Chapter 2 - Tax calculation and Credits Flashcards Preview

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Flashcards in Chapter 2 - Tax calculation and Credits Deck (42):
1

10% tax rate

Single - $0 - $9,225
HOH - $0 - $13,150
MFJ - $0 - $18,450
MFS - $0 - $9,225

2

15% tax rate

Single - $9,226 - $37,450
HOH - $13,151 - $50,200
MFJ - $18,451 - $74,900
MFS - $9,236 - $37,450

3

25% tax rate

Single - $37,451 - $90,750
HOH - $50,201 - $129,600
MFJ - $74,901 - $151,200
MFS - $37,451 - $76,600

4

28% tax rate

Single - $90,751 - $189,300
HOH - $129,601 - $209,850
MFJ - $151,201 - $230,450
MFS - $75,601 - $115,225

5

33% tax rate

Single - $189,301 - $411,500
HOH - $209,851 - $411,500
MFJ - $230,451 - $411,500
MFS - $115,226 - $205,750

6

35% tax rate

Single - $411,501 - $413,200
HOH - $411,501 - $439,000
MFJ - $411,501 - $464,850
MFS - $205,751 - $232,425

7

39.6% tax rate

Single - $413,201 and over
HOH - $439,001 and over
MFJ - $464,851 and over
MFS - $232,426 and over

8

A reduced tax rate of 20% (if taxpayer in 39.6% tax bracket), 15% (most taxpayers) or 0% (if the taxpayer is in the 15% or 10% tax bracket - under: $37,450 for single and MFS, $50,200 HOH and $74,900 for MFJ) is provided for:

1. Qualified dividends
2. Long term capital gains

tax rates (20%, 15% or 0%, depending on tax bracket).

9

Non - Refundable tax credits (personal tax credits)

Personal tax credits are non refundable (may no result in a cash refund) but they may reduce personal tax liability to 0. Personal tax (Non refundable) credits include:
1. Child and dependent care credit
2. elderly and permanently disabled credit
3. Education credits (Lifetime learning credit)
4. retirement savings contribution credit
5. foreign tax credit
6. general business credit
7. adoption credit
8. Long term unused minimum tax credits

10

Refundable tax credits

Refundable credits are subtracted form income tax liability such as non refundable tax credits. But, they may result in a cash refund when the credit exceeds the tax liability owed , even if no tax liability is withheld from wages. Refundable tax credits include:
1. Child tax credit (refund is limited)
2. Earned income credit
3. Withholding taxes (W-2)
4. Excess social security paid.
5. American opportunity credit (40% refundable)

11

Child and dependent care credit limitation

A tax credit of 20% to 35% of eligible expenditures for those who maintain a home, work and incur eligible expenditures for the care of eligible people :
- if 1 dependent $3,000 max eligible expenditures
- if 2 dependents $6,000 max eligible expenditures

- Eligible people include:
-A qualifying child who is under the age of 13 for whom and exemption may be claimed
-Any disabled dependent who is unable to care for self
-A spouse who is disabled and unable to care for self

- Married taxpayers must both produce earned income (salary) to receive credit (unless one is a full time student or mentally/physically incapacitated). The credit received is the lowest of (1) earned income of spouse with lesser amount (2) the actual childcare expenditure or (3) the max amount of expenditure ($3,000 or $6,000) multiplied by the applicable %.

Eligible expenditures include those that allow the taxpayer to be employed including:
-babysitting
-nursery school
-day care
- NOT gammer school

Calculation of credit:
- The max child care credit is 35% against tax liability for which the taxpayer must have AGI of $15,000 or less.

- 35% reduced by 1% for each $1,000 increment over $15,000 to a minimum of 20%.

- The child care credit at the minimum rate of 20% for individuals with AGI of more than $43,000 is $600 (20% of $3,000) or $1,200 (20% of $6,000).

