R1 Individuals - M7 - Tax Computation and Credits

Question 1

Penalty on underpayment of Estimated Tax

Answer 1

1. 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

2. 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

Question 2

Types of Tax Credits

Answer 2

Refundable and Non refundable

Question 3

What are the 7 Non refundable tax credits?

Answer 3

1. Child and dependent care Credit
2. Elderly and Permanently Disabled Credit
3. Education Credits
   > Lifetime Learning Credit
   > American Opportunity (60% Non refundable)
4. Retirement Savings Contribution Credit
5. Foreign Tax Credit
6. General Business Credit
7. Adoption Credit

Question 4

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

Answer 4

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

Question 5

NR- Adoption Credit

Answer 5

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.

Question 6

NR- Foreign Tax Credit

Answer 6

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

Question 7

NR- Retirement Savings Contribution Credit

AT LEAST 18 Y.O

Answer 7

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

Question 8

NR- Education Tax Incentives

AMERICAN OPPORTUNITY

$ 2,500 PER STUDENT

Answer 8

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

Question 9

NR- Education Tax Incentives

LIFETIME LEARNING

$ 2K= 20% OF THE 10K Qualified expenses

Answer 9

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

Question 10

NR- Education Tax Incentives

COVERDELL EDUCATION SAVINGS

UNDER 18 y.o

2k Annually per student

Answer 10

1. Non deductible contribution and max of of $ 2k annually
2. Tax Free upon distribution as long us used for qualified expenses - including ROOM and BOARD
3. Beneficiary should be UNDER 18 y.o and no limit of beneficiaries
4. Phase out
   Single 95-110k
   MFJ- 190-220K
5. Earnings accumulate tax free while in an education savings account
6. 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.

Question 11

Marginal tax rate

Answer 11

Change in tax / change in taxable income

Question 12

R- Child Tax Credit

child should be under age 17 y.o

Answer 12

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

1. Excess of tax credit over tax liability
2. 15% x (Earned Income - $ 2,500)
3. $ 1,700 per qualifying child in 2024

Question 13

R- Earned Income Credit

Answer 13

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

4. 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

Question 14

What are the 7 rates used in progressive tax rates structure

Answer 14

10%
12%
22%
24%
32%
35%
37%

Question 15

What are the rates on Individual Preferential Income Tax Rates

Answer 15

0%
15%
20%

LTC Gains and Qualified Dividends

Question 16

Excess FICA (Social Security Tax) Withheld

Answer 16

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

Question 17

What is PTC- Premium Tax Credit?

Answer 17

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.

Question 18

Net investment income - 3.8%

Answer 18

1 is multiplied with 3.8% to arrive at the Net Investment TAX

1. Lesser between:

Net investment Income OR

MAGI minus below Threshold

Single HH - $200K
MFJ- $ 250K

Question 19

Taxable income is reduced by qualified dividends and LTCG because these 2 are subject to preferential tax rates of 0%, 15% and 20%.

Answer 19

You’‘ll arrive at taxable income taxed at ordinary rates

Question 20

Avoid the penalty for the underpayment of estimated tax if the timely estimated tax payments equal the required annual amount of:

Answer 20

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.

Question 21

There are 3 taxes that can be charged

Answer 21

Ordinary taxes
+Preferential tax rates on qualified dividends
+Net investment income tax
=Total tax liability

Question 22

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

Answer 22

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).

Question 23

KIDDIE TAX SAMPLE

Answer 23

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.