Section 4: Additional Taxes & Credits Flashcards
Question ID: 95034458 (Topic: Alternative Minimum Tax)
Which of the following would not be a part of the computation of alternative minimum tax?
A. Certain state and local taxes
B. Self-employment tax
C. Depletion
D. Interest on private activity bonds
Correct Answer Explanation for B:
A taxpayer’s regular taxable income is increased by certain tax preference items in determining alternative minimum taxable income (AMTI). After adjustment and preference items are added or subtracted, the taxpayer is left with alternative minimum taxable income, or AMTI. However, self-employment tax is not affected by the Alternative Minimum Tax calculation. To learn more about the AMT, see IRS Topic No. 556, Alternative Minimum Tax.
Question ID: 94850149 (Topic: Alternative Minimum Tax)
For individual taxpayers, certain deductions and exclusions are eliminated or reduced in the determination of the alternative minimum tax (AMT). These items include the following:
A. Standard deduction.
B. State, local, and foreign taxes.
C. Investment interest expense.
D. All of the above.
Correct Answer Explanation for D:
When calculating the AMT, many common items considered in the computation of the regular income tax liability are either adjusted downward or eliminated entirely. The alternative minimum tax (AMT) applies to taxpayers with high economic income by setting a limit on certain deductions. A nonrefundable credit (the AMT Credit) may be available to individuals, estates, and trusts for alternative minimum tax paid in prior years to the extent that a taxpayer’s regular tax in the current year is greater than his tentative minimum tax. If applicable, the credit is calculated on Form 8801, Credit for Prior Year Minimum Tax – Individuals, Estates, and Trusts.
The AMT is the excess of the tentative minimum tax over the regular tax. Thus, the AMT is owed only if the tentative minimum tax for the year is greater than the regular tax for that year. The tentative minimum tax is figured separately from the regular tax. In general, compute the tentative minimum tax by:
Computing taxable income, eliminating or reducing certain exclusions and deductions,
Subtracting the AMT exemption amount,
Multiplying the amount computed in by the appropriate AMT tax rates, and
Subtracting the AMT foreign tax credit.
The law sets the AMT exemption amounts and AMT tax rates. Taxpayers can use the special capital gain rates in effect for the regular tax if they’re lower than the AMT tax rates that would otherwise apply. In addition, some tax credits that reduce regular tax liability don’t reduce AMT tax liability. Learn more about the AMT on Topic No. 556 Alternative Minimum Tax.
Question ID: 94850178 (Topic: Alternative Minimum Tax)
Oliver was very high-income, and he made more than $2.5 million dollars in the prior year. As a result, he was forced to pay the Alternative Minimum Tax in the prior year. In 2023, his income drops significantly because of business losses, and he is no longer subject to the Alternative Minimum Tax. He now has an Alternative Minimum Tax credit in the current year. How can he claim an AMT credit on his individual tax return?
A. He should use Form 8801 and attach it to his individual tax return.
B. He should use Form 6251 to calculate his AMT credit.
C. He should file an amended return to claim the AMT credit.
D. AMT credits no longer exist because of tax law changes.
Correct Answer Explanation for A:
Oliver should use Form 8801, Credit for Prior Year Minimum Tax - Individuals, Estates, and Trusts and attach it to his individual tax return in order to claim his AMT credit for the tax he paid in the prior year.
A nonrefundable credit may be available to individuals, estates, and trusts for alternative minimum tax paid in prior years to the extent that a taxpayer’s regular tax in the current year is greater than their tentative minimum tax. The AMT is the excess of the tentative minimum tax over the regular tax. Thus, the AMT is owed only if the tentative minimum tax for the year is greater than the regular tax for that year. The tentative minimum tax is figured separately from the regular tax. In general, compute the tentative minimum tax by:
Computing taxable income, eliminating or reducing certain exclusions and deductions,
Subtracting the AMT exemption amount,
Multiplying the amount computed in by the appropriate AMT tax rates, and
Subtracting the AMT foreign tax credit.
The law sets the AMT exemption amounts and AMT tax rates. Taxpayers can use the special capital gain rates in effect for the regular tax if they’re lower than the AMT tax rates that would otherwise apply. In addition, some tax credits that reduce regular tax liability don’t reduce AMT tax liability. Learn more about the AMT on Topic No. 556 Alternative Minimum Tax.
Kiddie Tax Rules
- Kid’s investment (unearned) income is >$2,500. First $1,250 is tax-free, next $1,250 is at child’s marginal rate, rest is at parent’s rate.
- The child is either a 1) dependent under 18 or 2) under age of 19 and does not provide more than 1/2 of own support for earned income or 3) FT college kid under 24.
- kid required to file tax return
- if both parents are deceased, kiddie tax rules do NOT apply
- if the kid is MFJ, kiddie tax does NOT apply
Ways to File Kiddie Tax
1) Child’s return: Form 8615. If child has both unearned and earned income, this is your only option
2) Parent’s return: Form 8814
Nanny Tax/Household Employees
Threshold: $2600+ in wages; must withhold FICA & Medicare (ER & EE side) for 15.3%
- Any employed person by the household
- Schedule H (Household Employee) with an EIN & file W-2
- Not required to withhold income tax, but may upon request
- Does not apply to direct relatives (parent, spouse, kid under 21)
199A QBI Deduction
- Allows a deduction of up to 20% of qualified business income for owners of most pass-through businesses. NOT c-corps.
- qualifying businesses are sole props, partnerships, s-corps, trust, estates
- qualifying REIT/PTP (Publicly traded partnership) component: 20% of REIT dividends & qualified PTP income
- On 1040; NR aliens can take this but only applies to domestic activity