12

Elderly and permanently disabled tax credit

- Credit of up to 15% of eligible income is available to persons who are 65 and older or under 65 and retired due to permanent disability (have disability income).
- If single or married and only one spouse is over 65, then 15% of the base amount $5,000 ($3,750 if MFS, $7,500 if MFJ) reduced by nontaxable social security benefits received and 50% of AGI over $7,500 for single, $10,000 for MFJ and $5,000 for MFS.

- If married and both over 65, 15% of $7,500 reduced by nontaxable social security benefits received and 50% of AGI over $10,000.

- Claim the credit to the extent of tax liability.
- IF under 65 and disability income under $5,000 can the base amount is limited to $5,000.

13

What are education tax incentives?

if the requirements are met, a taxpayer can reduce and/or avoid taxes by taking advantage of the American opportunity credit, lifetime learning credit and/or a nontaxable distribution from a coverdell education savings account used to pay higher education costs.

14

What are the limitations for the American Opportunity credit?

- The American opportunity credit is available against federal income taxes for qualified tuition, fees and course materials (including books) paid for a students first 4 years of post secondary (college) education.

- 40% or $1,000 of the American opportunity credit is refunded ($2,500 max credit x 40% = $1,000).

- The max credit is $2,500 and is limited by
1) 100% of the first $2,000 of qualified expenses plus
2) 25% of the next $2,000 of qualified expenses paid during the year.

- The phase out beings with AGI exceeding $80,000 ($160,000 MFJ) and is fully phased out when $90,000 ($180,000 MFJ) is reached.

- expenses paid by dependent child are treated as if made by parent

15

What are the limits on the lifetime learning credit

The lifetime learning credit is available for an unlimited number of years for qualified tuition and related expenses (Except books) at eligible educational institutions.

- $2,000 mac credit per year
- Credit equals 20% of qualified expenses up to $10,000
Qualified expenses include: undergraduate courses, graduate courses, professional degree courses, and courses to acquire or improve job skills.

- expenses paid by dependent child are treated as if made by parent

Credit phase out beings with AGI exceeding $55,000 ($110,000 MFJ), with full phase out beginning at $65,000 ($130,000 MFJ).

16

Coverdell education savings account distributions

- Use coverdell distributions in conjunction with education credits
- Can claim educational credits (american and lifetime) for a tax year and also exclude from gross income amounts distributed from a Coverdell education savings account., but the distribution can not be claimed for the same educational expenses as the american or lifetime learning credits.

17

Qualified Tuition programs (529 plan)

- Not included in taxable income, and no deduction

- Contributions from a qualified trust (cash contributions to an account made on behalf of a beneficiary for payment of qualified educational expenses) used to pay for an accredited post secondary educational institution.

- program must be maintained and established by a state./state agency/ eligible educational institution.

- limit is limit of gift tax rules.

- no income phase out.

- distributions are excluded form beneficiary's gross income to the extent that the distributions is used to pay for qualified higher education costs.

18

Education income Exclusions

1) U.S. savings bond - series EE: Exclude form interest income to the extent used to pay for educational expenses.

- limit: must pay educational expenses

- Income Phase outs:
- $77,200 - $92,200 for single
- $115,750 - $145,750 MFJ

2) Employer paid education expenses: Exclude from income

- limit: up to $5,250 per year

- No income phase out

3) Scholarships: Exclude form income

-limit: only tuition books and fees

- Not room and board and no income phase out

19

Education Adjustments (Above the line)

1) Educator Expense - deduct above the line
- limit: $500/$250
-No income limit

2) Contributions to Coverdell education savings accounts - not deductible
- limit: $2,000
Income phase out:
$95,000 - $110,000 single
$190,000 - $220,000 for MFJ

3) Student loan interest deduction - deduct above the line
limit: $2,500
Income phase out:
$65,000 - $80,000 single
$130,000 - $160,000 MFJ

4) Tuition and fee deduction - deduct above the line
limit: $4,000
Income phase out:
$65,000 - $80,000 single
$130,000 - $160,000 MFJ

20

Education Itemized Deductions

1) Educational expenses - deducted below the line

- to maintain and improve job skills

- limit: subject to 2% (exces) AGI test
- no income phase out limit

21

Education Credits

1) American Opportunity credit - use for the first four years
limit: $2,500 per person
income phase out:
$80,000 - $90,000 single
$160,000 - $180,000 MFJ

2) Lifetime learning credit - use after first four years
limit: 2,000
Income phase out:
$55,000 - $65,000 single
$110,000 - $130,000 MFJ

22

What are the limits on the adoption credit?

