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ch.14 special tax computation methods, tax credit (SE tax (Self-Employment…
ch.14 special tax computation methods, tax credit
Alternative Minimum Tax
AMT Computation
AMT Tax Rates and Brackets
AMT Exemption Amount
AMT Tax Preference Items
AMT Adjustments
AMT Credits
SE tax (Self-Employment Tax)
What Constitutes Self-Employment Income
Proprietor or partnership
Ind. has 2 separate SE activities: net earnings from each activity are aggregated
MFJ: calculate SE tax each
Earnings subject to SE tax
Net earnings from a sole proprietorship
Director's fees
Taxable research grants
Distributive share of partnership income + guaranteed payments from the partnership
Computed on Schedule SE of Form 1040
An employee or an Independent Contractor?
The degree of influence and control an ind. has over his work.
20 factors to evaluate SE or employee
A combined FICA rate of 15.3%
OASDI: 12.4% (Ceiling: $127,200)
Medicare 2.9% for the first $200k ($250 MFJ)
When? Net earnings from SE > $400
SE are responsible for paying both the employee share and employer share of employment taxes
Net earnings from SE: 92.35% of SE income
For AGI - entitled to deduct 50% of the employer portion of their SE tax
FICA: for both employee & SE
the Social Security tax base: LESSER of
Net earnings from SE or
the Social Security Tax ceiling($127,200) - ind.'s earnings as an employee
Additional Medicare Tax
0.9% applies to SE income & wages
Threshold:
MFJ $250,000
MFS $125,000
Single $200,000
Additnl. Medicare Tax = [Net earnings from SE - (Threshold - wages)]*0.9%
Personal and Business Tax Credits
Use and Importance of Tax Credits
Tax credits may help to increase employment, encourage energy conservation and research and experimental activities, and provide tax relief for low-income taxpayers; mitigate the effects of double taxation on income from foreign countries
Nonrefundable credits: only offset tax liability
Refundable credits: not only offset tax liability but if the credits exceed the tax liability, the excess will be paid (refunded) directly to the taxpayer.
Value of a Credit v. a Deduction
Tax credit: reduce tax liability on dollar-for-dollar basis
Tax deductions: reduce taxable income (valuable to high-income taxpayers)
Nonrefundable Personal Tax Credits
Child and Dependent Care Credit
Qualifying employment - Related Expenses
amounts paid for care inside the home
(care and household maintenance)
E.g. housekeeper who cares for the child, and serves as maid and cook
amounts paid for care outside the home
(a dependent care facility which operates in compliance with federal, state, and local law)
E.g. a day care facility
E.g.2 adult day care for the care of an incapacitated dependent or spouse qualify only if the individual lives int he taxpayer's home for at least 8 hours a day
Additional Limitation:
Ceiling on qualifying expenses:
max.: $3,000 for one child $6,000 two or more; No carryover
Earned income limit: mix. qualifying exp. cannot exceed the taxpayer's earned income (spouse w/ the smaller earned income)
(full-time student or incapacitated spouse - $250/month; $500 if two or more child)
Credit Rate and Amount
Generally, the credit equals 35% of qualifying expenses
AGI - Base amount($15,000) = Excess / $2,000, then, Rounded up to = x
Applicable credit = 35% - x [no lower than 20%]
Provides tax savings for taxpayers who incur child and dependent care expenses because of employment activities
Qualifying individual:
A qualifying child under age 13 or
an incapacitated dependent or spouse who lived with the taxpayer for more than one-half of the year
Credit = 35% of qualified expenditures
Other sources of Tax Benefits for Dependent Care
Tax Credit for the Elderly and Disabled
Adoption Credit
Child Tax Credit
A credit of $1,000 for each qualifying child
The child is the taxpayer's dependent based on the category "qualifying child" under the conditions for the dependency exemption & under age 17
Phase out when modified AGI reaches a threshold amout
MFJ $110,000
Single $75,000
MJS $55,000
Phase out amount = [(modified AGI - Threshold)/$1,000]※ ✕ $50
rounded up to : ※
Child tax credit = $1,000 ✕ child - phaseout amount
After 2015, if a taxpayer's tentative child tax credit is greater than the total tax liability, part of the credit (the "additional" child tax credit) is refundable (Form 8812)
Refundable IF tentative child tax credit > total tax liability
[2-19] Refund limitation = (earned income - $3,000)*15%
Higher Education Costs Tax Credits
American Opportunity Tax Credit
Lifetime Learning Credit
Residential Energy Credits
Residential Energy Efficient Property (REEP) Credit
Qualified retirement Savings Contributions Credit ("Saver's Credit")
Foreign Tax Credit
Business Related Tax Credits
Refundable Personal Credits
Provisions Related to Health Insurance
Health Insurance Premium Assistance Credit (Also Known as Premium Tax Credit)
Shared Responsibility Payment
Payment of Taxes
Withholding of Taxes
Estimated Tax Payments
Tax Planning Considerations
Avoiding the AMT
Avoiding the Underpayment Penalty for Estimated Tax
Cash-Flow Considerations
Use of General Business Tax Credits
Foreign Tax Credits and the Foreign Earned Income Exclusion
Compliance and Procedural Considerations
AMT Filing Procedures
Withholding and Estimated Tax Payments
General Business Tax Credit
Nonrefundable Personal Tax Credits