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Tax-Domains 3 & 4

How much is the Child Tax Credit worth? Up to $1,000 per qualifying child.
What additional requirements must be met by a qualifying child for purposes of the child tax credit? the child must be a qualifying child who is the taxpayer’s dependent and who has not reached his 17th birthday by the end of the year. The child must be a citizen, national, or resident of the United States
At what income level is the allowable credit phased out for higher- income taxpayers? The taxpayer’s credit will be disallowed in part or in full if his modified adjusted gross income exceeds: • $75,000 (single, head of household, or qualifying widow(er)) • $110,000 (married filing jointly) • $55,000 (married filing separately)
Is the child tax credit refundable or nonrefundable? The Child Tax Credit is generally nonrefundable. However, certain taxpayers may qualify for the additional Child Tax Credit, which is refundable
What is the kiddie tax? The kiddie tax is the tax paid on the investment income of certain children.
What is the difference between Form 8615 and Form 8814? Although both forms are filed to calculate tax due on the investment income of a child, Form 8615 is filed with the child’s return, and Form 8814 is filed with the parent’s return
What do you think might be an effect of reporting a child’s investment income on a parent’s return? Tax on child’s inc mayB more when reported on parent’s return. B/c T rate on child’s inc b/t $950 & $1,900 is 10% when Form 8814 is filed with parent’s ret. If child files separate, rate maybe low as 0% due to prefered rates for Q div's & Cap gain dist's.
In 2011, Marlene surrendered her life insurance policy for cash. She received $1,000 more than she paid in total premiums. Are any of her proceeds taxable? Yes, the $1,000 would be taxable
What does the term nonrefundable credit mean? The combined amount of these credits cannot reduce the tax to less than $0.
What does the term refundable credit mean? Refundable credits can reduce the tax to less than $0, allowing the taxpayer to receive a refund of the excess.
Is the child tax credit refundable or nonrefundable? The Child Tax Credit is generally nonrefundable. However, certain taxpayers may qualify for the Additional Child Tax Credit, which is refundable.
Who may qualify for the Additional Child Tax Credit? TP's who qualify for the Child Tax Credit & have earned income in excess of $3,000 for 2011, or those with three or more qualifying children for Child Tax Credit purposes whose Child Tax Credit was limited by their tax liabilities.
How is the Additional Chiild Tax credit computed? The credit is 15% of amt by which taxable earned inc exceeds $3,000. TP's with 3 or more QC's may claim the higher of the above amt or amt by which their net SS & medicare tax paid exceeds their EITC. Credit is limited to $1,000/QC, reduced by the CTC.
What form is used to compute the Additional Child Tax Credit? Form 8812.
What are the four qualifications specific to taxpayers without qualifying children to receive the earned income credit? Be at least 25 to 65, on January 1, 2012 • Not be able to be claimed as a dependent on another TP’s return • Live in the U.S. more than half the year • Have earned income and AGI of less than $13,660 ($18,740 if married filing jointly
What are the four qualifications specific to taxpayers with qualifying children to receive earned income credit? Have QC with relationship,age & residency tests. Have QC only used by 1 person to claim EIC. Not be QC of another. Have earned I & AGI less than $36,052($41,132 if MFJ) with 1QC, $40,964 ($46,044 if MFJ) with 2QC, $43,998 ($49,078 if MFJ) with 3 +QC.
What are the six qualifications that apply to all taxpayers? Have earned inc.• Have a valid SSN.• Not use the filing status MFS.• Be a U.S. citizen or resident alien all year.• Not file a Form 2555 or Form 2555-EZ.• Have investment income of $3,150 or less.
Kris (26) has an earned income and AGI of $9,256. He has no other income. He lived in the United States all year and is no one’s dependent. He has a valid SSN and is filing as single. He is a U.S. citizen. Does Kris qualify for EIC? Yes.
Marla(29) has wages of $20,200, $2,000 int & $1,155 of div inc with no other inc.She had no adj to inc. Daughter Kayla(6) & no one else lived with all yr 2011.Both have valid SSNs.Marla files HOH.Both U.S. C's living in U.S. all yr.Can Marla get EIC? No. She has over $3,150 of investment income. A total of $3,150 is a “hard cap” and a single dollar over will disqualify a taxpayer from EITC
What is the exception to the rule requiring that a taxpayer live in the United States? Active duty military personnel are considered to live in the United States when they are stationed outside the United States
What are the four requirements of EIC due diligence? Complete an eligibility checklist. 2. Compute the amount of credit. 3. Comply with the knowledge requirement. 4. Retain records.
