Unit 15 - Additional Taxes & Credits Flashcards
AMT
A parallel tax that was created to prevent higher income taxpayers from not paying their share of taxes
Taxpayer has to pay the higher tax of regular tax liability or AMT
How is AMT calculated?
The AMT is the excess of the tentative minimum tax that is greater than the regular income tax
AMT is only owed if the tentative minimum tax is greater than the regular tax
The tentative minimum tax is computed by
- Starting with the regular taxable income.
- Add back the standard deduction if taken, or adjustments for itemized deductions not allowed (SALT taxes)
- Add back or adjust for tax preference items (ISOs, depreciation)
- real property depreciation is 40yrs for AMT! Use the MACRS tables to know % difference to deduct or add back. If MORE depreciated, it’s a negative. If LESS depreciated, you add it.
- ISO gains are immediately recognized for AMT. add back!
- Subtract exemption amount
- Multiplying the amount computed by the applicable AMT rate. (26% on first 220,700 and 28% on amounts above?)
- Subtracting the AMT foreign tax credit.
= Tentative minimum tax
Compare to regular tax liability!
If AMT IS GREATER, the difference is the AMT
Where is the AMT calculated and reported?
Form 6251 – alternative minimum tax, individuals, estates, and trust
Just because the form is required to be completed – may not necessarily need to file
The following items require the taxpayer to complete form 6251
- Accelerated depreciation.
- Stock received through incentive stock options that were not sold in the same year
- Tax exempt interest from private activity bonds.
- Income or loss from tax shelter, farm activities or passive activities.
Scenarios that could require a taxpayer to pay the AMT tax
Having a high income, coupled with high itemized deductions
The exercise of incentive stock options
A large sale of capital assets that result in long-term capital gains
Tax exempt interest from private activity bonds
AMT exemption amounts
Single or HOH – $81,300
MFJ or QSS – $126,500
MFS – $63,250
Once you calculate the alternative minimum taxable income
You subtract the correct exemption amount
And then multiply by the rate of 26% or 28%
Equals the tentative tax (subtract foreign tax credit if applicable)
Any amount greater than the regular tax is the AMT
Credit for prior year minimum tax
A nonrefundable credit may be available to individuals estates and trust
For alternative minimum tax paid in prior years
To the extent that taxpayers regular tax in the current year is greater than their tentative minimum tax
If applicable, the credit is calculated on form 8801 – credit for prior year minimum tax – individuals, estates, and trust
Kiddie tax – applies to what type of income?
Unearned and investment income, such as interest, dividends, and capital gains distributions
Never applies to earned income
The kiddie tax also applies to unemployment income
Part of a child’s investment income may be subject to the kiddie tax if:
- Child investment income is more than $2500.
- The child is:
- a dependent under age 18
- under the age of 19 and does not provide more than half of their support with their own earned income
- a full-time college student under age 24 and does not provide more than half of their support with their own earned income
- The child is required to file tax return for the tax year.
- At least one of the child’s parents was alive at the end of the year – does not apply if both parents are deceased.
For a child – what amount of investment income is taxed at the kiddie tax?
All the child’s investment income in excess of $2500 is taxed at the parents tax rate
The first $1250 in investment income is tax-free
The second $1250 is tax at the child’s marginal rate
How is kiddie tax reported?
- Child’s return - child can file their own return and report the tax on form 8615, tax for certain children who have unneeded income.
- On the parents return - Parents can report the child’s honor income on form 8814, parents election to report child’s interest and dividends.
To use the parent return method
- child can only have income from interest, dividends, or gain distributions
- child’s gross income needs to be less than $12,500
What is the child’s marginal tax rate?
10%
The kiddie tax does not apply to
A child who is married and files a joint return with their spouse
First time homebuyer credit repayment
In 2008 there was a special tax credit for first time homebuyers
It took the form of a loan – taxpayers required to repay the funds received over a 15 year. Period.
The maximum credit was $7500 which equals $500 per year for 15 years of additional tax
Where is the first time homebuyer credit repayment reported on a tax return
Scheduled two, line 10, of the form 1040
First time homebuyers credit repayment – what if you sell the home or convert it to a rental property
Taxpayer must complete form 5405, repayment of the first time homebuyer credit
Required to repay the credit with the tax return for the tax year in which the sale is completed
Some exceptions
- Involuntary conversions
- Transfers incident to divorce.
