REG: Chapter 10

Question 1

Individual Taxation

When can an employee taxpayer take deductions on state and local taxes paid?

Answer 1

• State and local taxes paid are deductible when the taxpayer selects itemized deductions
• Federal income tax withheld is taken as a tax credit, since the tax credit applies to the total tax due

Federal, Social Security and State and local taxes are not included in the standard deductions

Question 2

Individual Taxation

What are the deductions to arrive at AGI?

Answer 2

“SHAMPOO”
* Student Cost, including student loan interest
* Health Insurance paid by Self-Employed, HSA
* Alimony paid before 12/31/18 divorces
* Moving expenses for members of military
* Penalty on early withdrawal of savings
* One-half of self-employment tax
* Old age/Retirement IRA contributions

Question 3

Individual Taxation

What is the maximum credit that can be taken on student loan interest?

Answer 3

• The limit is $2,500
• Deduction starts to phase out when AGI is $70,000 (Single)/$140,000 (MFJ)
• The phase-out range is $15,000

Question 4

Individual Taxation

What is the maximum deduction for Health Savings Accounts (HSA)?

Answer 4

• Maximum deduction is $3,600 (Single) /$7,200 (MFJ)
• Must have a deductible of $1,400 (Single) /$2,800 (MFJ)

Question 5

Individual Taxation

What is the deduction limit for a self-employed pension, or KEOGH, plan?

Answer 5

Lesser of
* 25% of net income reported on Scheldule C
* Maximum amount of about $66,000

Question 6

Individual Taxation

What is the maximum deductions for IRA Contributions?

Answer 6

Applies to both Traditional and Roth IRAs
* Before Age 50: $6,500/$13,000
* After Age 50: $7,500/$15,000
* If the earned income is less than the maximum deduction, then the deduction contribution would be the earned income.

Example
* Earned income for a 50 year old is $5,200, then the IRA deduction contribution reported would be $5,200.

Question 7

Individual Taxation

What is the spousal rule for IRA contribution deductions?

Answer 7

• The AGI is below $220,000
• A married spouse who is non-working , or earns very little, is entitled to contribute and deduct the same amount that the working spouse contributed

Question 8

Individual Taxation

What amount can be contributed to an Education IRA?

Answer 8

• Maximum Education IRA contribution is $2,000/year
• A distribution of $10,000 is allowed for private K-12 education

Question 9

Individual Taxation

What is the difference between the Child Tax Credit and the Family Credit?

Answer 9

Child Tax Credit
* The tax credit is $2,000 per child under the age of 17, as of 12/31 of the taxable year
* $1,600 per child is partially refundable

Family Credit
* $500 non-refundable credit for each qualifying dependent, other than qualifying children
* Example of qualifying dependent is a child over the age of 17 or an older or elderly parent

Question 10

Individual Taxation

What is the dependent care credit?

Answer 10

• No AGI limitation
• Covers 20% of care expenses
• If AGI is less or equal to $15,000, the percentage covered is 35%
• Expenses are capped at $3,000 for one child, $6,000 for more than one child
• The calculation is limited to the lowest earned income of the spouse or the expense cap
• If the spouse has no income, then no credit can be taken

Question 11

Individual Taxation

How is the dependent care credit calculated?

Answer 11

Examples

• For two children, one spouse earned $60,000 and the other spouse earned $10,000. Total child care costs of $15,000. Since $6,000 is less the lowest income earned, then the dependent care credit would be $1,200 ($6,000 x 20%)
• For two children, one spouse earned $73,000 and the other spouse earned $2,000. Since $2,000 is less then the maximum amount of $6,000, the dependent care credit would be $400 ($2,000 x 20%)

Question 12

Individual Taxation

What are the requirements for the American Opportunity Credit?

