R1 Individuals - M7 - Tax Computation and Credits Flashcards
1 Individual Ordinary Income Tax Calculations and Limitations 2 Tax Credits Overview and the Child and Dependent Care Credit 3 Education Tax Incentives 4 Other Nonrefundable Tax Credits: Part 1 5 Other Nonrefundable Tax Credits: Part 2 6 Refundable Tax Credits 7 Estimated Tax Payments and Other Taxes
Penalty on underpayment of Estimated Tax
- If AGI of Prior year is 150k or less then:
Lesser between
90% of current year estimated tax liability paid in 4 equal installments
OR
100% of PY tax liability paid in 4 equal installments
- If AGI of Prior year is over 150K
Lesser between
90% of current year estimated tax liability paid in 4 equal installments
OR
110% of PY tax liability paid in 4 equal installments
Types of Tax Credits
Refundable and Non refundable
What are the 7 Non refundable tax credits?
- Child and dependent care Credit
- Elderly and Permanently Disabled Credit
- Education Credits
> Lifetime Learning Credit
> American Opportunity (60% Non refundable) - Retirement Savings Contribution Credit
- Foreign Tax Credit
- General Business Credit
- Adoption Credit
NR- Child and Dependent Care Credit
Child should UNDER 13 Y.O
Any dependent regardless of age if disabled- SUPPORT test need not be met as long as you provide more than 50% of the support
Spouse if disabled
1 Qualified Expense has limit of
20 to 35% of Qualified expenses
1 qualifying person $ 3k
2 OR MORE- $ 6K
The #1 is compared to the taxable income of spouse earning the lower income , whichever is Lower
Then apply the rate of 20% or 35% to arrive at CDC Credit
Note: Both spouse should be working.
35% - for AGI of $ 15k or less
The credits decreases by 1 % for each $ 2,000 increase in AGI
20% for AGI of > $ 43k
NR- Adoption Credit
Max qualified expenses in 2024- $ 16,810
Any excess can be carried forward for up to 5 YEARS.
Phase out based on MAGI
252,150-292,150 (at this level completely Phased out)
Allowed expenses are all reasonable necessary costs
Not allowed
1. Adoption of the child of a spouse or for surrogate parenting arrangement
2. Medical expenses
Credit is claimed until the Adoption is Final- so it can be claimed for years - date of payment or can be lump sum claimed on the year the adoption becomes final.
Adoption of Foreign Child- no credit can be claimed until it becomes final so only lumpsum credit.
Above both cases, expenses paid in later years can be claimed in the year paid.
NR- Foreign Tax Credit
2 ways to claim :
Taxes deducted as Itemized deduction- There is no limit
Foreign tax credits as credit from Federal income taxes SUBJECT TO LIMITATION:
FTC Limit= Taxable income from all foreign operations / Total Taxable Worldwide Income
Whichever is LESSER
NR- Retirement Savings Contribution Credit
AT LEAST 18 Y.O
Eligible Amount of Contribution of up to $ 2,000 per Taxpayer
At least 18 y.o
Not a full time student
Not claimed as dependent of another taxpayer
Allowable credit - based on filing status and AGI
10%
20%
50%
This type of credit is available for both traditional and Roth
For low and moderate income TPs
NR- Education Tax Incentives
AMERICAN OPPORTUNITY
$ 2,500 PER STUDENT
Only for first 4 years of postsecondary education (College)
Qualified TUITION, FEES and Books and COURSE MATERIALS
American Opportunity Tax Credit max- $ 2,500 computed as:
100% of first 2k expenses
25% of the next 2k expenses
40% of that is Refundable which is up to $ 1,000 (2,500x 40%)
Per student basis- on behalf of TP, spouse or dependent
student must be in at least half of the time of one academic period
Credit Phase out begins
Single - 80k-90k
MFJ- 160K-180K
NR- Education Tax Incentives
LIFETIME LEARNING
$ 2K= 20% OF THE 10K Qualified expenses
Available for Unlimited no. of years for
Qualified tuition and course fees
20% of qualified expenses of up to $ 10k= Max credit of $ 2k
Qualified TUITION, FEES BUT NOT COURSE MATERIALS
NR- Education Tax Incentives
COVERDELL EDUCATION SAVINGS
UNDER 18 y.o
2k Annually per student
- Non deductible contribution and max of of $ 2k annually
- Tax Free upon distribution as long us used for qualified expenses - including ROOM and BOARD
- Beneficiary should be UNDER 18 y.o and no limit of beneficiaries
- Phase out
Single 95-110k
MFJ- 190-220K - Earnings accumulate tax free while in an education savings account
- need to be withdraw any excess when beneficiary hits 30Y.O with 10% penalty or can be rolled over to another family member tax free
A TP can claim credits for AO and LL same year and still EXCLUDE distributions from this savings account from Gross Income.
The distributions should not be used for the same educational expenses for which the AOC and LL Credits was claimed.
