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Survey Of Taxation > Chapter 14: AMT, SE Tax, Tax Credits, Tax Payments > Flashcards

Chapter 14: AMT, SE Tax, Tax Credits, Tax Payments Flashcards

1
Q

Purpose of alternative minimum tax

A

To ensure that all taxpayers would pay at least a minimum amount of income tax

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2
Q

Who does the alternative minimum tax apply to

A

Individuals, estates, and trusts

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3
Q

Alternative minimum taxable income

A

AMTI =
Taxable income (regular)
+ AMT preference items
+/- AMT adjustments

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4
Q

Alternative minimum tax base

A

Alternative minimum taxable income (AMTI)
Minus: AMT exclusion amount

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5
Q

Tentative minimum tax

A

Alternative minimum tax base
* AMT tax rates

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6
Q

Alternative minimum tax

A

AMT

Tentative minimum tax
Minus: regular income tax

Taxpayers must pay the greater of the regular income tax or TMT (aka must pay regular income tax + any AMT)

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7
Q

AMT tax brackets

A

26% on first $199,900 AMTI
28% on AMTI over $199,900

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8
Q

AMT exemption up to threshold

A

Exception given up to threshold

MFJ: $114,600 (up to $1,047,200 AMTI)

MFS: $56,300 (up to $523,600 AMTI)

Single or HOH $73,600 ((up to $523,600 AMTI)

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9
Q

AMT exception above the threshold

A

= basic exemption amount - 25%(AMTI - threshold)

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10
Q

Tax preference items

A

Items that receive regular preferential tax treatment that may be overused

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11
Q

Common tax preference items

A
  • excess of accelerated depreciation expense over straight line for real property placed in service before 1987 (computed item by item)
  • tax exempt interest on “private activity bonds” (state and local bonds issued to help a private business)
  • excess of depletion expense over adjusted basis of underlying resource asset (NOT INC. independent oil and gas producers and royalty owners)
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12
Q

Categories of AMT adjustments

A
  • regular tax itemized deductions disallowed in computing AMTI
  • disallowance of the standard deduction (if used)
  • timing differences from deferral of income or acceleration of deductions under tax rules
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13
Q

Itemized deductions not allowable for AMT

A
  • state, local, foreign sales, income, property tax
  • home mortgage interest other than qualified housing interest
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14
Q

Qualified housing interest

A

Interest on debt incurred to acquire/build/improve taxpayers principal residence or second home

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15
Q

Common AMT adjustments for timing

A
  • if taxpayer elected out of bonus depreciation for property placed in service between 1999 and 2015
  • real property placed in service between 1987 and 1998, the difference between MACRS claimed and hypothetical straight line depreciation
  • incentive stock options, exceed of FMV over price paid on date rights are freely transferrable/not subject to substantial risk of forfeiture
  • Difference between R&E regular deduction and deduction allowed had expenditures been capitalized and amortized over 15 years
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16
Q

What credits may reduce AMT

A

Only foreign tax credit and nonrefundable personal credits

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17
Q

Positive AMT adjustment

A

When amounts depreciated etc under AMT are smaller than actual amounts used the difference must be added to income to reach AMTI

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18
Q

Minimum tax credit

A

Credit allowed against regular tax liability for AMT paid in past years (if AMT was from amounts that reversed in later year)

If taxpayer paid AMT in a previous year and did not in the current they may be entitled to this credit

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19
Q

Total tax liability if subject to AMT

A

= regular tax + AMT

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20
Q

Do employees have to report FICA taxes on their income tax

A

No

Reported by the employer

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21
Q

Combined FICA rate

A

15.3%

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22
Q

FICA tax breakdown

A

12.4% social security tax
2.9% Medicare tax

If self employed must pay full amount

If employee of another: employer pays 1/2 and employee pays 1/2 (withheld from paycheck)

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23
Q

Social security ceiling

A

For 2021: $142,800

Wages/earnings above this amount do not accrue 12.4% social security tax

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24
Q

Is there a ceiling for medical tax imposed?