What is the possible penalty for failing to comply with the EIC due diligence rules? A Tax Professional is subject to a $500 penalty for each occurrence.
A taxpayer who was denied Earned Income Credit because of an error that was due to reckless or intentional disregard of the EIC rules cannot claim the EIC for the next how many years? Two years. If a taxpayer’s EIC was denied for any year after 1996 and it was determined that your error was due to reckless or intentional disregard of the EIC rules, the taxpayer could not claim the EIC for the next two years
For the purpose of this section, what is “minimum retirement age”? Minimum retirement age is the age at which the taxpayer could have first received a pension or annuity from the employer if the taxpayer was not disabled. It is set by the employer’s plan.
How is disability pension income received under a plan paid for by the taxpayer’s employer reported on the taxpayer’s tax return? Until the TP's reaches Minimum Retirement Age, disability pension inc is reported as wage inc on Form 1040, line 7. On the day after TP reaches MRA, DP inc is reported as pension inc on Form 1040A, lines 12a and 12b, or Form 1040, lines 16a and 16b.
How can a disability pension qualify as earned income for the EIC? Normally, pensions are not earned income. Remember, disability pension income received before the taxpayer attains minimum retirement age is reported as wage income. It is also considered earned income for purposes of EIC.
How do you explain to a taxpayer who knows they are receiving disability income about the fact their tax return shows wage income and that they have earned income? Disability pension income received before the taxpayer reaches minimum retirement age is treated as wage income.
What is an HSA? An HSA is a tax-advantaged savings account that can be used to pay current and future medical expenses
What are the three requirements to be eligible to contribute to an HSA? 1.Be in a HDHP. 2.Not be covered by other health insurance, including Medicare. (Accident,disability, dental, vision, and long-term care coverage are allowed.) 3.Not be eligible to be claimed as a dependent on someone else’s return.
What is a high deductible health plan (HDHP)? an HDHP is health insurance plan with a minimum annual deductible of $1,200 for self-only coverage or $2,400 for family coverage & maximum annual out-of-pocket exp not exceeding $5,950 for self-only coverage & $11,900 for family coverage in 2011.
What are qualified medical expenses with regard to an HSA? For the most part, they are unreimbursed medical expenses that would normally be deductible on Schedule A. There are some exceptions
What form is used to report HSA contributions and determine any allowable deduction? Form 8889.
What happens if a taxpayer receives a nonqualified distribution from an HSA? The taxpayer may be subject to tax and to a 10% penalty. The penalty, however, is waived if the account owner is age 65 or older, becomes disabled, or dies.
What is the maximum annual contribution for an HSA? $3,050 ($4,050 if age 55 by December 31, 2011) for self-only coverage or $6,150. The amount is increased by $1,000 for each eligible individual who is age 55 or older by the end of the tax year.
How does one determine the taxable income of taxpayers who itemize deductions? Adjusted gross income (AGI) minus total itemized deductions and total exemptions
Who may itemize? Technically, any taxpayer who wants to. However, generally it is not advantageous unless total itemized deductions exceed the taxpayer’s standard deduction.
The cost of most legal medical and dental procedures is de - ductible, but there is an exception. What is it? The cost of cosmetic surgery and procedures is not deductible unless the surgery or procedure is necessary to correct or improve a deformity arising from a con genital abnormality, an accident, or a disfiguring disease
What kinds of medicines and drugs may be claimed as itemized deductions? Prescription medicines and drugs and insulin.
Although the cost of nonprescription medicines is not deductible, there is a provision that allows deductibility. What is it? If Dr. writes RX for a non-RX medicine 2 treat disease/condition diagnosed by Dr, non-Rx can be paid for (or reimbursed) using pretax money in a §125 plan (known as cafeteria plan or flexible spending plan).The Rx must be filled by a pharmacist.
Is the cost of a weight-loss program or weight-loss surgery deductible? Yes, if it is undertaken to treat a specific diagnosed disease. If a doctor has diagnosed the patient as obese, the cost of a weight-loss program or weight-loss surgery would be deductible. The cost of food included in such a program is not deductible
If a taxpayer drives his own car to the doctor or to buy prescription medicine, what expense, in addition to the doctor bill or cost of the medicine, may he deduct? He may deduct the standard mileage rate for the round trip, or his actual ex penses for gas and oil. Most taxpayers use the standard mileage rate.