Marginal tax rate
Change in tax / change in taxable income
R- Child Tax Credit
child should be under age 17 y.o
For 2018- 2025
max tax CREDIT is $ 2,000 PER qualifying child
Qualifying Child Rule applies here except the age must be under 17 Y.O
Phase out child tax credit
$ 2,000 credit is reduced by $ $ 50 for every $ 1,000 MAGI that exceeds below:
400K for MFJ
200K for unmarried individuals
200k for MFS
The child tax credit is refundable of the lesser among the 3
- Excess of tax credit over tax liability
- 15% x (Earned Income - $ 2,500)
- $ 1,700 per qualifying child in 2024
R- Earned Income Credit
Conditions:
1. TP lives in the US more than half of the taxable year
2. meet certain earned low income thresholds
3. do not have > specified amount of disqualified income which means if TP has investment income of more than $ 11,600 in 2024, he will be ineligible.
Investment income includes both taxable and non taxable
- if no qualifying children, should be aged between 26-64 y.o- only 1 spouse should meet the age test if MFJ
Earned income EXCLUDES Pensions and annuities
only wages, etc self employment income
A qualifying child is not a requirement to be eligible for earned income credit
What are the 7 rates used in progressive tax rates structure
10%
12%
22%
24%
32%
35%
37%
What are the rates on Individual Preferential Income Tax Rates
0%
15%
20%
LTC Gains and Qualified Dividends
Excess FICA (Social Security Tax) Withheld
if one employer- no credit allowed, ask refund from employer
If two or more employers withhold correctly, credit can be claimed against Federal Income taxes
What is PTC- Premium Tax Credit?
Refundable Credit for low and moderate income ind and families to afford health insurance purchased from Health insurance market.
The credits are available immediately when the insurance is purchased to help individuals pay for their monthly health insurance premiums.
Net investment income - 3.8%
1 is multiplied with 3.8% to arrive at the Net Investment TAX
- Lesser between:
Net investment Income OR
MAGI minus below Threshold
Single HH - $200K
MFJ- $ 250K
Taxable income is reduced by qualified dividends and LTCG because these 2 are subject to preferential tax rates of 0%, 15% and 20%.
You’‘ll arrive at taxable income taxed at ordinary rates
Avoid the penalty for the underpayment of estimated tax if the timely estimated tax payments equal the required annual amount of:
I.
Payment of 90% of the tax on the return for the current year avoids the penalty for underpayment of estimated tax OR
II.
Generally, payment of 110% of the prior year’s tax liability avoids the penalty for underpayment of estimated tax when the taxpayer’s AGI from the prior year exceeds $150,000.
If the taxpayer’s AGI is $150,000 or less, payment of 100% of the prior year’s tax liability avoids the penalty for underpayment of estimated tax.
There are 3 taxes that can be charged
Ordinary taxes
+Preferential tax rates on qualified dividends
+Net investment income tax
=Total tax liability
KIDDIE TAX
Dependent child under 18 y.o or 18-24 who does not provide more than half of his support and is a full time college student when it has earned income,
Income includes only dividends interest rents royalties not WAGES
Child unearned income levels and related tax rate
up to $ 1,300= 0%
1,301-2600= Child’s rate
over 2600= Parent’s rate
EXAMPLE
Chris, age 5, has $3,000 of interest income and no earned income this year. Assuming the current applicable standard deduction for dependents is $1,300, how much of Chris’ income will be taxed at his parents’ marginal rate?
A. $0 B. $400 C. $1,700 D. $3,000
Explanation
Choice “B” is correct. The net unearned income of a dependent child under age 18 is taxed at the parents’ marginal rate under the “kiddie tax” rules. Net unearned income is calculated by taking the child’s unearned income and reducing it by the dependent child’s allowable standard deduction of $1,300 plus an additional $1,300 that is taxed at the child’s marginal tax rate (2024). Chris’ net unearned income taxed at his parents’ marginal rate is $400 ($3,000 interest income – $1,300 standard deduction – $1,300 taxed at child’s marginal rate).
KIDDIE TAX SAMPLE
A 22-year-old full-time student earned $11,000 in salary and received $9,000 in interest from corporate bonds. The bonds were a gift from the student’s grandparents. The student’s parents pay more than half of the student’s support, including $25,000 in tuition. Which of the following statements is correct regarding the student’s current year income tax?
A. The student's salary income and no other income will be subject to the "kiddie tax." B. A portion of the student's interest income and no other income will be subject to the "kiddie tax." C. Both the student's salary and a portion of the interest income will be subject to the "kiddie tax." D. Neither the student's salary nor the interest income will be subject to the "kiddie tax."
Explanation
Choice “B” is correct. Only a portion of the student’s interest income is subject to the kiddie tax. Net unearned income of a dependent child is taxed at the parent’s marginal rate (“kiddie tax”).
Choice “A” is incorrect. The student’s salary income is earned income, so it is not subject to the kiddie tax.
Choice “C” is incorrect. Only a portion of the interest income, not the salary income, is subject to the kiddie tax.
Choice “D” is incorrect. A portion of the student’s interest income is subject to the kiddie tax.