A

No. 2.9% Medicare tax imposed on all wages

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25
Q

Net earnings from SE

A

92.35% of self employment income

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26
Q

Self employment income which can be made by an individual and not have self employment tax charged

A

$400

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27
Q

Allowable deduction for self employment tax

A

50%

Deducted to arrive at AGI

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28
Q

Calculating SE tax

A

Self employment income x .9235 = net earnings from SE

(Smaller of net earnings from SE or $142,800) * .124 = social security tax

Net earnings * 0.029 = Medicare tax

Medicare tax + social security tax = FICA tax

FICA tax * .5 = SE tax deduction

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29
Q

Self employment tax for individuals who work as an employee and operate a business

A

Tax base for social security tax = lesser of net earnings from self employment or social security ceiling amount reduced by earnings as an employee

Tax base for Medicare tax is net earnings from self employment

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30
Q

Net earnings from self employment

A

Total self employment income x .9235

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31
Q

Hospital insurance tax

A

Aka additional Medicare tax

0.9% of wages and self employment income for individuals whose income exceeds $200,000 (single), $250,000 (MFJ), $125,009 (MFS)

Threshold amount used first against employee compensation and then against SE income

Only pay the additional tax on the income above the threshold

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32
Q

Is additional Medicare tax included in the for AGI self employment tax deduction?

A

No

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33
Q

SE tax for married filing jointly who both have SE income

A

Must be calculated separately

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34
Q

Items included in self employment income

A
  • net earnings from a sole proprietorship
  • directors fees
  • taxable research grants
  • distributive share of partnership income plus guaranteed payments from the partnership
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35
Q

Nonrefundable tax credits

A

Only offset tax liability (so only available to the extent of tax liability)

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36
Q

Refundable credits

A

Excess over tax liability will be paid to the taxpayer

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37
Q

Partially refundable tax credits

A

Child tax credit
American opportunity tax credit

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38
Q

Nonrefundable personal tax credits

A
  • Child and dependant care credit
  • tax credit for the elderly and disabled
  • adoption credit
  • child tax credit (partial)
  • American opportunity tax credit (partial)
  • lifetime learning credit
  • residential energy efficient property credit
  • qualified retirement savings contribution credit
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39
Q

Child and dependent care credit

A

35% of qualified expenses incurred for the care of a qualifying individual that enables the taxpayer to be gainfully employed

Must include SSN for qualifying individual AND the dependent care provider

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40
Q

Qualifying individual for child and dependent care credit

A
  • qualifying child under age 13
  • incapacitated dependent or spouse who lived with the taxpayer for more than 1/2 the year
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41
Q

Qualifying employment-related expenses for the child and dependent care credit

A
  • care inside the home: care and household maintenance (not if paid to a relative that is a dependent or a child)
  • care outside the home: as long as facility is run in compliance with the law (nursery school and kindergarten count, first grade does not)
  • care outside home for an incapacitated dependent or spouse only qualify if individual lives in the taxpayer’s home for at least 8 hours a day
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42
Q

Qualifying employment-related expenses for the child and dependent care credit

A
  • care inside the home
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43
Q

Ceiling on qualified child and dependent care expenses

A

$3000 for one qualifying individual
$6000 for two or more

No carryover in excess of maximum amounts

Maximum qualifying expense cannot exceed the taxpayer’s earned income (for MFJ the earned income of the spouse with a smaller income). Spouse who is a full time student or incapacitated is deemed to have earned income of $250/month)

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44
Q

Change in credit rate for child and dependent tax credit as AGI increases

A

35% if AGI up to $15,000

Reduced by 1 percentage point for each $2000 (or fraction thereof) of AGI in excess of $15,000

Rate goes no lower than 20%

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45
Q

If taxpayer receives employer supported dependent care assistance

A

Qualified expenses for the child and dependent care credit are reduced to the extent that the dependent care costs are funded through employer supported plans