A credit for qualifying expenses of adopting a child is available.

Limit: $13,400 per child (including special needs child)
Phase out: $201,010 - $241,010
Eligible expenses include: All reasonable and necessary expenses, costs and fees associated with adopting the child
- can not be used for adopting the child of a spouse or for a surrogate arrangement
- medical expenses do not qualify as eligible expenses

- Credit is claimed for years after payment is made until the adoption is final, at which the expenses paid in the year it becomes final are claimed in that year.

- For foreign children adopted, the credit cannot be claimed until the adoption is final.

- Expenses paid in later years can be claimed in the year paid

23

What are the limits on the Retirement Savings Contribution Credit?

Nonrefundable tax credit (made by pension protection act) that may offset both regular and AMT for contributions to either a traditional or Roth IRA.

eligible taxpayers include:
- at least 18 by close of the tax year.
- not a full time student
- not a dependent

- income limits apply

- limited to excess of regular tax liability and AMT liability of the taxpayer minus the taxpayer's nonrefundable personal credits (except retirement savings contribution credit, adoption credit, foreign tax credit and some energy credits).

- No carryover is allowed
max contribution = $2,000
max credit :
$1,000 for $0 - $36,500 MFJ and $0 - $18,250 single, credit rate = 50%
$400 for $36,501 - $39,500 MFJ and $18,251 - $19,750 for single, credit rate = 20%
$200 for $39,501 - $61,000 for MFJ and $19,751 - $30,500 for single, credit rate = 10%
$0 for income over $61,000 for MFJ and over$30,500 for single, credit rate = 0%

24

What are the limits on the foreign tax credits?

Taxpayer may claim a credit for foreign income taxes paid in a foreign country of U.S. possession. There is a limit however which may make the itemized deduction (which is not limited) look more attractive.
-Can claim deduction or credit
- There is no limit for foreign taxes used as a deduction

There is however a limit for foreign tax credits, which is the lessor of:
1) foreign taxes paid OR
2) Overall Limit which equals = (Net foreign income / (worldwide taxable income + exemptions)) * U.S. tax liability before credit on worldwide taxable income

- Any disallowed or unused credit can be carried back 1 year and carried forward 10 years.

25

What are the limitations on the General Business Credit ?

The general business credit is made up of a number of credits including:
- investment credit
- work opportunity credit
- alcohol fuls credit
- increased research credit
- low income housing credit
- qualified childcare expenditures
- small employer plan start up costs credit
- alternativ motor vehicle credit
- other infrequent credits

- Credit may not exceed net income tax minus
the lessor of:
1) 25% of regular tax liability above $25,000 or
2) tentative minimum tax for the year.

net income tax = regular income tax + AMT - nonrefunable tax credits, other than AMT credit.

- Tentative tax from $0 - $25,000 * 100% allowable = allowable amount

- Tentative tax in excess * allowable 75% = allowable amount

- Unused credits may be carried back on year and forward 20 years.

26

What are the limitations on the Work opportunity credit?

The work opportunity credit is available to employers who hire employees from a targeted group (part of general business credit).

limited to:
- 40% of the first $6,000 of wages per employee paid during the first year of employment
- 40% of the first $3,000 to certain summer youth

Qualified targeted groups include:
- disabled
- 18 - 24 year olds from poor families
- Vietnam veterans from economically disadvantaged areas
- certain food stamp recipients

27

What are the limits on the child tax credit?

Taxpayers may claim a $1,000 tax credit for each qualifying child.
- "CARES" rules apply, except tat a child must be under the age of 17 and a citizen.

