Credits, AMT, and Losses

Question 1

What qualifies an individual for the Earned Income Credit, assuming they meet the income and residency requirements?

Answer 1

A taxpayer can be eligible for the Earned Income Credit by having a qualifying child or meeting three qualifications:

1) The individual must have his or her principal place of abode in the United States for more than one-half of the taxable year;
2) (S)he must be at least 25 years old and not more than 64 years old at the end of the taxable year; and
3) The individual can’t be claimed as a dependent of another taxpayer for any tax year beginning in the year the credit is being claimed.

Question 2

What is the maximum amount that capital losses may offset against ordinary income for the current tax year?

Answer 2

$3,000

Question 3

Is the Earned Income Credit refundable?

Answer 3

Yes, it is a refundable credit. A refundable credit is payable as a refund to the extent the credit amount exceeds tax otherwise due.

Question 4

Are miscellaneous itemized deductions allowed in calculating AMT?

Answer 4

No, miscellaneous deductions are not allowed in calculating AMT.

Question 5

How are passive activity losses offset with other passive activities that have a gain?

Answer 5

By a proration between the passive activities with losses based on the amounts of each individual loss.

Question 6

What is the tax treatment of net losses in excess of the at-risk amount for an activity?

Answer 6

Any losses in excess of the at-risk amount are suspended and carried forward without expiration and are deductible against income in future years from that activity.

Question 7

How much may an active participant in rental real estate generally deduct?

Answer 7

Generally, an active participant in rental real estate may deduct up to $25,000 per year in rental real estate losses. For taxpayers whose MAGI exceeds $100,000, the amount of the active real estate loss deduction is reduced for 50% of the excess of MAGI over $100,000.

Question 8

When do suspended and current-year losses from passive activities become deductible in full?

Answer 8

Suspended and current-year losses from passive activities become deductible in full in the year the taxpayer completely disposes of all interest in the passive activity.

Question 9

Is a deduction allowed for personal exemptions in the computation of AMTI?

Answer 9

Personal exemptions are added back to taxable income when calculating the Alternative Minimum Tax. Therefore, no deduction is allowed for personal exemptions in the computation of AMTI.

Question 10

What is the % of qualified tuition expenses used to calculate the Lifetime Learning Credit?

Answer 10

20%

Question 11

Does a tax credit lower taxable income dollar-for-dollar?

Answer 11

A $1 tax credit lowers tax liability (not taxable income) by $1 (i.e., dollar-for-dollar)

Question 12

What are the nonrefundable personal credits?

Answer 12

Nonrefundable personal credits include the Foreign Tax Credit, the Child and Dependent Care Credit, the Lifetime Learning Credit, the Retirement Savings Contribution Credit, the Child Tax Credit, the Credit for the Elderly or the Disabled, and the General Business Credit

Question 13

What happens with the unused amounts from a taxpayer’s foreign tax credit?

Answer 13

The unused foreign tax credit can be carried back for 1 year and then carried forward for 10 years.

Question 14

What is the General Business Credit (GBC)?

Answer 14

The General Business Credit (GBC) is a set of several credits commonly available to businesses. The GBC is limited to net income tax minus the greater of the tentative minimum tax or 25% of net regular tax over $25,000. Net income tax is the sum of regular income tax and minimum tax liability, reduced by nonrefundable credits other than those that comprise the GBC. Tentative minimum tax is an amount used in computing the alternative minimum tax. Net regular tax is the taxpayer’s regular income tax liability (i.e., without alternative minimum tax) reduced by nonrefundable credits

Question 15

What is the % and $ amount for the Work Opportunity Tax Credit?

Answer 15

Employers may take a Work Opportunity Tax Credit equal to 40% (25% for employment between 120 hours and 400 hours) of the first $6,000 paid to employees from certain targeted groups who work 400 hours or more. The credit is taken for first-year wages paid to eligible individuals. An employee must be a member of a target group before commencing work for the employer

Question 16

How are the three tests (relationship, residency, and age) for a qualifying child with the Earned Income Credit (EIC) implemented?

