R1 M7 - Tax Computation & Credit Flashcards
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What is tax credit?
Tax Credit reduce personal tax liability , dollar for dollar.
What are two types of tax credit?
1) Nonrefundable personal tax credit
2) Refundable credits –> Reduces tax can create a refund
Please give me a list of nonrefundable Personal Tax credit?
- Child and dependent care credit
- Elderly and Permanent disable credit
- Education Credits
1) Lifetime Learning credits
2) American Opportunity credit (60% nonrefundable) - Retirement saving contribution credit
- Foreign tax credit
- Adoption Credit
- General Business credit
Please give me a list of refundable credits
- Child tax credits ( refund is limited)
- Federal income tax withholding (Form W2)
- American opportunity credit (40% refundable)
- Excess social security
Child & Dependent care credit –> 20 % to 35% of work-related expense
- Maximum allowable expense are:
1) $3,000 for 1 qualifying person
2) $6,000 for 2 or more qualifying persons
Who qualifies for Child & Dependent Care credit
1) Child under 13 years of age
2) Disabled person of any age who is dependent
3) Spouse is disabled
Child & Dependent care credit:
Is applicable if the parents are working for married filing jointly to benefit from it (self-employed, salary, wages etc.)
What is Child & Dependent Care Credit expense?
- Nursing school
- Baby Sitting
- Day Care
It does not include elementary school.
Education Tax incentives
American opportunity Tax credit (AOTC)
- Qualified expense: Tuition, fees, course material (including books)
- Applicable for its first 4 years of post-secondary college education.
What is the maximum (AOTC) Credit?
Maximum (AOTC) Credit is $2,500 per student
1) 100% of the first $2,000 of qualified expense plus
2) 25% of the next $2,000 expense for the year
–> Yourself, Spouse and dependent.
Lifetime Learning credit (LLC) is for just a student
- Available for unlimited number of years
- 20% of qualified expense up to $10,000
Qualified Expense
- Tuition and course fee
- Graduate level course
- Certain professional degree course
- Course to acquire or improve skills
Coverdell Education Saving Account
- It has no limit on the number of beneficiaries
—> Saving account set for children qualified education expense
—> Maximum contribution per beneficiary is $2,000 per year
—> Beneficiary maybe a child under 18
It can be used in elementary, Middle School or College.
Sidenote: Don’t focus on the phase out.
Nonrefundable Tax Credit:
Elderly and permanently disabled
-65 years and older or
- Under 65 and permanently disabled
Retirement Saving contributions credit
- Maximum contribution eligible for credit is $2,000
Foreign tax Credit
- Takes it as an itemized deduction or it can be used as a credit (nonrefundable)
- Carryover of excess (disallowed credit)
- Carried back 1 year
- Carried forward 10 years
General Business credit.
Refundable tax credit:
Child tax credit
- Under the age of 17
- Citizen, resident
Earned Income is wages, salaries, tips, self-employment earning
- Does not include pension and annuity income
The amount of taxes owed (excess of tax liability over withholding) is expected to be $1,000 or more. Then the IRS will examine the taxpayer’s withholding is less than the lesser of:
- 90% of the current year’s tax; or
- 100% of last year’s tax