Higher income taxpayers must reduce the $1,000 credit by $50 for each $1,000 by which modified AGI exceeds:
- $110,000 for MFJ
- $75,000 for single
- $55,000 for MFS

- Low income families can use the credit to offset their income taxes as well as social securities taxes paid for the year.

The credit is refundable to the extent of the lessor of:
1) excess child tax credit over tax liability
2) earned income minus $3,000 x 15%

28

What are the limitations on the Earned Income Credit (EIC) ?

The earned income credit is a refundable credit, can get refund even if no tax liability.

To be eligible for the credit a taxpayer must:
- live in the US for more than half the taxable year
- meet certain low earned income thresholds
- not have more than a specified amount of disqualified income (disqualified income cannot exceed $3,400)
- be over 25 and under 65 if there are no qualifying children
- file a joint return with a spouse, if married.

Earned income = salaries, wages, tips, other employee compensation and earnings from self employment. It does not include pension and annuity income.

Disqualified income = taxable and nontaxable interest, dividends, net rental and royalty income, net capital gains income, and net passive income other than self employment income.

A qualifying child is not a requirement, however the earned income credit % goes up if there are qualifying children.
A qualifying child is the taxpayers son/daughter/step/foster child/brother/sister/step brother or sister that was under 19 or under 24 and a full time student, lived with the taxpayer for more than half the year and is the taxpayers dependent (if the child is married).

Computing the credit:
- Single - 7.65% of earned income, for a max credit of $503 for taxpayers with no children.
- Taxpayer with 1 qualifying child - 34% of earned income , for a max credit of $3,359.
- Taxpayer with 2 qualifying children - 40% of earned income , for a max credit of $5,548.
- Taxpayer with 3 or more qualifying children - 45% of earned income , for a max credit of $6,242.

29

What are the limits on the withholding tax or paycheck credit?

All income taxes withheld from a taxpayers paycheck are considered a credit against the taxpayers tax liability.

When this credit exceeds the tax liability, a refund is generated to the taxpayer.

30

What are the limitations on Excess FICA taxes (social security tax withheld)?

Excess social security tax is treated as additional tax payments withheld.

When an employee who has had social security tax withheld in an amount greater than the max for a particular year:
- IF the excess was withheld by two or more employers then the taxpayer may claim the credit against income tax.
-IF the excess was withheld by only one employer, the employer must refund the excess to the employee and no tax credit is allowed.

31

What are the limits on the small employer pension plan start up costs credit?

For small businesses (100 employees or less) who earned at least $5,000 in the prior tax year, a credit is allowed for 50% of the first $1,000 (up to $500 per year) of qualified start up costs for establishing a new qualified pension plan for three years (starting with the year the plan was established.

Qualified costs = expenses to establish and administer the plan and provide information to employees regarding retirement.

If the expenses are used for the credit, they cannot also be used as a deductible ordinary and necessary business expense.

Employers are not required to take the credit for any ax year and can take the credit starting in the first year that precedes the first year of the plan.

32

What are the limits on the small business health care tax credit?

A credit up to 50% of the employer's costs of the plans premiums )or the average of the group's premium for small businesses within taxpayers state) is allowed as a credit for eligible employers, provided the employer contributes at least 50% of the costs of health coverage on behalf of the employees enrolled in a qualified health plan offered through a small business health options program.

smaller businesses receive the better tax benefits.

The credit is allowable as an offset to AMT, however it is not refundable and the unused amount is carried back 1 year and forward 20 years (tax exempt organizations will receive a refund).

The costs for family members, sole proprietors, partners, s corp owners with greater than 2% ownership and shareholders owning more than 5% of corp are excluded.

If the expenses were used for the credit, they are not allowable as a tax deduction for employee benefits expense.

33

What are the limits on residential energy credits ?

A max credit of 15% of qualifying nonbusiness energy property pr improvements ( high efficiency heat pumps, air conditioners, windows, door, certain roofs, insulation, etc) that were installed in 2014 is allowed, up to the max credit of $500. For qualified solar electric property, water heaters, small wind energy property, and geothermal pumps, there is no limit on the amount of the credit (15% of the cost is allowed as a credit)

34

Which of the following credits can result in a refund even if the individual had no income tax liability?
a.Credit for prior year minimum tax.
b.Earned income credit.
c.Child and dependent care credit.
d.Elderly and permanently and totally disabled credit.