What is the standard mileage rate for the year 2011 for mileage to and from the Dr.'s or to buy prescriptions? For 2011, the rate is: • 19¢ per mile from January 1–June 30. • 23.5¢ per mile from July 1–December 31.
A man paid $2,500 to have a hot tub installed in his home b/c his Dr prescribed it for his back problems. The hot tub increased the value of the home by $2,000 & cost $300 to run during the year. How much may be deducted as a medical expense this year? The $500 over and above the increase in value to the home plus the $300 operating expenses for a total of $800.
Pete Carter is confined to a wheelchair. He paid $8,000 to have the counters in his kitchen and bathroom lowered so he could use them. What is the tax consequence of Pete’s remodeling? The full $8,000 is deductible as a medical expense because the work was to remodel the home to make it more habitable for a handicapped individual
Is the deduction for medical expenses limited? Yes, only the excess over 7½% of AGI can be de ducted.
What types of taxes are deductible? State and local income or sales taxes (but not both), real estate taxes, personal property taxes, and foreign income taxes that were paid or withheld during the year
Where is federal income tax withheld reported? Form 1040, line 61. This tax is not deductible on the federal return, but it might be on the state return.
Where are social security and medicare taxes withheld reported? Nowhere on the federal return, but these taxes might be deductible on the state return.
Where are state and local income taxes withheld reported? They are included on Schedule A, line 5. A taxpayer enters the income taxes on the withholding lines of the state and local returns.
What is a general sales tax? A tax imposed on retail sales of a broad range of items at a single rate. Sales taxes imposed at lower rates are fully deductible; those imposed at higher rates are deductible up to the general sales tax rate.
A taxpayer makes his final 2011 state estimated tax payment on January 15, 2012. Where should he report this item? It is included on his 2012 Schedule A, line 5. This payment also should have been included on the estimated payments line of his 2011 state return
A taxpayer has a 2010 state balance due, which she paid when she filed her return on April 8, 2011. Where should she report this item It is included on her 2011 Schedule A, line 5.
A taxpayer has 2011 state estimated tax payments, which he made on the 15th of April, June, and September, and on January 15, 2012. Where should he report these items? The April, June, and Sept payments are included on his 2011 Sch A, line 5. The Jan payment is not included because it was made in 2012. The total of the 4 payments is entered on the estimated payments line of his 2011 state return.
For income tax purposes, we divide interest into several categories. What are they? Business interest, investment interest, personal interest, qualified home mortgage interest, and passive activity interest. Remind participants that businesses and passive activities will be introduced later in the course
Why is it important to distinguish qualified home mortgage interest from personal interest? Qualified home mortgage interest is deductible, but personal interest is not
On how many personal homes may a taxpayer deduct home mortgage interest? Two.
What is the limit on the number of homes or personal property a TP may deduct state taxes? that there is no limit to the number of personal homes or properties on which a taxpayer may deduct real estate taxes.
There are two categories of home mortgage interest. What are they? Acquisition debt and home equity debt.
What is acquisition debt? Debt secured by the home, incurred to buy, build, or improve the home.
What is home equity debt? Debt secured by the home and used for a purpose other than to buy, build, or improve the home.
Generally, what is the limit on acquisition debt for which interest paid may be deducted in full? $1 million ($500,000 if Married Filing Separately.)
What is the comparable limit for home equity debt? $100,000 ($50,000 if Married Filing Separately) or the difference between the fair market value of the home and the total remaining acquisition debt, whichever is less.
What are points? A one-time interest charge paid up front for the use of money. Points are also called loan origination fees, maximum loan charges, and loan discounts.
When are points deductible? Generally, they are deductible over the life of the loan. However, points paid for the purchase or improvement of a home may be deducted in the year paid if certain conditions are met.
If paid by the buyer, are points deductible? Yes, if they’re for the purchase or improvement of the taxpayer’s principal residence and if the charging of points is a common practice in their area.
Suppose the points are paid by the seller. What happens then? The points are deductible by the buyer, and the buyer must reduce the basis of the home by the same amount.
Under what circumstances may points be deducted ratably over the life of the loan (as opposed to using the OID rules)? If the loan is secured by a home, lasts no more than 30 years, and a) is no more than $250,000 or b) not more than four points were paid for loans of 15 years or less (not more than six points were paid for loans of more than 15 years).
