Flashcards in Chapter 2 Continued Deck (38):
Child and Dependent Care Credit:
A tax credit of 20 percent to 35 percent of eligible expenditures:
1 dependent - max expenditure 3,000
2 or more - max expenditure 6,000
eligible people - kids under 13, or disabled dependent
general rule - both parents must be working and paying someone to take care of dependent
Credit for the Elderly and/or Permanently Disabled:
credit of 15% of eligible income available to individuals who:
65 years of age and older
under 65 and retired due to PERMANENT disability
The American Opportunity Credit (also known as "Hope Scholarship"):
First 4 years of a students college
maximum is 2,500
qualified "per student" basis (multiple kids ok)
credit phase out begins at AGI 80,000/160,000 joint and ends at 90,000/180,000 joint
The Lifetime Learning Credit:
Maximum is 2,000 per year
available for unlimited number of years for qualified tuition
credit = 20% of qualified expenses up to 10,000
Only get 1 credit no matter how many kids you have going to school
credit phase out begins at AGI 55,000/110,000 joint and ends at 65,000/130,000 joint
Credit is phased out when AGI goes from 201,010 - 241,010
all reasonable and necessary expenses FOR adopting
MEDICAL EXPENSES do NOT qualify
Retirement Savings Contributions Credits (IRA):
must be at least 18, not a full time student, and NOT a dependent of anyone
Foreign Tax Credit:
Lesser of the foreign taxes paid OR
(Taxable income from all foreign operations / Taxable income + exemptions) X US tax = Foreign tax credit
carry back 1 year, forward 10 years
General Business Credit:
Tentative Tax 0 - 25,000 you are allowed 100%
Tentative Tax excess you are allowed 75%
usually can carry back 1 year and forward 20
Work Opportunity Credit:
40% of first 6,000 first year wages or 3,000 to summer youth
this is for hiring disabled people, 18 to 24 poor kids, etc
"Child" Tax Credit:
Can claim a 1,000 credit for each qualifying child
kid must be under 17 age and of course a citizen
phase out of course
Earned Income Credit (REFUNDABLE):
your income has to be really low for this
Which of the following credits can result in a refund even if the individual had no income tax liability?
The earned income credit is refundable. Eligible taxpayers can get advance payments from their employers because the credit is assured.
How may taxes paid by an individual to a foreign country be treated?
A taxpayer may claim a credit against federal income taxes due for foreign income taxes paid to a foreign country or a U.S. possession. There is a limitation on the amount of the credit an individual can obtain. In lieu of this credit, an individual might find it better to deduct the taxes as an itemized deduction (NOT subject to the 2% floor) instead.
The only refundable credits are?
the child tax credit (which is a different credit with a similar name), the earned income credit, withholding taxes, portions of the Hope Scholarship credit, and excess Social Security taxes paid.
An employee who has had social security tax withheld in an amount greater than the maximum for a particular year, may claim:
An employee who has had social security tax withheld in an amount greater than the maximum for a particular year, may claim the excess as a credit against income tax, if that excess resulted from correct withholding by two or more employers.
Which of the following is not an adjustment or preference to arrive at alternative minimum taxable income?
Deductible contributions to individual retirement accounts are not an adjustment or preference in calculating a taxpayer's alternative minimum taxable income. They are an adjustment in calculating adjusted gross income for regular (not alternative minimum) tax purposes.
Which of the following may not be deducted in the computation of alternative minimum taxable income of an individual?
Alternative minimum tax will add back various deductions to arrive at alternative minimum taxable income. If an item is not added back, then it is allowed to be deducted. Personal exemptions are added back. Therefore, they are not deducted to arrive at alternative minimum taxable income.
Which of the following statements about the alternative minimum tax (AMT) of an individual is correct?
AMT credits may be carried forward indefinitely against regular tax.
What is Alternative Minimum Tax (AMTI)?
Tax designed to ensure that taxpayers who take a large number of tax preference deductions pay a minimum amount of tax on their income. Note: Alternative Minimum Tax = Excess of the tentative AMT OVER regular tax.
AMTI - Exemption Formula:
Exemption amount is 53,600 less 25% (AMTI 119,200) for single and 83,400 less 25% (AMTI 158,900) for joint filers, in NO case can exemption be less than zero
AMTI - Adjustments:
Think Panic Timme
P passive activity losses (increase or decrease AMTI)
A accelerated depreciation (increase or decrease AMTI)
N net operation loss of individual taxpayer (incr or decr)
I installment income of a dealer (increase or decrease)
C contracts % of completion vs. complete (incr or decr)
Note: the timmes ones are itemized deductions
T tax deductions (only increase AMTI)
I interest deductions on some home equity loans (incr)
M medical deductions (limit 10% excess AGI) incr
M miscellaneous deductions NOT allowed (increase)
E exemptions (personal) and standard deduction (incr)
AMTI - Tax Preference Items:
P private activity bond interest income (on certain bonds)
P percentage depletion the excess over adjusted basis of property
P pre-1987 accelerated depreciation
Note: ALL THESE INCREASE AMTI
AMT CREDIT - Credits for Prior Year Minimum Tax:
It may only reduce regular tax, NOT future alternative minimum tax
Carry forward or time period is forever
F foreign tax credit
A adoption credit
C child tax credit
C contributions to retirement plans credit
E earned income credit
Is charity an add back for AMT?