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46
Q

Tax credit for the elderly and disabled

A

Tax credit of 15% of the tax credit base of $5,000 ($7,000 MFJ) reduced by:
- nontaxable benefits from SSI, railroad retirement, or veterans admin pension or annuity
- 1/2 of any AGI in excess of $7500 ($10,000 MFJ)

47
Q

Adoption credit

A

Credit of up to $14,440 (2021) for qualified adoption expenses allowed in the year the adoption is finalized

Phased out ratably over a $40,000 range for AGI over $216,660

48
Q

Qualified adoption expenses

A

Reasonable and necessary fee, court costs, attorney fees, and other expenses directly related to the legal adoption of a child who is not yet 18 when the adoption takes place or one who is physically or mentally incapable of self care

Expenses reduced by any reimbursements from an employer plan

49
Q

Adoption credit if adopting a special needs child

A

Taxpayers allowed maximum credit even if actual expenses were less

50
Q

Child tax credit

A

For qualifying children under the dependent qualification rules
$3,600 for children ages 5 and under at the end of 2021; and
$3,000 for children ages 6 through 17 at the end of 2021. (So is for all children under age 18)
$500 (nonrefundable) for “qualifying relatives”

51
Q

Child tax credit phase out (the additional $1,600)

A

The Child Tax Credit begins to be reduced to $2,000 per child if your modified AGI in 2021 exceeds:

$150,000 if married and filing a joint return or if filing as a qualifying widow or widower;
$112,500 if filing as head of household; or
$75,000 if you are a single filer or are married and filing a separate return.

The first phaseout reduces the Child Tax Credit by $50 for each $1,000 (or fraction thereof) by which your modified AGI exceeds the income threshold

52
Q

Child tax credit phase out (below $2,000)

A

The Child Tax Credit won’t begin to be reduced below $2,000 per child until your modified AGI in 2021 exceeds:

$400,000 if married and filing a joint return; or
$200,000 for all other filing statuses.

The second phaseout reduces the Child Tax Credit by $50 for each $1,000 (or fraction thereof) by which your modified AGI exceeds the income threshold

53
Q

Calculating child tax credit lost to phaseout amount

A

(modified AGI - threshold)/1000 rounded up to the next whole number * 50

54
Q

Refundable portion of the child tax credit

A

If child tax credit is greater than tax liability part of the credit is refundable

Refundable portion is the LESSER OF
- unclaimed portion of the credit,
- 15% of earned income in excess of $2,500, or (if 3+ children this is the greater of this or taxpayer’s social security taxes in excess of the taxpayer’s earned income credit)
- $1,400 per qualifying child

(Form 8812 to compute)

55
Q

Modified AGI

A

AGI plus:
Net foreign income excluded

56
Q

American opportunity tax credit

A

100% of the first $2000 in qualified tuition expenses + 25% of up to an additional $2000 qualified expenses (total possible credit $2,500) for each eligible student in the first four years of postsecondary education

57
Q

Criteria for American opportunity tax credit

A
  • qualified expenses only tuition and fees for enrollment and course materials (textbooks included)
  • limited to expenses paid for first four years of postsecondary education (may only be used 4x per student)
  • student must be enrolled at least half time at a eligible institution
  • eligible student = taxpayer, their spouse, or dependents
  • if have felony drug conviction not eligible
58
Q

Treatment of payments made in one tax year for an academic period in the next tax year

A

If academic period starts in Jan, feb, or March the period is treated as starting during the year in which the payments were made (so can be claimed for tax credit in the year paid)

59
Q

Treatment of scholarship payments for AOTC

A

Qualified tuition and eligible expenses must be reduced by amounts received as scholarships or from employer-sponsored educational plans

60
Q

Phase out threshold for AOTC

A

For MAGI over $160,000 MFJ - phased out over $20,000 range. Other filers $80,000 threshold over $10,000 range