- The person who claimed the credit dies.
First time homebuyer credit repayment – involuntary conversion
The home is destroyed or condemned and not replaced within the two-year replacement.
Then … The repayment amount owed after the two year period ends is limited to the gain on the disposition
Any amount of the credit in excess of the gain does not have to be repaid
First time homebuyer credit repayment – transfers incident to divorce
The spouse who receives the home is responsible for repaying the credit – regardless of which spouse purchase the home
First time homebuyer, credit repayment – the person who claimed the credit dies
The remaining balance of the credit is not required to be paid
Unless
The credit was claimed on a joint return requiring the surviving spouse to continue repaying their half of the credit
Nanny tax
What is it?
Examples ?
When a taxpayer employees household workers, they are responsible for paying employment taxes
A worker is classified as an employee if the taxpayer has control over what work is done and it is done, whether the work is full-time or part-time .
Examples :
Babysitters
Housekeepers
Private nurses
Yard workers
Chauffeurs
Where is nanny tax reported
Tax requirements…
Schedule H - household, employment taxes (the employer taxpayer needs an EIN to file schedule H)
If a taxpayer pays a household employee wages of $2600 or more
Employer must withhold the employees share of Social Security and Medicare taxes and remit them along with the employers matching share for a total of 15.3%
No FICA taxes are required if paid less than $2600
Employer is not required to withhold income tax.
Wages paid for $2600 and more – the employer also must file form W – two, wage and tax statement, and furnish a copy of the form to the employee
Nanny tax rules exemption
Wages paid to a taxpayer spouse, parent, or child under the age of 21 are exempt from the nanny, tax rules
Taxpayer would not have to withhold FICA tax
Nanny tax – tax liability payments
Estimated taxes must be withheld or paid as the tax liability is incurred – lawyers cannot wait until they file the tax return with schedule H to pay household taxes owed
The taxpayer has several options
- Increase federal income tax withheld by giving their employer a new form W-4
- Increase their federal income tax withheld by giving the payer of their Social Security or pension a new form W-4 – P, with holding certificate for pension or annuity payments.
- Make estimated tax payments by filing form 1040 – ES, estimated tax for individuals.
Section 199A deduction
Also referred to as the QBI deduction
Qualified business operating within the United States
Available regardless of whether an individual itemizes their deductions or takes the standard deduction
Expires 2025
Only applies to individuals and estates or trust who own interest in businesses, tax as sole proprietor ships, partnerships, or S corporations
The purpose is to level the Plainfield with C corporations that have a max tax of 21% - and these types of businesses flow through to owners with potential taxes at 37%
QBI deduction – modified taxable, income, threshold amounts
What are the threshold’s?
How to calculate MTI
What if you exceed the threshold’s?
MFJ – $364,200-$464,200
All other filing statuses – $182,100 to $232,100
Modified taxable income = taxable AGI - Standard or itemized deduction amount - Net capital gains - qualified dividends
(Taxable AGI = wages - above line)
Taxpayers with taxable income that exceeds the threshold amounts – the deduction is subject to two limitations
- The type of trade or business.
- The amount of W –2 wages paid by the qualified trader business, and the UBIA of qualified property held by the trader business
Blank
Calculating the QBI
Qualified business income is the net amount of qualified items of income, gain, expenses/deduction, and loss from any qualified trader business
Minus any of the exclusion items
The business income must be generated by domestic business activity
Qualified business income does not include
Employee wages – accept wages earned by a statutory employee
Reasonable compensation earned by a shareholder – employee of an S corporation
Any guaranteed payment from a partnership for services rendered with respect to the trade or business
Investment income – such as capital gains or interest and dividend income
Hobby income
Non-taxable income, such as municipal bond interest
Rental real estate income, where the real estate activity does not rise to the level of a trade/business – this does not mean that the taxpayer has to be a real estate professional in order to get the CBI deduction
How is the QBI deduction claimed by partnerships and corporations?
Where is it reported?