A claim for refund of erroneously paid income taxes, filed by an individual before the statute of limitations expires, must be submitted on Form:
Martin filed a timely return on April 15. Martin inadvertently omitted income that amounted to 30% of his gross income stated on the return. The statute of limitations for Martin's return would end after how many years?
For a 30% understatement of gross income (anything over 25%), the statute of limitations is 6 years.
For a 25% (or less) understatement of gross income, the statute of limitations is 3 years.
The statute of limitations is unlimited for fraud
Dawn White's adjusted gross income on her Year 1 tax return was $100,000. The amount covered a 12-month period. For the Year 2 tax year, the minimum payments required from White to avoid the penalty for the underpayment of estimated tax is:
The requirement is 90% of the current tax on the return for the current year paid in four equal installments or 100% of the prior year's tax liability paid in four equal installments.
110% of the prior year's tax liability is only required if AGI is in excess of $150,000.
A calendar-year individual filed an income tax return on April 1. This return can be amended no later than:
Three years, three months, and 15 days after the end of the calendar year.
If an individual paid income tax in the current year but did not file a current year return because his income was insufficient to require the filing of a return, the deadline for filing a refund claim is:
Rule: A taxpayer may file a claim for refund within three years from the time the return was filed, or two years from the time the tax was paid, whichever is later. Since no return has been filed, the refund claim must be filed within two years from the time the tax was paid.
Shore, a paid tax return preparer, was given three partnership Schedule K-1 forms by client Fuller. Fuller is a limited partner in each of the partnerships. The K-1s disclosed small pass-through losses allocated to Fuller. Fuller had passive income in excess of these losses from other partnerships.According to the AICPA Statements on Standards for Tax Services, assuming that no at-risk limitations apply, what is Shore's professional responsibility regarding the reporting of these partnership losses on Fuller's federal income tax return?
Without obtaining verification, a tax preparer may in good faith rely on information furnished by a taxpayer or third parties when preparing a tax return. The tax preparer should, however, make reasonable inquiries if the information appears to be incomplete, incorrect, or inconsistent.
While preparing a client's individual federal tax return, the CPA noticed that there was an error in the previous year's tax return that was prepared by another CPA. The CPA has which of the following responsibilities to this client?
When an AICPA member becomes aware of an error in a previously filed return, he should promptly notify the taxpayer.
In evaluating the hierarchy of authority in tax law, which of the following carries the greatest authoritative value for tax planning of transactions?
According to the IRS's website under Tax Code, Regulations and Official Guidance, the "federal tax law begins with the Internal Revenue Code (IRC), [which was] enacted by Congress in Title 26 of the United States Code (26 U.S.C.)." The IRC holds the most authoritative value.
Wilma A. Guess, a CPA and a member of the AICPA, is preparing a federal tax return for her client, William H. Bates, one of the wealthiest businessmen in the town of Poughkeepsie, New York. Because of his extremely busy schedule, Bates keeps very few records for his various business operations. Guess has been preparing Bates' returns for the past 15 years. According to the AICPA's Statements on Standards for Tax Services, which of the following statements is correct for this situation?
Guess may use estimates provided by Bates if it is not practical for Bates to obtain exact data.
A CPA assists a taxpayer in tax planning regarding a transaction that meets the definition of a tax shelter as defined in the Internal Revenue Code. Under the AICPA Statements on Standards for Tax Services, the CPA should inform the taxpayer of the penalty risks unless the transaction, at the minimum, meets which of the following standards for being sustained if challenged?
The CPA should inform the taxpayer of the penalty risks with respect to the tax effects (tax return position) of a transaction unless the transaction, at the minimum, meets the more-likely-than-not standard.
Reason: "Not frivolous," "realistic possibility," and "substantial authority" are lesser standards than the more-likely-than-not standard. So, if the transaction meets only one of these lesser standards, the CPA must inform the taxpayer of the penalty risks with respect to the tax effects (tax return position) of a transaction.
Which of the following statements is correct with respect to the AICPA's Statements on Standards for Tax Services (SSTS)?
In general, a preparer should recommend a tax return position only if the preparer has a good faith belief that the position has a realistic possibility of being sustained administratively or judicially on its merits.
A tax preparer can recommend a tax return position according to the Statements on Standards for Tax Services No. 1:
Choice "c" is correct. The AICPA Statement on Standards for Tax Services No. 1 states that a tax professional should comply with the standards, if any, imposed by the applicable tax authority for recommending a tax position, or preparing or signing a tax return. If the tax authority has no written standards, then the tax professional may recommend a tax return position or prepare or sign a return when she has a good-faith belief that the position has a realistic possibility of being sustained if challenged, or if there is a reasonable basis for the position and it is adequately disclosed on the tax return.
A taxpayer wants to take a position on a tax return that the CPA determines is frivolous. However, the CPA and the taxpayer determine that the possibility of the return being selected for audit is remote and that even if the return is selected for audit the issue most likely will not be raised. According to the AICPA Statements on Standards for Tax Services, under these circumstances the CPA
The CPA cannot sign or prepare a tax return with a known frivolous position. The likelihood of audit or the raising of the issue is not relevant in this determination.