Tentative AOTC x ((MAGI - threshold)/ phase out range) = phase out

61
Q

Refundability of AOTC

A

Up to 40% of allowable AOTC is refundable

62
Q

Lifetime learning credit

A

20% of qualified education expenses of up to $10,000 a year per family unit (taxpayer, spouse, and dependents)

Nonrefundable

Allowed for unlimited number of years

63
Q

Expenses eligible for lifetime learning credit

A
  • paid during the year for tuition and academic fees (not course materials)
  • for postsecondary academic work or courses to obtain or improve job skills
  • paid for the taxpayer, their spouse or dependents

Reduced by any tax preferred amounts (scholarships, employee benefits) received

64
Q

Phaseout for lifetime learning credit

A
  • MFJ threshold= $160,000, phase out range = $20,000
  • other filers threshold = $80,000, phase out range $10,000

(Threshold revised annually)

Tentative LLC x ((AGI - threshold)/ phase out range) = phase out

65
Q

Choosing between AOTC and LLC

A

Can only select one credit for each eligible student. If any of the students expenses are used for AOTC in a year then none of their expenses may be used for LLC that year

AOTC cannot be taken if it has already been used for the students for four tax years

66
Q

Residential energy efficient property credit

A

REEP credit

Valid for tax years through 2021

For non-solar (fuel cell, wind, geothermal) vs solar (water heating and electric generating) energy efficient property installed on a taxpayer’s principal residence

Costs eligible for credit include labor cost

Taxpayer’s basis in the property is reduced by the amount of the credit

If less than 80% of dwelling is for non business use only nonbusiness percent of credit taken

Swimming pools and hot tubs not eligible

Credits nonrefundable but credits earned but unused may be carried forward

67
Q

REEP credit rates

A

Property placed in service before 2017: 30%

Property placed in service after 2016: only solar property eligible

Placed in service 2017- 2019: 30%

Placed in service in 2020: 26%

Placed in service in 2021: 22%

68
Q

Qualified retirement savings contribution credi

A

Aka saver’s credit

Credit for up to $2000 in qualified retirement savings contributions

Allowed in addition to allowable exclusions and deductions

% of contributions that can be taken as a credit determined by AGI range

69
Q

Foreign tax credit

A

Taxpayers with foreign income can take either the FTC or a deduction for foreign taxes paid or accrued to avoid double taxation. The FTC generally results in a greater tax benefit than the deduction

70
Q

Allowable foreign tax credit

A

The lesser of
- foreign tax paid or accrued, or
- portion of U.S income tax liability attributable to income earned in all foreign countries = (foreign source taxable income / (worldwide taxable income)*US income tax before credits

71
Q

Treatment of unused foreign tax credit

A

may be carried back one year or forward for ten years to use in years limitation is not exceeded

Anything unused after 10 years is lost

72
Q

General business credits

A

Credits commonly available to business

Grouped together for the purpose of finding an overall dollar limitation

Excess may be carried back one year and forward 20 years

Used in order generated (carry forward 1st, then current year, then very back

All nonrefundable

73
Q

Credit for rehabilitation expenditures

A

Credit of 20% of qualified rehabilitation expenditures for older industrial and commercial buildings and certified historic structures - allowed ratably over a 5-year period

Depreciable property held for Trade or business or investment NOT residential rental unless certified historic

74
Q

Qualified rehabilitation expenditures

A

Renovation, restoration, construction

NOT enlargement or new construction

For buildings other than certified historic structures project must meet structural tests and have QRE exceeding $5,000 or the building’s adjusted basis

75
Q

Additional rules for the tax credit for rehabilitation expenditures

A
  • rehabilitation of a certified historic structure must be certified by department of interior
  • must use straight line depreciation with sec 168 recovery periods
  • basis of property for depreciation is reduced by full amount of credit taken
76
Q

Recapture of tax credit for rehabilitation expenditures

A

Recaptured at 20% per year if property disposed of in 5-years of date placed in service

77
Q

Business energy tax credits

A

Can take grants or credits, not both.

