R2-M3 Tax Computation and Credits

Question 1

what are rules of adoption credit?

Answer 1

Eligible expenses:
- All reasonable and necessary expenses, costs, and fees such as legal fees, agency fees,… are eligible
- Not eligible for adopting a child of a spouse or for a surrogate parenting arrangement
- medical expenses do NOT qualify

Question 2

what are refundable tax credits?

Answer 2

the IRS may refund cash when the credit exceeds tax liability owed even if no tax is withheld from wages

• child tax credit (refund is limited)
• earned income credit
• federal income tax withheld (form W-2)
• excess social security tax paid
• American opportunity credit (40% refundable)

Question 3

what are rules of penalty of underpayment of estimated taxes?

Answer 3

• NO penalty for underpayment of estimated tax if tax dues after withholding is $1,000 or LESS
• If taxpayer’s AGI is LESS than $150k, payment of 100% PY tax liability avoids the penalty for underpayment of estimated tax
• If taxpayer’s AGI is MORE than $150k, payment of 110% PY tax liability avoids the penalty for underpayment of estimated tax
• OR payment of 90% of tax on CY tax return avoids the penalty regardless of AGI

Question 4

what are non-refundable tax credits?

Answer 4

• child and dependent care credit
• elderly and permanently disabled credit
• education credits: lifetime learning credit and American opportunity credit (60% nonrefundable)
• retirement savings contribution credit
• foreign tax credit
• general business credit
• adoption credit

Question 5

what are rules of child and dependent care tax credit?

Answer 5

• expenses for care of disabled spouse is eligible up to $3,000
• Maximum credit is 35% of eligible expenses, with phase-out for excessive AGI. the max qualifying expenditure is $6,000 for 2 or more dependents, so the MAX credit is $2,100
• Child must be under 13

Question 6

what are rules of tax credit for IRA contribution?

Answer 6

• maximum contribution eligible for credit is $2,000 for an eligible taxpayer
• at least 18 years old by end of the year, not a full time student , and not a dependent of another taxpayer
• credit rate depends on taxpayer’s filing status and AGI
• no carryover is allowed

Question 7

what are rules for foreign tax credit?

Answer 7

• a taxpayer can claim a credit for foreign income taxes paid against federal income tax; or can deduct as an itemized deduction
• limitation to lessor of:
  + foreign tax paid; or
  + (taxable income from all foreign / total taxable worldwide income) x U.S tax
• can carry back one year and forward 10 years

Question 8

what are rules of Child tax credit?

Answer 8

• may claim a $2,000 tax credit for each “qualifying child”
• Child must be under 17
• if AGI exceeds $400k for MFJ, reduce $2000 allowable child tax credit by $50 each $1000

Question 9

what are rules of excess FICA (social security tax withheld)?

Answer 9

• 2 or more employers: an employee who has SS tax withheld greater than the maximum amount for a particular year may CLAIM the excess as a CREDIT against income tax, if that excess resulted from correct w/holding by 2 or more employers
• 1 employer: if excess was w/held by 1 employer, the employer must REFUND the excess to the employee

Question 10

what are rules of net investment income tax?

Answer 10

• an individual who is a US resident
• may subject to 3.8% of net investment income tax on net investment income above the statutory AGI threshold amounts
• Lesser of NI income; or the excess AGI over the threshold amount

Question 11

what are rules of Kittie Tax?

Answer 11

• child must be under 18 years old or under 24 if not able to provide over half of his/her own support and is a full time student
• tax at parent’s tax rate if child’s unearned income is over $2,500
• child’s rate if $1,250-$2,500
• zero rate if under $1,250