Unit 2 - Deductions and Credits

Question 1

Standard deduction - 2015

Answer 1

AGI is reduced by the greater of standard deduction or allowable itemized deductions.
Single = $6300
MFJ = $12,600
MFS = $6300
HOH = $9250
QW = $12600

Question 2

Additional standard deductions - 2015

65 or older or blind

Answer 2

two deduction if over 65 AND blind
Single = $1550
MFJ = $1250
MFS = $1250
HOH = $1550
QW = $1250

Question 3

Overall limitation on itemized deductions

Answer 3

For higher income levels allowable itemized deductions are reduced by the lesser of 3% of the amount that AGI exceeds the threshold or 80% of total deductions after exclusions

2015 AGI limit
MFJ = $309,900
HOH = $284,050
MFS = $154,950
Single = $258,250

Question 4

Deductions excluded from total itemized deductions when calculating the deduction

Answer 4

Medical
Investment interest
Casualty and theft losses
gambling losses

Question 5

Qualified residence

Answer 5

Primary + 1 is limited to $1 million - $500k MFS
Home equity debt is $100k - may be reduced by FMV of homes.
ex - FMV 425 - first mortgage debt 330 = 95 anything over that on HELOC is not deductible

Question 6

Personal casualty losses

Answer 6

Sudden , unusual and unexpected
Take lesser of adjusted tax basis or FMV
subtract insurance
subtract $100 - per tax law
subtract 10% AGI

Question 7

Miscellaneous itemized deductions

Answer 7

subject to 2% AGI limitation
unreimbursed business expenses including T&E
Investment expenses - advisory fees
tax return prep
professional dues and subscriptions
job hunting  expenses
unreimbursed job relation education
home office expenses

Question 8

T&E

Answer 8

100 % travel expense
50% meals
To a temp location is deductible as long as it is less than one year

Question 9

Foreign travel

Answer 9

must allocate between personal and business unless one the following exceptions is met
7 days or less
less than 25% was spent on personal
employee has no control over schedule
the desire for vacation did not drive the reason for trip

Question 10

Margin account interest

Investment Interest Expense

Answer 10

deductible up to net investment income and is NOT subject to 2% floor. However, qualifying dividends and LTCG are not included in investment income unless taxpayer elects out of those rates

Question 11

Home office deduction

Answer 11

cannot exceed gross income or create a loss

simple deduction is $5/per square foot - max is 300 sq feet or $1500 per year

Question 12

Marginal income tax rate

Answer 12

10
15
25
28
33
35
39.6

Question 13

Tax credit

Answer 13

dollar for dollar reduction Vs. income tax liability and is not affected by marginal tax rate
Refundable credits can create a refund
Nonrefundable cannot create refund but can reduce tax liability to zero

Question 14

American Opportunity Tax Credit

Answer 14

covers first four years - reduce family’s tax in an amount equal to 100% of first $2,000 and 25% of next $2,000 Max = $2,500 per year
Up to $1,000 can be a refund.
Phase out 80-90k singles and 160-180k MFJ

Question 15

Child and dependent care credit

Answer 15

Cap is $3k for single and $6k multiple. Sliding scale from 20-35% of expenses. 35% if AGI is less than $15k to 20% if greater than $43k

Question 16

Child tax credit

Answer 16

$1,000 per each dependent qualifying child under 17. Credits reduced by $50 per every thousand over AGI threshold. single = $75k and MFJ = $110k

Question 17

Taxpayer penalties
Failure to File
Failure to Pay

Answer 17

failure-to-file = 5% of the unpaid tax balance per month up to 25% (5 months). filed more than 60 days after due date min penalty smaller of $135 or 100% unpaid tax. No penalty for reasonable cause , but penalty increases for fraudulent reason to 15% up to 75% of unpaid tax
failure-to- pay 0.5% per month on unpaid up to 25% (50 months)
If both apply failure to file is reduced by failure to pay, but is still assessed

Question 18

Avoiding an underpayment penalty

Answer 18

to avoid an underpayment penalty, taxpayers must make estimated or total payments that are the lesser of:
90% of tax liability on current year’s return OR
100% of tax liability from preceding year - if greater than $150k (or$75k MFS) then %110 of preceding year