What is investment interest? Interest on loans used to purchase investment property
To what extent is investment interest deductible? Investment interest is deductible to the extent of net investment income. Any amount disqualified under this rule may be carried over to future years
Is interest paid to purchase nontaxable investments, such as municipal bonds, deductible? No.
What is personal interest? Interest on credit cards, car loans, and other loans used for personal purposes. Home mortgage interest in excess of the limits discussed earlier is also considered personal interest.
Is personal interest deductible? Generally, no, except for qualified student loan interest, as you learned in Chapter 10.
What are qualified charitable organizations? Qualified organizations are generally nonprofit groups that are charitable, religious, educational, scientific, or literary in purpose, or that work to prevent cruelty to children or animals.
Is the following outlay deductible as a charitable contributions? A CHURCH YES
Is the following outlay deductible as a charitable contributions? A WORTHY INDIVIDUAL? NO
Is the following outlay deductible as a charitable contributions? A SCHOLARSHIP FUND FOR A SCHOOL? YES
Is the following outlay deductible as a charitable contributions? TICKETS FOR A SCHOOL ALUMNI BANQUET? NO
Is the following outlay deductible as a charitable contributions? DONATIONS TO BOY SCOUTS? YES
Is the following outlay deductible as a charitable contributions? SCOUT CAMP FEE FOR YOUR CHILD? NO
Is the following outlay deductible as a charitable contributions? YMCA MEMBERSHIP DUES? YMCA MEMBERSHIP FUND? NO TO DUES, YES TO FUND
Is the cost of items purchased to benefit a charitable organization deductible (for example, ballet tickets to raise money for a nonprofit hospital)? Only the amount paid in excess of the value of the item is deductible
What is the general deduction limit for charitable contributions? 50% of the taxpayer’s adjusted gross income. Lower limits may apply for certain organizations and donations of appreciated property.
What can be deducted by volunteer workers? Out-of-pocket expenses for uniforms, equipment, supplies, transportation, and food and lodging if away from home overnight.
What can be claimed by volunteers in lieu of actual gas and oil expenses? 14¢ per mile.
May a volunteer claim a deduction for the value of his time? No.
What is the allowable deduction for permitting a charitable organization to use property without charge? No deduction is allowed for a donation of the use of property
A taxpayer wrote a check for a $500 donation to his mosque. Is his cancelled check sufficient documentation to support his deduction? No. Because the gift exceeded $249, the taxpayer must have written confirmation from the donee organization.
When should the TP get his/her documentation of his/her charitable donation. written confirmation generally must be obtained before the earlier of the date the TP files the return or the due date (including extensions) for filing the return. It is too late if the TP waits until he’s audited to obtain the proper documentation.
Myra paid $500 to the university from which she graduated. For this payment, Myra received the right to buy season tickets for the team’s home basketball games. May Myra claim any part of the $500 as a charitable contribution? Yes, Myra may claim 80% of the $500 or $400 as a charitable contribution. She is not able to claim any part of the actual ticket cost.
What characteristics must an event have to qualify as a casualty or theft? A casualty or theft is the result of an identifiable event of a sudden, unexpected, or unusual nature.
What types of damage or destruction qualify as casualties or thefts? Severe weather, flood, fire, accident, earthquake, vandalism, terrorist attack, tidal wave, and unlawful taking of property.
Name some types of losses that would not qualify as a casualty or theft. Damages paid for injury to another person or property owned by another person, damages caused by ordinary use, or by disease, insects, or progressive deterioration, & the loss or disappearance of property w/o evidence that a casualty or theft occurred.
By what amounts must all casualty and theft losses of personaluse property be reduced? Such losses must be reduced by (1) insurance and other reimbursements, (2) $100, and (3) 10% of AGI.
May a taxpayer claim a casualty loss for uninsured damages to his dependent teenager’s car if the car is registered in the dependent’s name? No.
If the car is registered jointly in the taxpayer’s and dependent’s names? Yes
What information must you obtain to determine the amount of a casualty or theft loss? The adjusted basis and the FMV of the property before and after the casualty or theft.
What can be used as a measure of the decrease in FMV of property involved in a casulty? The cost of necessary clean-up or repairs to the property to return it to thecondition it was in immediately be fore the casualty.
What is the allowable loss to property involved in a casulty or theft? The lesser of the adjusted basis or the decrease in FMV.