Energy conserving priorities constructed, reconstructed or acquired for original use and placed in service before 2017: 30% property basis for solar, fuel cell, or wind. 10% for other (geothermal etc.)

SOLAR energy property acquired or began construction by 2019: 30%, if in 2020: 26%, in 2021: 22%

78
Q

Work opportunity credit

A

Years before 2026

Credit of certain % of qualified first year wages for hiring individuals from certain targeted groups

79
Q

Work opportunity credit: group A

A

Credit of 40% of wages up to $6,000

Qualified Veterans
Ex-felons
Designated community residents
Vocational rehabilitation referrals
Summer youth employee
Recipients of welfare programs

80
Q

Work opportunity credit: group B

A

40% of qualified first year wages up to $10,000 of first year wages and 50% of up to $10,000 of second year wages

Recipients of benefits under long term family assistance

81
Q

Work opportunity credit: group C

A

40% of qualified first year wages up to $12,000

Veterans with a service related disability hired within 1 year of discharge from active duty

82
Q

Work opportunity credit: group D

A

40% of qualified first year wages up to $14,000

Veterans with 6-months or more of unemployment in the year before hire

83
Q

Work opportunity credit: group E

A

40% of qualified first year wages up to $24,000

Veterans with a service related disability
hired within 1 year of discharge from active duty or with more than 6 months of unemployment before the year of hire

84
Q

Employer provided child care credit

A

Sum of:
25% of qualified child care expenses
Plus
10% of qualified child care resources and referral expenditures

May not exceed $150,000 in a tax year

May not claim deduction and credit. Expenses otherwise deductible are reduced by the amount of the credit claimed

85
Q

Recapture provisions for employer provided child care credit

A

If use of facility as a qualified child care facility is terminated within ten years of the year the child care facility is placed in service original credit must be recaptured

100% recapture if terminated in first three years and then declines

86
Q

Disabled access credit

A

50% of eligible expenditures exceeding $250 but not over $10,250, incurred to make existing facilities accessible to disabled individuals

(Max annual limit $5000)

Credit reduces deduction for eligible expenses

Payments made in connection with a new facility are not eligible

Depreciable basis of the property is reduced by the credit amount

87
Q

Small businesses eligible for disabled access credit

A

Either
- gross receipts of $1M or less in preceding year
Or
- no more than 30 full time employees in the preceding year

88
Q

Credit for increased research activities

A

Sum of:
- regular research credit
- University basic research credit
- Energy research consortium credit

Rate of 20% of excess qualified research expenses over base amount

89
Q

Qualified research expenses

A

Internal and external research expenses that are incident to the development or improvement of a product or component.

Only incremental expenditures in excess of a base amount are eligible

Research conducted after start of commercial production does not qualify (also not marketing, advertising, or production expenses)

90
Q

Base amount for qualified research expenses

A

Greater of:
1) product of the taxpayer’s fixed-base percentage and annual gross receipts over the four years prior to the credit year, or
2) 50% of credit year qualified research expenditures

91
Q

Base amount for qualified research expenses

A

Greater of:
1) product of the taxpayer’s fixed-base percentage and annual gross receipts over the four years prior to the credit year, or
2) 50% of credit year qualified research expenditures

92
Q

Calculating fixed-base percentage for credit for increased research activities

A

Historical ratio of qualified research expenditures to gross receipts but limited to 16%

Based on table

93
Q

Simplified credit for increased research activitirs

A

Not based on historical gross receipts.