They are not claimed at the entity level
All S corporations and partnerships report each shareholders or partners share of QBI on schedule K –1
So the shareholders or partners can claim the 199A deduction on their individual tax returns
Form 8995 or 8895-A
Flows to the 1040 line 13 qualified business income deduction
Qualified business loss
And overall qualified business loss results in no QBI deduction for the taxable year
The lost carries over to subsequent years and reduces the section 199 a deduction for QBI in the following years
The total section 199A deduction is…
The lessor of:
20% of qualified business income
Or
20% of modified taxable income
Tax home of the taxpayer
Where the taxpayer resides -is what matters (not the physical location of the employer)
Example – a US citizen living in Canada working remotely for a US company is considered foreign earned income because the taxpayer resides in another country
Foreign earned income exclusion
If taxpayer is eligible for the foreign earned income, exclusion, therefore foreign income up to a certain threshold is not taxed
Maximum exclusion is $120,000
For Mary couples the exclusion is applied on a per spouse basis
Exclusion does not apply to investment income, such as dividends, interest, or passive income from rental activities
It does not apply to pension or retirement income
Where is foreign earned income, exclusion reported
For 2555
Each spouse must file their own form if both qualify
Foreign earned income – tax return filing requirements
The exclusion is not automatic – must file a US income tax return each year with form 2555 attached
All of the normal filing thresholds for US taxpayers apply – regardless of where the taxpayer works or resides
Eligibility requirements to claim the foreign earned income exclusion
- Must be a US citizen or a legal resident alien of the United States.
- Have foreign earned income.
- Have a foreign tax home. (Residence)
- And past one of the two following test.
- bona fide residence test – US citizen or US resident alien is a genuine resident of a foreign country for an uninterrupted period that includes an entire tax year
- the physical presents test – US citizen or US resident alien is physically present in a foreign country or country countries for at least 334 days during 12 consecutive months
The foreign earned income exclusion does not apply to who?
Members of the armed forces
And government employees of the United States
Nonresident aliens do not qualify
But civilian contract workers may qualify as having a tax home in a foreign country
Foreign housing exclusion or deduction
The foreign housing exclusion applies only two amounts paid by an employer (for an employees housing that is reported as income)
The foreign housing deduction applies only to amount paid with self-employment earnings
Qualified housing expenses include reasonable expenses paid for housing in a foreign country
The foreign housing exclusion, and or deduction will reduce regular income tax, but will not reduce self-employment tax for taxpayers who are self-employed
The foreign tax credit and foreign income taxes
Foreign income taxes paid to another country can be deducted as an itemized deduction on schedule a
Or
As a foreign tax credit against US income tax
Taxpayer can choose between a foreign tax deduction or a foreign tax credit – which ever results in the lowest tax
The foreign tax credit is usually the best advantage
The foreign tax credit – purpose and eligibility requirements
Credit is designed to relieve taxpayers of the double taxation burden that occurs when foreign source income is taxed by both the US and a foreign country
Nonresident aliens are not eligible for this credit
For test must be met to qualify for the credit
- The tax must be imposed on the taxpayer.
- The taxpayer must have paid the tax.
- The tax must be a legal and actual foreign tax liability.
- The tax must be an income tax – not an excise tax, sales, tax, etc..
The foreign tax credit does not apply to
Taxes paid on any income that has already been excluded, using the foreign earned income exclusion, or the foreign housing exclusion
The foreign tax credit applies to
Doesn’t apply to…
Any type of foreign income, including investment income
For tax paid may be reported to the taxpayer on form 1099 – INT or form 1099 – DIV
Does not apply to
- interest or penalties paid to a foreign country
- taxes imposed by countries involved with international terrorism
- taxes on foreign oil or gas extraction income
- Tax paid to Iran, North Korea, Sudan, or Syria.
The foreign tax credit – where is it reported?
If total foreign taxes paid do not exceed $300 or $600 MFJ – claim the credit directly on schedule 3
If foreign tax paid exceeds $300 or $600 MFJ taxpayer must file form 1116, for tax credit
Foreign tax credit – amended returns
Taxpayers allowed to switch between claiming the foreign tax credit or an itemized deduction for foreign tax paid
If taxpayer claimed an itemized deduction for a prior year for qualified foreign taxes – the taxpayer can also switch to claiming a credit by filing an amended return within 10 years from the original due date of the return
Foreign tax credit - max amount
Foreign tax credit cannot exceed…
US tax liability multiplied by a fraction of
Numerator- foreign taxable income
Denominator - total US + foreign income