In what year is a casualty or theft loss deducted? Generally, in the yr in which the casualty or theft occurred. However, a casualty loss from a disaster occurring in an area the president declares warrants federal assistance may be deducted for the yr of loss or by amending the previous year’s return.
What are some general types of itemized deductions that are subject to the 2%-of-AGI floor? Employment expenses (including qualified transportation and education expenses), investment expenses (other than interest), job-seeking ex - penses, hobby expenses to the extent of hobby income, and expenses for tax preparation and advice.
Which expenses are reported on line 21 of Schedule A? Unreimbursed employment-related expenses.
Under what circumstances may unreimbursed employee expenses be reported directly on Sche dule A, line 21, rather than on Form 2106 or 2106-EZ and then on line 21? When the taxpayer is not claiming meal, entertainment, travel, or transportation expenses or any reimbursed expenses.
What are deductible transportation expenses? Those that involve the use of a motor vehicle for business purposes.
What is commuting? Driving back and forth to the regular place of work. Commuting expenses are not deductible.
Describe the optional method of deducting transportation expenses Using the standard mileage rate rather than actual vehicle expenses
What is the standard mileage rate for unreimbursed employee vehicle expenses for 2011? For 2011, the standard mileage rate is: • 51¢ per mile from January 1–June 30. • 55.5¢ per mile from July 1–December 31.
What conditions must be met to qualify to use the optional method? T0000P must own or lease the vehicle, must not use it for hire (ex, as a taxicab), must not have had more than 4 vehicles in simultaneous business use at any time during the yr & must use the optional method 1st yr the car or truck is placed in service.
What educational expenses may be deducted by an employee on Schedule A? Education intended to maintain or improve the taxpayer’s current job skills.
What is the primary requirement to deduct job-seeking expenses? The taxpayer must be seeking employment in the same occupation in which he is currently or was most recently employed.
What are some employee expenses that can be claimed directly on line 21 without using Form 2106 or 2106-EZ? Union dues,subscriptions to work- related publications, dues to professional org's, cost of physical exams req by employer, cost of small tools & safety equipment,cost & cleaning of specialized clothing req by employer not adaptable to general wear
What expenses are reported on line 22 of Schedule A? Fees paid to obtain tax advice, for the preparation of tax returns, and for electronic filing fees.
Are bank fees for products, such as refund anticipation loans, deductible? No.
What expenses are reported on line 23 of Schedule A? All other miscellaneous itemized deductions subject to the 2% floor.
Name some deductible investment expenses. Legal fees paid to produce or collect taxable inc, appraisal fees to determine the value of property donated to charity or to establish the amt of a casualty loss, fees paid to obtain investment advice,fees paid to an agent to collect taxable income.
What is the limitation on deduction of hobby ex penses? Expenses are deductible only to the extent of hobby income
What are some miscellaneous itemized deductions that are not subject to the 2%-of-AGI limitation? The most common examples include gambling losses to the extent of gambling winnings, impairment-related work expenses of the handicapped, decedent’s remaining basis in a pension or annuity, and federal estate tax on income in respect of a decedent.
Where are some miscellaneous itemized deductions that are not subject to the 2%-of-AGI limitation deducted? On Schedule A, line 28.
What limitation must we keep in mind when de ducting gambling losses? Losses are deductible only to the extent of gambling winnings reported as income.
What type of information should be retained by the taxpayer if he wishes to deduct gambling losses? • The date & type of wagering activity • The name & address or location of the gambling establishment• The names of other persons present with the TP at the gambling establishment • The amounts the TP won and lost
What is the purpose of the alternative minimum tax (AMT)? The purpose of the alternative minimum tax is to make sure that taxpayers with higher incomes cannot entirely avoid taxes through the use of certain deductions and credits.
Thinking about the AMT, why is it important for new clients to bring in their prior year’s return? New clients who might fit the criteria for being subject to the AMT might have paid AMT on their prior year’s return. It is possible that they might qualify for a credit on their current-year return.
What is the most common taxable recovery? State income tax refund and, if applicable, local refunds.
Under what circumstances is a refund of state income tax generally taxable? When the taxpayer itemized deductions for the year the tax was paid
Name two other types of recoveries that may be taxable if the taxpayer itemized. Medical expenses and casualty and theft losses.
