Tax Implications of Special Circumstances Flashcards
1
Q
Dependency Exemptions
A
- Taxpayers may take a personal exemption for a spouse ($4,050) and a dependency exemption for each child under the age of 19 (24 if full time college student) for whom they provide half of the support.
- a taxpayer can claim an exemption for elderly parents and adult children if the taxpayer provides half of their support and the parent or adult child has income below the exemption amount (taxable income and social security).
2
Q
Filing Status
A
- an unmarried taxpayer and a parent qualifies as a dependent for exemption purposes, the taxpayer will be able to file has head of household (unless dependency status is a result of a multiple support agreement)
- single parents who support an adult child is able to claim an exemption for that child and can file as head of household as long as the child lives with them for half of the year.
3
Q
Medical Expenses
A
- if an elderly parent does qualify as a dependent, medical costs paid for by the child may be taken as an itemized deduction. Still subject to 10% of AGI threshold. Premiums paid for medigap or long-term care can also be added to medical expenses for deduction purposes.
- if the parent does not meet the income test, medical expenses can still be deducted as long as the child provides more than 50% of the parent’s support.
4
Q
Dependent Care Credit
A
- this deduction has been expanded to allow it to be used by children caring for elderly parents.
- each taxpayer is allowed a credit of 20% (higher if AGI < $43,000) of the amount of expenses for dependent care necessary so a taxpayer can be gainfully employed.
- maximum credit is $3k for one dependent and 6K for two
- credit can still be claimed even if the parent does not meet the income test.
5
Q
Multiple Support Declarations
A
- used when more than one sibling provides support but neither provides more than 50% of the support.
- each sibling must contribute at least 10% of the cost of care and that when combined, they provide at least 50% of the support for the parent
- Form 2120 allows one sibling to claim the benefits by having the other one waive their tax claims that year. Valid for only that year, so siblings can take turns.
6
Q
Alimony
A
- deductible to the payer in calculating AGI and are included in gross income for the receiver.
- requirements for Alimony:
- must be paid in cash
- must be paid under a divorce or separation agreement
- must combine only until the death of the recipient spouse.
- Spouse cannot be members of the same household and may not file a joint return.
- cash payments to third parties are deductible when the payment is to meet the ex-spouse’s obligation, such as a mortgage or real estate taxes.
7
Q
Child Support
A
- are not deductible to the payer
- are not included in gross income for the recipient
8
Q
Dependency Exepmtions
A
- usually granted to the custodial parent (the parent whom the child spend the most number of nights with during the year)
- a custodial parent can sign form 8332 to release the claim, allowing the non-custodial parent to claim the exemption.
9
Q
Property Settlements
A
- if done within one year of divorce ,they are nondeductible to the spouse who gives up the property and are not included in the income of the spouse who receives it.
- no gain or loss is recognized on the transfer of the property.
- basis is transferred
10
Q
Excess Alimony Recapture
A
- used to prevent front-loading of alimony and allowing tax payers to disguise property settlements as deductible alimony.
- it is made up of 2 amounts: 1) the amount by which the second-year payment exceeds the third year payment. 2) the amount by which the first year payment exceeds the average of the second year and third year payments, plus $15,000. The excess is recaptured and included in income for the third year.
11
Q
Qualified Domestic Relations Order (QDRO)
A
- an order made under state law that tells the administrator or trustee of a qualified retirement plan how much to pay out of to the nonowner-spouse pursuant to a divorce.
- without one any withdrawal would be subject to income taxes and possibly penalties.
- it cannot override the rules set forth in the qualified plan document
- if the ex-spouse receiving the funds does not roll over the funds to a qualified IRA, they would have to pay income taxes, but would not be subject to the 10% penalty.
12
Q
QDRO - IRA
A
-if the distribution is from an IRA pursuant to a QDRO, any funds not rolled into the ex-spouses IRA will be subject to income taxes and 10% penalty.
13
Q
Income and Asset Transfers in Divorce
A
- payer spouse will want to pay more in alimony and transfer less in assets, while the recipient will want more in assets and less in alimony
- the assets transferred in divorce should be selected based on their income tax consequences.
14
Q
Credits Not Used by Dependents
A
- when parents do not take a personal exemption, the student will be allowed one of the credits.
- the use of the credit by the children will make sense when clients reach the AGI level where they are phased out of the credits and the student’s use of the credit will create a greater tax savings than the parents would receive for claiming the student as a dependent.
15
Q
Deduction for Higher Education
A
- $4,000 for married taxpayers whos AGI did not exceed $130,000 ($65,000 for singles)
- $2,000 whos AGI was in the range from $130,000-$160,000 (65-80k for singles)
- this deduction cannot be used if the American Opportunity Tax Credit or Lifetime Learning credit are used on the same student in the same year.
- the deduction cannot be used for expenses covered by a tax-free distribution from an educational savings account and is limited in its use in combination with a qualified tuition plan.
