Federal Taxation V: Individual Issues and AMT Flashcards Preview

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Flashcards in Federal Taxation V: Individual Issues and AMT Deck (26):

Dependents: Qualifying Child Tests

1. Relationship Test (natural/adopted/step/foster child, sibling, step-sibling, descendant of these)
2. Residence Test (> 1/2 year)
3. Age Test (< 19 unless student, then < 24)
4. Joint return test (dependent can't file married-jointly)
5. Citizenship/Residency test (citizen/resident of US or resident of Can/Mex)
6. Not self-supporting test (must not have provided > 50% of his/her own support)


Dependents: Tiebreaker rules

1. If parent, parent claims exemption unless another eligible individual has higher AGI
2. If both parents want to claim: one who child lived with the longest wins
3. Same as 2, but child lives with both parents at the same time, higher AGI wins
4. If no one is parent, highest eligible AGI wins.


Dependents: Qualifying Relative Rule

Relative = all common relatives except cousins.
Must meet:
1. Support test (>50%)
2. Gross Income test (taxable income must be less than the exemption amount for the year)
4. Joint return test (dependent can't file married-jointly)
5. Citizenship/Residency test (citizen/resident of US or resident of Can/Mex)


Phaseout of Exemptions Shortcut

All exemptions phased out when AGI is $122,501 over trigger ($122,501/$2,500 = 50 steps). Since each step results in a 2% reduction, 100% of exemptions are lost.


Tax Calculation Formula

Adjusted Gross Income
Itemized Deductions or Standard Deduction and
Personal and Dependent Exemptions
Taxable Income
Tax Rates
(determined by Filing Status)
Gross Tax
Tax Credits
Additional Taxes
Net Tax


Earned Income

Income generated by personal services as opposed to income generated by property


Kiddie Tax

Designed to discourage taxpayers from giving income-generating property to children in order to have the income taxed at the child's low tax rates



Old age, survivor and disability insurance (social security)


Self-Employment Tax

Consists of two parts imposed at 2x the OASDI rate

1. (SS portion) 12.4% on first $118,500 of SE ceiling. If wages earned higher than that, ceiling is reduced by wages subject to OASDI.
2. (Medi portion) 2.9% on all SE income


Self-Employment Income

1. Gross income from SE less deductions associated with the activity (which are FOR AGI)
2. SE income must be > $400 for SE Tax to apply
3. Calculate SE Tax by 92.35% b/c 1/2 of SE Tax is deductible FOR AGI


Nanny Tax

Taxpayers, who employ domestic workers, must w/h FICA if cash wages exceed $1,900 (2015)


Payroll Taxes

1. SS: 6.2% of first $117K
2. MEDI: 1.45% on all wages
3. Employer matches


Hospital Insurance Tax

Additional .9% hospital insurance tax applies to:

1. Joint filers with wages > $250K
2. Single and head of household filers with wages > $200K
3. SE income above these limits
4. Applies only to employees/not employers


Alternative Minimum Tax

Separate tax system that calculates broader tax base by modifying taxable income. Mods generally serve to increase taxable income and disallow deductions


Formula for computing AMT

Regular taxable income
+/- Adjustments
+ Preferences
= AMT Income
- Exemption
= AMT Base
x Rate
= Tentative Minimum Tax before Foreign Tax Credit
- Certain credits
= Tentative Minimum Tax
- Regular Tax Liability
= AMT (if positive)


AMT Adjustments

Often represent income/deductions used to defer taxation of economic income (many are just timing differences that will be reversed)


AMT Adjustment: Deprection

Applies to MACRS 3-, 5-, 7-, 10-yr property that is depreciated using 200% declining balance method. AMT adjusts to 150% method.


AMT Adjustment: % of Completion

Income over completed contract Income


AMT Adjustment: Itemized Deductions

1. No phaseout of itemized deductions
2. Medical deduction only allowed on amount exceeding 10% of AGI
3. No deduction for taxes (must be added back to taxable income)
4. No 2% Misc Deductions allowed
5. Home mortgage interest deductible only if the loan proceeds are used to acquire/improve home


AMT Adjustment: Exemptions

If personal exemption or standard deduction was used, must be added back


AMT Preferences

Always increase AMT Income

1. Tax-exempt interest on private activity bonds
2. % Depletion in excess of cost basis on certain mineral properties
3. 7% gain excluded from income under qualified small business stock provision
4. Gain on sales of qualified small business stock (9/27/10-1/1/14 and held for 5 years)


AMT Exemption

1. (2015) $83,400 if married/joint. $53,600 if not.
2. Phaseout if > $158,900 if married, $119,200 if single
3. Phaseout rate: 25% of amount over trigger
4. If kiddie tax, AMT exemption cannot exceed sum of child's earned income plus $7,400
5. AMT Tax Brackets: 26% and 28%


AMT: Tax Credits

1. Foreign Tax Credits and all personal credits are allowed
2. Preferential rates on capital gains are available for a net capital gain
3. Taxpayers pay > of AMT tentative tax or regular tax (before credits)


AMT Credit

1. Created by amount of AMT paid due to timing defferences between regular taxable income and AMTI
2. Can be used to offset regular tax liability in future years
3. Can be carried forward indefinitely


AMT Refundable Credit

Greater Of:
1. amount of AMT refundable credit for preceding tax year
2. 50% of long-term unused minimum tax credit


AMT: Long-term unused minimum tax credit

Regular AMT credit carryforward reduced by any minimum tax credit for the three immediately preceding tax years