Jill taking the bar exam, is currently enrolled in a bar prep course to help her prepare for exam. Course sponsored by local bar assoc. May she deduct fees she paid for course as an itemized misc deduction? May Jill deduct fees she paid to take bar exam? No to both
Carol has a home office. When she is not using the office, she lets her children play video games on an old television she keeps there. Can Carol deduct home-office expenses? No. She fails the exclusive-use test
An employee has an office where he works, but his work load demands that he bring home work on evenings and weekends. He uses a room of his home regularly and exclusively for his work. May he deduct home-office expenses? No, because his home office is for his convenience as opposed to his employer’s convenience.
A self-employed carpenter uses a room in his home regularly and exclusively in his business as a place to do billing and recordkeeping and to contact customers on the telephone. May he deduct home-office expenses? Yes, if he has no other fixed location to perform the necessary administrative or management activities.
Mario takes a client to a football game. The cost of the ticket is $110. He attends the game with his client and discusses an upcoming business venture with the client. How much may Mario deduct as a business expense? $55,
What does it mean to depreciate an asset? The cost or other basis of the asset is deducted over a period of years rather than all at once.
What kind of property is depreciable? Property that is used in business or held for the production of income and that has a limited and determinable life that is longer than one year.
What kinds of property are not depreciable? Personal-use assets, assets with an unlimited or indeterminable useful life (such as land), and inventory
Give a general definition of MACRS property. MACRS property is tangible depreciable property placed in service after 1986.
What is the general procedure for determining the MACRS deduction for a particular asset? First, determine the recovery period of the asset. Then, determine the percentage from the appropriate MACRS table. Finally, multiply the unadjusted basis of the asset by the percentage on the table.
How do we determine the MACRS recovery period of a piece of personal property? We use the CLADR table. For MACRS under the general depreciation system, we use the number of years in the center column of the chart.
Use the CLADR table to determine the class life of these assets: An oil drill used for off-shore drilling (5 years). Heavy construction equipment (5 years). A breeding hog (3 years). Office furniture (7 years). An automobile (5 years). A computer (5 years). Furniture in a rental house (5 years).
What does 200DB stand for? The 200DB stands for 200% declining balance, the mathematical formula upon which the percentages in the MACRS table are based.
What does HY stand for? It stands for the half-year convention used with the regular MACRS system
what form is completed in the year the asset is placed in service? Form 4562.
If a copier were used by a sole proprietor who is not a farmer and placed into service in 2010,to which form would we carry the depreciation deduction? Schedule C.
For MACRS purposes, we need to divide real property into two categories. What are they? Residential rental property and nonresidential real property
How is residential real property, such as a rental house or apartment building, depreciated under MACRS? By the straight-line method over 27½ years.
A taxpayer placed a rental house in service in November 2011. He paid $110,000 for the house, including $10,000 for the land. What is the depreciable basis of the rental property? $100,000 because land is never depreciable
What is the 2011 depreciation for a house costing $100,000 placed into service in 2011? $455. [$100,000  .00455]
By what method is depreciation for nonresidential real property, such as an office building, determined under MACRS? By the straight-line method over 39 years if placed in service on or after May 13, 1993, and by the straight-line method over 31½ years if placed in service after 1986 and prior to May 13, 1993.
What kinds of property may be expensed using the §179 deduction? Generally, tangible personal property purchased for use in a trade or business qualifies. Beginning in 2010, some real property can qualify for a §179 depreciation
Which specific items do not qualify for the §179 deduction Prop held for investment, real prop not qualifying for §179 real property deduction, furnishings used in rental lodging, a/c &heating units, listed property used 50% or less for business purposes, & property acquired from a related party or entity.
What is the maximum §179 deduction allowed for 2011? Generally $500,000. However, there are cases where it can be greater. For example, it might be increased for an enterprise zone business.
When does the mid-quarter convention come into play? When the depreciable basis of personal property placed in service during the final three months of the year exceeds 40% of the total depreciable basis of personal property placed in service during the entire year.
If the mid-quarter convention applies, what property must be depreciated using the convention? All personal property placed in service during the year
How can the §179 deduction be used to help avoid the mid-quarter convention? A §179 deduction may be claimed for some or all of eligible property placed in service during the 4th quarter of yr. B/c expensed property is not counted when computing the 40% figure, the percentage of 4th-quarter property is correspondingly reduced.
A taxpayer organized a group of 20 tourists to take a cruise. The travel agency, for which the taxpayer worked, awarded the taxpayer a free trip for his efforts. Is the value of the trip taxable? Yes,
What does the expression “nonrefundable credit” mean? The combined amount of these credits cannot reduce the tax to less than $0.