Earned income credit..

Explanation:
Choice "b" is correct. The earned income credit is refundable. Eligible taxpayers can get advance payments from their employers because the credit is assured.

35

Mr. and Mrs. Sloan incurred the following expenses during the year when they adopted a child:
Child's medical expenses - $ 5,000
Legal expenses - $8,000
Agency fee - $3,000
Without regard to the limitation of the credit, what amount of the above expenses are qualifying expenses for the adoption credit?
a.$10,160
b.$11,000
c.$16,000
d.$5,000

$11,000.

Explanation:
Choice "b" is correct. The adoption fees would be qualifying expenses for the tax credit (medical expenses do not qualify).

Choice "c" is incorrect. $5,000 of the $16,000 of total expenses are not eligible.
Choice "a" is incorrect. The expenses ($8,000 + $3,000) are eligible.
Choice "d" is incorrect. Medical expenses are not eligible for the credit.

36

How may taxes paid by an individual to a foreign country be treated?
a.As a credit against federal income taxes due.
b.As an itemized deduction subject to the 2% floor.
c.As an adjustment to gross income.
d.As a nondeductible expense.

As a credit against federal income taxes due..

Explanation:
Choice "a" is correct. 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. Note that the only correct response to this question is choice "a"; however, also note that the other option for treating the taxes paid to the foreign country is not included as an answer option.

Choice "b" is incorrect. Although taxes paid by an individual to a foreign country are allowable itemized deductions, they are NOT subject to the 2% floor.
Choice "c" is incorrect. An adjustment is not allowed for taxes paid by an individual to a foreign country. 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. 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.
Choice "d" is incorrect. 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. 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.

37

Which of the following statements about the child and dependent care credit is correct?
a.The child must be a direct descendant of the taxpayer.
b.The child must be under the age of 18 years.
c.The credit is nonrefundable.
d.The maximum credit is $600.

The credit is nonrefundable..

Explanation:
Choice "c" is correct. The child and dependent care credit is nonrefundable.
The only refundable credits are the child tax credit (which is a different credit with a similar name- $1,000 credit for qualifying children under 17), the earned income credit, withholding taxes, portions of the Hope Scholarship credit, and excess Social Security taxes paid. The child and dependent care credit is a "personal" tax credit.

Choice "b" is incorrect. The child must be under age 13, not age 18, to be a qualifying child and for there to be a credit.
Choice "a" is incorrect. The child need not be a direct descendant of the taxpayer for there to be a credit. To be a qualifying child, the child must merely be a dependent of the taxpayer.
Choice "d" is incorrect. The maximum child and dependent care credit is 35% of eligible expenses, with a phase out for AGI over $15,000. There is no pure $600 limit.

38

Frank and Mary Wood have 2 children, Becky, age 10, and Matt, age 14. The Woods incur expenses of $4,000 for after school-care for each child. Their only income is from wages. Frank's wages are $60,000, and Mary's wages are $2,500. What amount of Child and Dependent Care Credit may the Woods claim on their joint tax return?
a.$1,200
b.$1,600
c.$800
d.$500

$500.

Explanation:
Choice "d" is correct. First of all we need to determine the eligible expenses. Only expenses for Becky will qualify because Matt is not under 13 years of age. So of the $8,000 spent, only $4,000 will qualify. The maximum eligible for 1 dependent, though, is $3,000. Then it is further limited because it is limited to the lowest earned income of either spouse. That would be Mary's $2,500. Due to their combined income level, they are in the 20% credit range( Over $43,000 = lowest credit rate or 20%). The credit is 20% of $2,500, or $500.

Choices "b", "c", and "a" are incorrect, per the above explanation.

39

Which of the following credits can result in a refund even if the individual had no income tax liability?
a.Child and Dependent Care Credit.
b.Adoption Credit.
c.Credit for the Elderly or Permanently Disabled.
d.Earned Income Credit.