Answer 12

• Taxpayer must be enrolled as a student for at least a half-time basis
• The taxpayer must be a candidate for a degree
• Qualifying expenses must be for the current year and for the first three months of the following year
• Qualifying expenses are for tuition and all related supplies required for courses, except room and board
• Credit limitation of $2,500 per student
• Up to 40% of $1,000 of tax liablity is partially refundable
• AGI phase out begins at $80,000/$160,000
• No credit after $90,000/$180,000

Question 13

Individual Taxation

What is the calculation to determine the American Opportunity Credit Deduction?

Answer 13

• The spend amount to maximize the credit is $4,000
• 100% of the first $2,000 of qualifying expenses
• 25% of the following $2,000 of qualifying expenses

Question 14

Individual Taxation

What is an example of American Opportunity Credit calculation?

Answer 14

Total tax before credit is $2,000
American Opportunity Credit = $2,500
Tax Liability = ($500) ($2,000 - $2,500)
Amount refunded would be $500 x 40% = $200

Total tax before credit is $2,500
American Opportunity Credit = $2,500
Tax Liability is zero since $2,500 - 2,500 = 0
Amount refunded would be $1,000 x 40% = $400

Total tax before credit is $800
American Opportunity Credit = $2,500
Tax Liability = ($1,700) ($800 - $2,500)
Amount refunded would be $1,700 x 40% = $680

Question 15

Individual Taxation

What are the requirements for the Lifetime Learning Credit?

Answer 15

• Phase out of AGI starting at $80,000/$160,000
• No credit at all at $90,000/$180,000
• Credit is non-refundable
• Can be taken for courses in graduate, undergraduate or for learning a new job skill

Question 16

Individual Taxation

What is the calculation to determine the Lifetime Learning Credit Deduction?

Answer 16

• 20% of the amount spent on the first $10,000 of tuition and expenses per year
• Maximum credit is $2,000 per family per year

Question 17

Individual Taxation

What is the calculation to determine the credit for Elderly and/or Permanently Disabled?

Answer 17

Base Amount
(Social Security Benefits)
(50% of AGI of $10,000)
Balance

Credit is lesser of current tax liability or 15% of balance

Question 18

Individual Taxation

What are the requirements for the Elderly and/or Permanently Disabled credit?

Answer 18

• Credit is either lesser of prior tax credit or 15% of eligible income
• The credit is non-refundable
• AGI limits and social security count against the credit
• The base amount is $3,750 (Single) / $7,500 (MFJ)
• Must be age 65 or disabled to qualify

Question 19

Individual Taxation

What are the requirements for the Retirement Savings Contribution Credit?

Answer 19

• Maximum of $1,000 non-refundable credit based on IRA contributions
• The credit is non-refundable
• The credit is available to younger people starting in the workforce
• AGI limitation of $37,000/$74,000
• If the AGI is less than $37,000, the credit is 50% of the contribution

Question 20

Individual Taxation

What is the calculation to determine Retirement Savings Contribution Credit?

Answer 20

• IRA Contribution x 50%
• Credit cannot be greater than $1,000

Question 21

Individual Taxation

What is an example of the credit for the Elderly Care Credit?

Answer 21

AGI: $16,000 (MFJ)
Taxes Owed: $95
Social Security: $2,000

Base: $7,500
Social Security Benefits: (2,000)
50% of AGI Over $10,000: (3,000)
Total: $2,500
Balance = 15% x $2,500 = 375
Credit: Lesser of Current Tax Liability or Balance

Question 22

Individual Taxation

How is an annuity payment included in gross income?

Answer 22

• Any amount received that is in excess of the cost of the annuity are included in gross income

Example
Annuity Investment: $100,000
Disbursements: $12,000/year for 10 years

Total Amount of Disbursements: $12,000 x 10 = $120,000
Total Excess Amount: $120,000 - $100,000 = $20,000
Current year income reported in gross income: Total Excess Amount/# of Years = $20,000/10 = $2,000

Question 23

Individual Taxation

What is the calculation to determine the deduction from a self-employed pension, or KEOGH, plan?

Answer 23

20% X (Self-Employed Earnings - Self Employment Taxes)