What does the expression “refundable credit” mean? Refundable credits can reduce the tax to less than $0, allowing the taxpayer to receive a refund of the excess.
What requirements must be met for a taxpayer to be able to claim a credit for child or dependent care expenses Married TPs must file MFJ. •Care provided so TP (& spouse) could work or look for work. •Must have EI. TPs who are married &living together must both have EI (unless one spouse was a student or disabled).•TP & the person(s) for whom the care was provided
Generally, the taxpayer must be able to claim the child as a dependent to claim the Child Care Credit. What is the exception to this rule? In the case of divorced or separated parents, the child will be considered the qualifying child of the custodial parent (for purposes of this credit), even if the noncustodial parent is allowed to claim the dependency exemption for the child.
What is earned income? Inc received as result of employment or self-employment. Also includes nontaxable earned inc amnts, such as parsonage allowances, employer-provided meals & lodging, voluntary salary deferrals, military houzin & subsistence allowances, & combat pay.
What are the exceptions to the rule that, if married, both spouses must have earned income? If 1 spouse is full-time student during at least 5 calendar months of year or is physically or mentally incapable of self-care, that spouse will be considered to have some earned income for each month that he holds that status.
What is the earned income of the unemployed spouse considered to be? $250 per month if there is one qualifying individual ($500 per month if there are two or more qualifying persons) for each month one spouse is a full-time student or incapable of self-care.
Why is it necessary that the unemployed spouse be considered to have earned income with regards to the Child Care credit? If there is no earned income, there is no allowable credit. The tentative credit is based on the earned income of the spouse who earned the lesser amount
A taxpayer’s employer paid $500 of a taxpayer’s $2,000 child care expenses for him. How will the employer’s assistance affect the Child Care Credit? The expenses eligible for the credit must be reduced by the amount of employer-provided assistance that can be excluded from income.
Where does the employer report the amount of the assistance to the taxpayer? In box 10 of Form W-2.
Is the Child and Dependent Care credit refundable or nonrefundable? The Child and Dependent Care Credit is nonrefundable.
What is the maximum amount of the adoption credit and exclusion for 2011? $13,360 per child.
In what year will the Adoption credit generally be claimed? The year after the yr in which expenses R paid. If the adoption becomes final during or before the yr the expenses are paid, the credit is claimed the yr the expenses are paid. Special rules apply for adoptions of foreign and special-needs children
What types of expenses qualify for the adoption credit? Qualified expenses include adoption fees, court costs, attorney fees, travel expenses (including meals and lodging), and other expenses directly related to, and necessary for the adoption.
What types of expenses do not qualify for the adoption credit? Those that violate state/fed law, exp's assoc with surrogate parenting arrangements, exp assoc with adoption of spouse’s child, exp's paid with funds received from any gov program, & exp's allowed as credit or deduction under any other fed inc tax rule
To qualify for the 1st time home buyers credit Must the home purchased be in the United States? Yes, the home purchased must be the taxpayer’s principle residence and be located in the United States.
What are the two classes of taxpayers who may qualify for the credit? A first-time homebuyer and a long-term resident of the same main home.
A first-time homebuyer and a long-term resident of the same main home. Q.How much is the credit for a First-Time Homebuyer Credit? The smaller of 10% of the purchase price or $8,000 ($4,000 if MFS).
How much is the credit for a long-term resident of the same main home? The smaller of 10% of the purchase price or $6,500 ($3,250 if MFS)
May a taxpayer purchase a home of any price? No, the credit is not available if the purchase price of the home is greater than $800,000.
Can a taxpayer claim a nonbusiness energy property credit of $1,500 in 2010 and a credit of $1,500 in 2011? No. As of 2011, the maximum credit is $500 and includes all years since 2005.
How long is the new Nonbusiness Energy Property Credit supposed to last? The credit expired December 31, 2010.
How much is the NBEP credit? The credit is 30% of the cost of the property, up to a maximum amount of $1,500.
A taxpayer is building a new home and had a solar water heater installed in 2011, but the home was not ready to be occupied until early 2012. Can they take the credit? Yes, they can take the credit on their 2012 tax return.
What costs qualify for the REEP credit? Costs include the labor allocable to on-site preparation, piping, or wiring to connect the property to the home and the property itself.
