Individual Taxation: Income Tax and Credits Flashcards
How are income taxes calculated?
There is a table listing different filing statuses and ranges within which a tax rate applies
E.g. for 2013, a MFJ return will have all income between $72,500 and $146,400 taxed at 25%
Does the tax rate apply to the entirety of an individual’s income?
No, since then people would be penalized for barely reaching a higher tax rate
Instead, everybody with a given filing status receives the same tax rate for a given range of income, and then only those whose income exceeds that range have the higher tax rate apply to that range of income, and so on
Can a taxpayer be taxed for his children’s unearned income?
Yes, so long as they are under age 14 by year-end
This amount is added to the parent’s income and taxed at that rate, though an amount can be deducted
How much can be deducted from a taxpayer’s children’s unearned income?
For 2013, it is the sum of $1000 and either (a) $1000 or (b) the total itemized deductions relating to that unearned income
What is the alternative minimum tax (AMT)?
Implemented to ensure that taxpayers did not get off easy with their deductions – this provides a minimum tax that must be calculated and compared to a regular tax liability, with the greater amount being the taxpayer’s actual liability
Does a taxpayer receive any sort of benefit for paying an AMT?
The difference between the regular tax liability and AMT can be carried forward indefinitely and applied to future regular taxes (as a tax credit), though not to future AMTs
What is the formula to calculate AMT?
Regular taxable income \+ net operating loss deduction \+/- AMT adjustments \+ tax preferences = AMT income (AMTI) - exemption x AMT rate - various credits = AMT
What is the net operating loss (NOL) deduction?
Any deduction for having a NOL in a business for a given year (or carried to this year from a different tax year)
This has to be added back to compute AMT
What are some items included in AMT adjustments?
(1) standard deduction
(2) second-tier miscellaneous deductions
(3) itemized deductions
(4) tax refunds
(5) interest expenses from investments
For this and other categories when calculating AMT, you will want to look up these items in the authoritative literature
How does the exemption (subtracted from AMTI) work?
There is a given exemption for each filing status, though this exemption is phased out over a particular threshold
What are the AMTI exemptions?
For 2013, MFJ/SS: $80,800 S/HH: $51,900 MFS: $40,400 Estates/trusts: $23,100
Phase-out thresholds: MFJ/SS: $153,900 S/HH: $115,400 MFS: $76,950 Estates/trusts: $76,950
How does the AMTI exemption phase-out work?
If the AMTI surpasses the phase-out threshold, the exemption is decreased by 25% of the amount over the threshold
Thus the phase-out range is four times the exemption amount
What is the AMT rate?
For 2013, if the AMTI (minus the exemption) is less than $179,500, the AMT rate is 26%
Otherwise it is 28%
This threshold is cut in half for MFS status
Which credits are permitted to reduce AMT?
(1) refundable child tax credit
(2) retirement savings credit
(3) foreign tax credit
How do tax credits differ from deductions?
Deductions reduce the amount of taxable income, i.e. the amount of money subject to a tax rate
Credits reduce the tax liability directly
What is the difference between refundable and nonrefundable tax credits?
Both directly reduce one’s tax liability, but refundable credits can also result in a refund by reducing one’s tax liability below zero
What is the earned income credit (EIC)?
A refundable credit for those who have earned low incomes in a given year – applies especially if the taxpayer has qualifying children
Also called the earned income tax credit (EITC)
What are the general requirements to attain the EIC?
(1) if married, must have filed jointly
(2) must be eligible to work in the U.S.
(3) must have earned taxable income
Who counts as a qualifying child for an EIC?
(1) shares taxpayer’s U.S. residence for more than half the year
(2) is permanently disabled, under 19 or, if a full-time student, under 24
(3) is the taxpayer’s child, stepchild, sibling, or a descendant thereof (or a foster child)
(4) has valid SS number
If a taxpayer does not have a child, can he still claim the EIC?
Yes, though it will be reduced
Must be 25-65 years old
How much of an EIC does an eligible taxpayer receive?
The number of qualifying children determines a credit rate (percentage) that reduces the amount of taxable income
There is a max income to which this rate applies, and above this max income is a phase-out threshold at which the credit begins to disappear
What is the child tax credit?
A refundable credit for each qualifying child – $1,000 per child
Who are qualifying children for the child tax credit?
Any children who qualify as dependents and are under age 17 at year-end
When does the child tax credit not apply?
When the AGI begins to phase out
For each $1,000 (rounding up) over the phase-out threshold, the credit is reduced by $50
How do nonworking spouses relate to the child tax credit?
Ordinarily both spouses must be working to attain the credit, but one can be a full-time student (or incompetent) and the couple can still qualify
What is the adoption tax credit?
A credit for qualified adoption expenses
If married, must be a joint filing
To what extent is the child tax credit refundable?
The excess of 15% of the taxpayer’s earned income over $3,000 can be refunded
For families with three or more kids, excess of SS taxes over the earned income credit is the refundable amount
For what year should the adoption tax credit be claimed?
Either the year the adoption occurred or the year payment occurs, whichever is later
How much is the adoption tax credit?
The amount actually spent on adoption expenses, except insofar as they’re reimbursed – and up to a maximum credit (for 2013, $12,970)
Adopters of special-needs children automatically receive the maximum credit
What is the child and dependent care credit?
A non-refundable credit for unreimbursed child care expenses paid by the taxpayer
Amount ranges between 20-35% of qualifying expenses, with a max of $3,000 for one qualifying dependent and $6,000 for any higher number
Is there a phase-out amount for the adoption tax credit?
Yes, though credits lost through a phaseout can be carried forward for five years
The 2013 phaseout range is $194,580 - $234,580
How do nonworking spouses relate to the child and dependent care credit?
There must be at least one working spouse for the credit to count, but any spouses who are either (1) incapable or (2) full-time students count as “working” for this definition
For calculating the phaseout, nonworking spouses are treated as earning $250 per month for one child and $500 per month for any higher number
How does the child and dependent care credit phase out?
According to 2013 numbers, for an AGI of $15,000 or less, the credit is for 35% of eligible expenses – but this reduces 1% for each $2,000 increase in AGI, though no further than 20%
What is the foreign tax credit?
A nonrefundable credit for taxes paid to a foreign government, whether through foreign employment or foreign investments
Usually the taxpayer can choose between a deduction for this or a credit
What is the elderly and disabled credit?
A nonrefundable credit for taxpayers who are either age 65 or permanently disabled
Requires both (1) AGI and (2) nontaxable income from annuities, SS, pensions, and disability income to be sufficiently low
How do (nonrefundable) education credits generally work?
They only apply to tuition and other higher-education fees inasmuch as they are not paid for by scholarships – though these fees still generate a credit if they are paid for with gifts, bequests, or student loans
What is the general business tax credit?
A nonrefundable credit which is actually a collection of various different business tax credits intended to promote research, reforestation, oil recovery, etc.
What are some miscellaneous kinds of nonrefundable tax credits?
Credits for…
(1) saving for retirement
(2) driving an electric (but not hybrid) car
(3) retaining workers
(4) small employers offering healthcare insurance
Can a dependent ever claim an education credit?
No, although if he pays for his higher-education fees, then his parents can still claim it on their return