  • 14% of the excess qualified research expenses from the current year / 50% of the average qualified research expenses for preceding three taxable years, or
  • 6% of qualified research expenses in the current year if the taxpayer does not have qualified research expenses in the previous three tax yearw
94
Q

General business credit overall limitation

A

May not exceed the smallernof

95
Q

General business credit limitation

A

May not exceed the smaller of:
- net income tax less tentative minimum tax and
- net income tax less (.25*(net regular tax - 25,000)

96
Q

Net income tax

A

Sum of net regular tax liability and the AMT reduced by nonrefundable personal credits and foreign tax credit

97
Q

Net regular tax liability

A

Regular tax reduced by nonrefundable personal tax credits and the foreign tax credit

98
Q

Refundable personal credits

A

Earned income credit
Parts of AOTC and the child tax credit

99
Q

Earned income credit

A

Based on taxable employee compensation + net earnings from self employment

Not available if “disqualified Income” is above $3,650 (2021)

Available to individuals with qualifying children and some individuals without children of they meet requirements

(Married taxpayers must file jointly to be eligible)

Credit based on # of qualifying children and income earned

100
Q

EIC disqualified Income

A

Taxable interest income and dividends
Tax-exempt interest income
Net income from nonbusiness rents or royalties
Net capital gains
Net passive activity income

101
Q

Requirements for individuals without children to qualify for the EIC

A
  • principal place of abode in US for more than 1/2 the tax year
  • individual (and spouse) is at least 25 and not more than 64
  • not a dependent or qualifying child of another taxpayer
102
Q

Calculating EIC

A

Tentative EIC = credit rate x credit base for number of qualifying children.

Phase out amount = phase out rate x (AGI- phase out threshold)

Allowed EIC= tentative EIC - phase out amount

103
Q

Health insurance premium assistance credit

A

Aka premium tax credit

Excess of qualifying health insurance premiums over premium amount deemed affordable based on the taxpayer’s household income

104
Q

Withholding of tax when working for more than one employer during the same year

A

Each employer withholds FICA and income tax without regard to the other.

Over withholding of employee portion of FICA: excess is credited as additional tax payment

Excess employer FICA contributions: not refundable or creditable against tax liabilities of employer or employee

105
Q

When are taxpayers exempt from income tax withholding?

A
  • if they had no tax liability in the prior year
  • expect no tax liability in the current year
  • can be claimed as a dependent and report no more than $1100 total income (no more than $350 unearned)

Earnings still taxable. Just withholding not required

106
Q

Employment activities exempt from withholding

A

Agricultural laborers
Ministers
Household employees
Newspaper carriers under 18
Those earning tips of less than $20/month

Earnings still taxable, employers still responsible for matching FICA payments

107
Q

Backup withholding

A

24% withholding rate required on most types of payments where a 1099 is required if a proper taxpayer identification number is not provided

108
Q

W-4

A

Employees withholding certificate

Amended w-4 must be supplied to the employer within 10 days of a change in employees circumstances

109
Q

Information on a W-4

A

Filing status
Number of qualifying children for child tax credit
Number of jobs held by taxpayer and spouse
Additional deductions/losses/credits expected
Expected tax savings from 21-41 credits

110
Q

Required estimated tax payments to avoid underpayment penalty

A

Must equal or exceed any of the following

  • 90% of current year tax liability
  • 100% of the prior year tax liability if the taxpayer’s AGI was $150,000 or less or 110% of the prior year’s tax liability if the taxpayer’s AGI was more than $150,000
  • 90% of current year tax liability computer on annualized basis

No penalty imposed if:
- estimated tax for current year is under $1000 or if no tax liability in the prior year

111
Q

Deadlines for calendar year quarterly estimated tax payments

A

April 15
June 15
September 15
January 15 (following year)

112
Q

Form to determine potential underpayment penalty or if exception applies

A

Form 2210

113
Q

Does the IRS have to pay interest on refunds

A

Not if refund paid within 45 days from the later of the due date of the return or it’s filing date

114
Q

Withholding vs estimated tax payments

A

Even if increased at the end of the year withholding is treated as being made evenly over the year

Survey Of Taxation (14 decks)

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