Earned Income Credit.

Explanation:
Choice "d" is correct. The Earned Income Credit is refundable. The other credits listed are not refundable.
Note: The Child Tax Credit (not listed) can be refundable in certain circumstances. Do not confuse this with the Child and Dependent Care credit, which is not refundable.

Choices "a", "b", and "c" are incorrect, per the above explanation.

40

Which of the following disqualifies an individual from the earned income credit?
a.The taxpayer's five-year-old child lived in the taxpayer's home for only eight months.
b.The taxpayer's qualifying child is a 17-year-old grandchild.
c.The taxpayer has earned income of $5,000.
d.The taxpayer has a filing status of married filing separately.

The taxpayer has a filing status of married filing separately.

Explanation:
Rules: Earned income tax credit is a refundable tax credit. It is designed to encourage low-income workers (i.e., those with earned income) to offset the burden of U.S. tax. A claimant can have one qualifying child or two or more qualifying children for this credit. There is a maximum credit available for this purpose. Further:
The taxpayer must meet certain earned low-income thresholds.
The taxpayer must not have more than the specified amount of disqualified income.
The taxpayer must be over age 25 and less than 65 if there are no qualifying children.
If married, the taxpayer must generally file a joint return with his/her spouse (i.e., the married filing separate status disqualifies a taxpayer from claiming the earned income credit).
A qualifying child can be up to and including age 18 at the end of the tax year, provided the child shared a residence with the taxpayer for 6 months or more.
The taxpayer must be related to the qualifying child (or children) through blood, marriage, or law.
The child must be either in the same generation or a later generation of the taxpayer.
A foster child qualifies if officially placed with the taxpayer by an agency.
Choice "d" is correct. Based on the above rules, the filing status of married filing separately disqualifies a taxpayer from claiming the earned income credit.

Choice "b" is incorrect. If the taxpayer's qualifying child is a 17-year-old grandchild, the requirement of age and relation is satisfied, and the taxpayer may qualify to claim the EIC.
Choice "c" is incorrect. The taxpayer earning an income of $5,000 meets the earned low-income requirements; thus, it does not disqualify him or her from claiming the EIC.
Choice "a" is incorrect. The taxpayer's five year old child lived in the taxpayer's home for eight months. The above rules indicate that the otherwise qualifying child must live with the taxpayer for six or more months; thus, this fact does not disqualify the taxpayer from claiming the EIC

41

Which of the following is not a refundable tax credit?
a.Child tax credit.
b.Earned income credit.
c.Retirement savings contribution credit.
d.Excess social security paid.

Retirement savings contribution credit.

Explanation:
Choice "c" is correct. The Retirement savings contribution credit is a non-refundable credit. The EIC and child tax credit could result in a refunded amount beyond the actual tax liability, depending upon the taxpayer's income levels. In addition, if excess social security is paid, the taxpayer can receive a refund of those amounts regardless of the income tax liability being reduced to zero.

42

An employee who has had social security tax withheld in an amount greater than the maximum for a particular year, may claim:
a.Reimbursement of such excess from his employers, if that excess resulted from correct withholding by two or more employers.
b.The excess as a credit against income tax, if that excess resulted from correct withholding by two or more employers.
c.The excess as a credit against income tax, if that excess was withheld by one employer.
d.Such excess as either a credit or an itemized deduction, at the election of the employee, if that excess resulted from correct withholding by two or more employers.

b.The excess as a credit against income tax, if that excess resulted from correct withholding by two or more employers.

Explanation:
Choice "b" is correct. 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.

Choice "d" is incorrect. The excess resulting from the correct withholding by two or more employers may only be claimed as a credit against income tax.
Choice "a" is incorrect. The employee may not seek reimbursement of the excess if the excess resulted from correct withholding by two or more employers.
Choice "c" is incorrect. The employee may not claim the excess as a credit against income tax, if that excess was withheld by one employer. The employer must adjust the excess for the employee.