M3: Tax computations & credits

Question 1

Estimated tax and inadequate withholding

Answer 1

taxpayer is required to make estimated quarterly payments if both conditions are met:

• $1,000 or more tax liability
• inadequate tax estimates
  
  • 90 percent of the current year’s tax or
  • 100 percent of last year’s tax = safe harbor: exception if AGI is in excess of 150k, 110% of the prior years tax liability

must pay the less of 90 of current year tax or 100% of prior year tax liability unless AGI is in excess of $150k then must pay 110%

Question 2

Foreign tax credit

Answer 2

Allowable credit: there is no limit however , foregin tax credits are limited to the lesser of:

• foreign taxes paid or
• taxable income from all foreign operations/(taxable income + exemptions) X US tax = foreign tax credit limit

Question 3

Refundable credits

Answer 3

Child tax credit, withholding taxes, portions of the Hope Scholarship credit, and excess social security taxes paidS

Question 4

Child &Dependent Care credit

Answer 4

Children under the age of 13 qualify & then it is limited to the lowest earned income of either spouse.

General rule: both parents work & pay someone to take care of junior

One dependent - $3000
Two or more - $6,000

Credit computation:

• 35% for AGI 15k or less
• Phase out 20 to 35 percent: decrease by 1% for each $2,000 of AGI over $15,000 but now below 20*
• minimum 20% for AGI more than $43,000 is 600 (20 percent of $3,000