Income Tax Flashcards
Estimated Tax Amount
No penalty will apply for 2023 if the taxpayer pays:
- 90% of this years tax
OR
- If AGI below $150k: 100% of the prior year’s tax liability
- If AGI above $150k: 110% of the prior year’s tax liability
Calculation of Kiddie Tax Standard Deduction with Earned and Unearned Income
The standard deduction is the greater of:
- $1,250 unearned income
or
- Earned income plus $400, but no more than the single person standard deduction ($13,850 - 2023).
Note: These numbers are given on the exam.
W-2 Tax Breakdown
Social Security (Up to $160,200)
- Employee* 6.2%
- Employer^ 6.2%
- Total 12.4%
Medicare (Up to Infinity)
- Employee* 1.45%
- Employer^ 1.45%
- Total 12.4%
Total
- Employee* 7.65%
- Employer^ 7.65%
- Total 15.3%
*Not deductible by the business owner/taxpayer / Medicare tax increases to 2.35% after $250K of wages MFJ.
^ Deductible on the company’s tax return
Credit for childcare and dependent care expenses
Nonrefundable
Under age 13, both Parents work
The credit is a percentage of expenses paid for care of a dependent that allows the taxpayer to work and earn income. In figuring the credit, qualifying expenses are limited to $3,000 for one dependent or $6,000 for two or more dependents.
Depending on income, a credit percentage applies.
Use 20% of the allowable expense on the exam.
Child tax credit
- Age of children
- Number of children
- Amount of credit
- Refundable amount of credit
- MAGI phaseout
Partially refundable
16 and under or under 17 (NOT 17)
Individuals may claim a child tax credit of $2,000 (2023) for each qualifying child under age 17.
Qualifying child: son, daughter, stepchild, or foster child.
The amount of the credit is phased out above $400,000 MAGI for married filing jointly and $200,000 single.
Up to $1,600 per child (NO LIMIT) is a refundable tax credit (2023).
Credit for other dependents (family credit)
- $500 nonrefundable credit
- allows a taxpayer to claim a credit for dependents in your household that do not meet the definition of qualifying child.
The taxpayer may not claim the credit for providing support to a non-child dependent (typically an elderly parent) having taxable income exceeding $4,500, as adjusted for inflation.
Section 1244 Qualified Small Business Stock
- Only applies to the first million dollars of stock (C or S) initially issued
- Loss of $100,000 per year (JT) ($50,000 otherwise) is ordinary (not capital loss)
Example
Bob (married) starts a corporation qualifying under Section 1244. His business fails. Bob loses $150,000. If he closes the business, what kind of losses can he take? He can claim a 1244 ordinary loss of $100,000 and a $3,000 capital loss. Without 1244, he can only take a $3,000 capital loss and a $147,000 carry forward. A Section 1244 election is an advantage.
Depreciating 179 Intangibles
A business may own assets with no physical substance. However, certain assets represent a valuable right or economic attribute, like goodwill.
Intangibles are amortized under a tax section called Section 197 intangibles.
The recovery method is similar to straight-line depreciation.
Can 179 Deduction Create a Loss?
No. Write it off over multiple years.
Exception to 2 years of last 5
(Section 121)
An exception is available if a taxpayer lives in the residence less than two years and moves because of a new job, for health reasons, or “unforeseen circumstances” like marriage.
Get to take a proportional exclusion (ex 6 months = 25% of the $250k/$500k)
Note: The typical exception will involve “move because of a new job”. A minimum 50 mile move is required.
Less than 50 miles, the exception doesn’t apply. Be careful with the distance.
Passive Activities Losses
Owns an interest in a business, but does not materially participate (like a limited partner) in the business, the interest is passive for federal tax purposes.
The owner of the passive activity (the limited partner) can only deduct the loss to the extent of income generated by other passive activity(s).
Types of Passive Activities
There are several kinds of passive activities.
- Limited partnership (with some exceptions)
- Individuals may own equity interests in business enterprises without rendering any personal service to the business (not materially participating).
Many partners and S corporation shareholders have no operational involvement in the business activity of these enterprises, yet these owners are allocated a share of operating income and losses. This income or loss will be considered passive.
There are two exceptions to the passive rules: material and active participation.
Material Participation
Exception to the passive activity rules
Involved in the operation of the activity on a regular, continuous, and substantial basis.
Active participation
Exception to the passive activity rules
- Active participation is a less demanding standard than material participation.
- It merely requires bona fide involvement in management decisions.
A limited partner may never be an active participant.
Note: Active participation can produce income or loss. The income or loss is generally reported on Schedule E.
$25,000 loss for Active Participants
Qualifying taxpayers may deduct up to $25,000, per year, of net losses from real estate activity from their active or portfolio income.
This deduction (up to $25,000) is phased out for taxpayers with AGIs between $100,000 and $150,000 on a $2 for $1 basis.