Answer 16

The child must be related by birth or adoption or be an eligible foster child or stepchild. The taxpayer must provide the child’s principal place of abode for more than half of the year. The child must be under age 19 at the close of the tax year, be permanently disabled, or be a student under the age of 24.

Question 17

Is the Earned Income Credit greater for individuals with 4 or more children?

Answer 17

The Earned Income Credit changes for qualifying taxpayers with zero, one, two, or three qualifying children; however, qualifying taxpayers with four or more qualifying children receive the same credit treatment as those with three qualifying children.

Question 18

May a remaining amount of a suspended loss from a passive activity be used to deduct non passive income in the year the taxpayer completely disposed of all interest in the passive activity?

Answer 18

Yes, suspended losses from a passive activity become deductible in full in the year the taxpayer completely disposes of all interest in the passive activity. The loss is deductible first against net income or gain from other passive activities. Any remainder of the loss is treated as nonpassive loss deduction

Question 19

Are casualty losses deductible against alternative minimum taxable income (AMTI)?

Answer 19

Yes, subject to limitations.

Question 20

What do the at-risk rules not apply to?

Answer 20

The at-risk rules apply to most business and income-producing activities. However, there is an exception for a closely held corporation actively engaged in equipment leasing. A closely held corporation for this purpose is defined as one owned more than 50% during the last half of the year by five or fewer individuals. At least 50% of the gross receipts must be from equipment leasing for the corporation to be considered “actively engaged” in equipment leasing [Sec. 465(c)(4)(B)].

Question 21

What defines a not operating loss (NOL)?

Answer 21

A net operating loss is defined as the excess of allowable deductions (as modified) over gross income [Sec. 172(c)]. An NOL generally includes only items that represent business income or loss. Personal casualty losses and wage or salary income are included as business items. Nonbusiness deductions in excess of nonbusiness income must be excluded. Interest and dividends are not business income.

Question 22

If a personal loss occurs from a fire, the loss is deductible?

Answer 22

Yes, the IRC allows deduction for losses caused by theft or casualties, whether business or personal. A casualty loss arises from a sudden, unexpected, or unusual event caused by an external force, such as fire, storm, shipwreck, earthquake, sonic boom, etc. Theft includes robbery, larceny, and the like. It may also include loss from extortion, blackmail, etc

Question 23

An individual taxpayer may carry forward excess capital losses indefinitely?

Answer 23

Yes, an individual taxpayer may deduct net capital losses to the extent that they do not exceed the lesser of $3,000 ($1,500 if married filing separately) or ordinary income. The individual may carry forward any excess capital losses indefinitely

Question 24

NOLs are carried back for 2 years and forward for up to 20 years?

Answer 24

Yes, a net operating loss (NOL) occurs when business expenses exceed business income. The NOL is deductible when carried to a year in which there is taxable income. NOLs are first carried back for 2 years and then carried forward up to 20 years. However, a 3-, 4-, or 5-year carryback period may be elected for NOLs that arise in a tax year ending during 2008 or 2009. Election can be made to forgo the carryback years and start with the carryforward period.

Question 25

As long as an individual participates in rental activity for more than 500 hours, they will not be subject to passive activity loss limitations?

Answer 25

No, a passive activity is either a trade or business in which the person does not materially participate or a rental activity. It is true that a taxpayer materially participates in an activity during a tax year if (s)he satisfies any one of six tests, including participating more than 500 hours, however the material participation is not applicable to general rental activity.

Question 26

If a deduction would reduce basis in property and part or all of the deduction is disallowed by the at-risk rules, the basis is reduced anyway?

Answer 26

Yes, if a deduction would reduce basis in property and part or all of the deduction is disallowed by the at-risk rules, the basis is reduced anyway.