Tax Computation and Credits Flashcards
How is the marginal tax rate calculated?
the change in tax (calculated using the tax table) divided by the change in taxable income (total amount of money being taxed)
Components of the child and dependent care credit
Married taxpayers must both produce earned income
Dependent qualifying child who is under 13, disabled dependent of any age (half of support provided by taxpayer), or a disabled spouse
$3k for one dependent and $6k for two or more dependents
How is the child and dependent care credit calculated?
The amount eligible is the lesser of: the earned income of the lower earning spouse, the actual expenses incurred, or the maximum allowable amount (3k or 6k); the credit is the qualifying amount multiplied by the applicable percentage which is based on the taxpayer’s AGI
Maximum 35% - max credit is $1,050 (3k * 35%) or $2,100 (6k * 35%); taxpayer’s AGI must be $15k or less
Phase-out from 35-20% - the credit decreases by 1% for each $2,000 of AGI over $15k but is not reduced below 20%
Minimum 20% - min credit is $600 (3k * 20%) or $1,200 (6k * 20%); taxpayer’s AGI is more than $43k
How is the elderly and/or permanently disabled credit calculated?
15% of eligible income for people 65+ or under 65 but retired due to total and permanent disability and received taxable disability income for the year
Base amount for the credit is:
$7500 for MFJ
$3750 for MFS
$5000 for all other taxpayers
Eligible income is reduced by SS payments and other pensions/annuities received by the taxpayer & 1/2 of the taxpayer’s AGI that exceeds the following levels:
Single - $7500
MFJ - $10,000
MFS - $5000
What is the American Opportunity Tax Credit (AOTC)?
It goes against federal income taxes for tuition, fees, and course materials in a student’s first 4 years of college. The max amount is $2500 and is on a “per student” basis
Phase-out begins with modified AGI over $80k ($160k MFJ) with full phase-out at $90k ($180k MFJ); up to 40% ($1k) of this credit is refundable
What is the Lifetime Learning Credit (LLC)?
It goes against federal income taxes for tuition and course fees (not course materials) and applies for an unlimited number of years. The max amount is $2000 and is on a “per taxpayer” basis
Phase-out begins with modified AGI over $80k ($160k MFJ) with full phase-out at $90k ($180k MFJ)
Both the AOTC and LLC can be claimed in the same year, just not on the same student
What is the Coverdell Education Savings Account?
Similar to AOTC and LLC, but it can be used for all levels of education and must be for a designated beneficiary under 18 (of which there is no limit). Max contribution per beneficiary is $2k annually
Max allowable contribution amount is phased out for taxpayers with modified AGI between $95k-110k (unmarried) and $190k-220k (married)
When beneficiary reaches 30 (special needs beneficiaries are an exception), remaining amounts must be distributed and will be taxable unless it is rolled over to another family member
What is a Section 529 Qualified Tuition Program (QTP)?
A program where a person can purchase tuition credits or make cash contributions to an account on behalf of a beneficiary for payment of college expenses. It is maintained by a state, state agency, or an eligible educational institution
Components of the Adoption Credit
Max credit allowed is $14,890. The credit is nonrefundable, but any credit in excess of tax liability may be carried forward up to 5 years. It does not apply to the child of a spouse or for a surrogate parenting arrangement and medical expenses do not qualify.
Phase-out begins for taxpayers with a modified AGI over $223,410 and is completely phased out at $263,410
Components of the Foreign Tax Credit
There is no limit on foreign taxes used as a deduction; however, foreign tax credits are limited to the lesser of: foreign taxes paid or foreign tax credit limit (calculated as: taxable income from all foreign operations / total taxable worldwide income * U.S. tax)
Any disallowed foreign tax credit may be carried back one year or carried forward ten years. In lieu of this credit, an individual can deduct the taxes as an itemized deduction
Components of the Child Tax Credit
For 2018-2025, taxpayers can claim a $2,000 credit for each qualifying child. The CARES rules apply, but the child must be under 17. It is a refundable credit.
Phase-out rules: reduce the $2,000 credit by $50 for each $1,000 the modified AGI exceeds: $400k for MFJ and $200k for all other filers
Earned Income Credit
Most frequently tested issue is that it is a refundable credit
Components of the Kiddie Tax
Unearned income of a child under 18 (or 18 to under 24 who does not provide half of their support and is a full-time student) is taxed at the parent’s rate.
Take the child’s total unearned income and subtract $2300 ($1150 for their standard deduction and another $1150 that is taxed at the child’s regular income tax rate)
If the child has earned income of more than $750, the standard deduction is earned income plus $400 (max of $12,950 which is the 2022 single standard deduction amount)
How to avoid the penalty for underpayment of estimated taxes
Timely estimated tax payments must equal 90% of the current year’s taxes in 4 equal payments or 110% of the previous year’s taxes in 4 equal payments (100% if the taxpayer’s previous AGI was less than $150k)
How is the Net Investment Income (NII) tax calculated?
3.8% of the lesser of: the taxpayer’s net investment income or the excess of the modified AGI over a threshold amount
