26

Regular AMT credit carryforward reduced by any minimum tax credit for the three immediately preceding tax years