REG 2 Tax Calculations and Credits

Question 1

What are the tax rates for individuals and whom is provided a reduced tax and what is that reduced tax?

Answer 1

10, 15, 25, 28, 33, 35, & 39.6%
For 2015, a reduced tax rate of 20% (if a taxpayer is in the 39.6% bracket), 15% (most taxpayers), or 0% (if a taxpayer otherwise is in the 15% and/or 10% bracket) is provide for: Qualified dividends and long-term capital gains.

Question 2

What are the two basic types of tax credits (reduce personal tax liability), and what do they include?

Answer 2

1. Personal tax credits: May reduce personal tax liability to zero, but they may not result in a cash refund:
   a. Child and dependent care credit.
   b. Elderly and permanently disable credit.
   c. Education credits: Lifetime learning credit.
   d. Retirement savings contribution credit.
   e. foreign tax credit.
   f. General business credit.
   g. Adoption credit.
2. Refundable credits: Subtracted from income tax liability. They may result in a cash refund even if no tax is withheld from wages. The following are refundable credits (or payments that are treated as refundable credits) and are shown in the “payments” section of Form 1040:
   a. Child tax credit (refund is limited).
   b. Earned income credit.
   c. Withholding taxes (W-2).
   d. Excess social security paid.
   e. American Opportunity credit (40% refundable).

Question 3

How is the child and dependent care credit computed?

Answer 3

Use the lowest amount of (1) the earned income of the spouse with the lesser amount, (2) the actual childcare expenditure, or (3) the maximum amount (1 dependent $3,000 and 2+ dependents $6,000) - multiply by applicable percentage:

1. Max 35%: AGI $15,000 or less.
2. Phase-out 20-35%: credit decreased by 1% for each $2,000 (or fraction) of AGI over $15,000 but not below 20%.
3. Min 20%: AGI of more than $43,000.

Question 4

How is the credit for the elderly (65+) and/or permanently disabled?

Answer 4

Single: 
5,000 base amount (Joint $7,500)
Less: all social security
Less: 1/2 of excess AGI over $7,500 (Joint $10,000)
= Balance
* 15% rate 
= Credit

Question 5

Describe the 3 education tax incentives.

Answer 5

1. The American Opportunity Credit: for student’s first 4 years; credit is equal to 100% of first $2,000 of qualified exps plus 25% of the next $2,000 of exps paid ($2,500 max credit); per-student basis; phase-out $80-90,000 (joint double).
2. The Lifetime Learning Credit: available for unlimited number of years; books excluded; credit equal to 20% of qualified exps up to $10,000 ($2,000 max); only 1 per year regardless of how many students in family; phase-out $55-65,000 (joint double).
3. Coverdell Education Savings Account Distributions: Can use in conjunction with education credits but cannot be used for the same educational exps for which either education credit was claimed.

Question 6

What are the adoption credit limitations?

Answer 6

Limit: per child $13,400; special needs child: $13,400; phase out for modified AGI between $201,010-$241,010

Question 7

What is the allowable credit for foreign taxes?

Answer 7

No limit on foreign taxes used as a deduction, but foreign tax credits are limited to the lesser of foreign taxes paid Or { (Taxable income from all foreign operations/Taxable income + exemptions) * US tax}; Any disallowed foreign tax credit may be carried back one year and forward ten years.

Question 8

What is the general business tax formula?

Answer 8

Credit may not exceed “net income tax” less the greater of (a) 25% of regular tax liability above $25,000 or (b) “Tentative minimum tax” for the year:

Question 9

What is the work opportunity credit?

Answer 9

Available to employers who hire employees from a targeted group (Disabled, 18-24 year olds from poor families, Vietnam veterans from economically disadvantaged areas, and certain food stamp recipients); part of the general business credit; Credit equal to 40% of first $6,000 of first year’s wages and 40% of first $3,000 to certain summer youth.

Question 10

Describe the child tax credit.

Answer 10

Taxpayers may claim a $1,000 tax credit for each “qualifying child” (CARES applies except must be under 17); reduce credit by $50 for each $1,000 by which AGI exceeds the limits; refundable to the lesser of the excess child tax credit over tax liability and the earned income less $3,000 multiplied by 15%.