Can someone who is claimed as a dependent on another taxpayer’s tax return claim the Health Coverage Tax Credit if they paid the premiums for their own health care? No, a dependent on someone else’s return may not claim this credit.
What is the primary difference between a tax deduction and a tax credit? A tax deduction (for example, the standard deduction) reduces taxable income. A tax credit (for example, the child tax credit) is a direct, dollarfor- dollar reduction of tax liability.
When is the AOC available? Under current law, the AOC is available only for Tax Years 2009 through 2012.
How much is the AOC? The maximum allowable AOC is $2,500 per student. Up to 40% of the AOC may be refundable.Since 40% of the credit may be refundable, the maximum amount of the refundable AOC per student is $1,000. [$2,500  40% = $1,000]
What requirements must a taxpayer meet to claim the AOC? TP must meet all these requirements: Pay qualified exp's of higher education.•Have paid the qualified education expenses for an eligible student. •The eligible student must be the TP, spouse, or dependent for whom the TP actually claims an exemption.
Who cannot claim the AOC? Taxpayers who meet any of the following may not claim the AOC:• The taxpayer is filing MFS.•The TP is claimed as a dependent on anyone else’s tax return.•The TPs MAGI is above a certain amount.
Who may claim the AOC for a dependent student? qualified expenses paid on behalf of a dependent student are treated as paid by the person who claims the dependency exemption. Therefore, the person claiming the dependency exemption may claim the AOC if they meet all necessary requirements.
What are qualified education expenses for the AOC? Tuition and certain related expenses required for enrollment or attendance at an eligible educational institution.
What is an eligible educational institution with regards to the AOC? eligible educational institutions must be eligible to participate in student aid programs administered by the USDOE
Are expenses for books, supplies, and equipment needed for a course of study qualified education expenses? Yes. The expenses qualify even if the student does not purchase the materials from the school.
Are room and board a qualifying education expense for the AOC? No, they are not
What effect do tax-free funds (such as grants) have on qualifying expenses for the AOC? The expenses must be reduced by the amount of any tax-free funds received.
What effect do student loans have on qualifying expenses for the AOC? Student loans are not considered tax-free funds (plus, they have to be repaid). Qualifying expenses do not need to be reduced by student loan proceeds.
Who gets to take advantage of expenses paid directly to the educational institution by a third party on behalf of the student? Such expenses are treated as paid by the student, not by the party who actually made the payment.
How is the AOC calculated? The AOC is the sum of: 1. 100% of the first $2,000 of qualified education expenses per eligible student 2. 25% of the next $2,000 of qualified education expenses per eligible student
.How is the AOC claimed on a tax return? On Form 8863
Is the AOC allowed to taxpayers of all income levels? No, it is not. The AOC phases out for taxpayers with MAGI above certain levels.
What is the maximum lifetime learning credit? The maximum is $2,000 per return.
How is the lifetime learning credit calculated? It is 20% of the first $10,000 of qualifying expenses per return
Is there a course load requirement for students to claim the lifetime learning credit? There is not. Unlike the AOC, the qualifying student does need to be at least half-time.
What is a key difference between qualifying expenses for the lifetime learning credit and the AOC? Generally, books and supplies are not allowed as expenses for the lifetime learning credit (there is an exception if the books and supplies are required for enrollment and the materials are purchased directly from the qualifying educational institution
What is the main advantage of the tuition and fees deduction over the education credits? The deduction has a higher modified AGI limitation. However, neither tax break is available for MFS filers.
What is the maximum tuition and fees deduction? $4,000 for taxpayers with modified AGIs up to $65,000 ($130,000 MFJ), or $2,000 for taxpayers with modified AGIs between $65,001 and $80,000 ($130,001 and $160,000 MFJ).
Does the tuition and fees deduction phase out? No, the maximum deduction abruptly drops down, then out. If the taxpayer’s modified AGI exceeds $80,000 ($160,000 MFJ), no deduction is allowed at all.
Can a taxpayer claim both an education credit and a tuition and fees deduction for the same student in the same year? No. Any taxpayer who claims an education credit may not claim the tuition and fees deduction for the same student in the same year.
Can a dependent claim a tuition and fees deduction? No.if no one qualifies to claim the student as a dependent, all expenses are considered paid by the student, and the student may claim the deduction.
How is the tuition and fees deduction claimed? The deduction is figured on Form 8917 and reported on Form 1040, line 34 or on Form 1040A, line 19.
Created by: mslinda