Becker: REG 2, MODULES 3 & 4

During the year, Donna Nichols, a single taxpayer, had 60,000 in taxable income before personal exemptions. She had not tax preferences, and her itemized deductions included the following: Home mortgage interest on loan to acquire residence 25,000 Home equity interest on loan used to purchase an automobile 5,000 State and local income taxes 4,500 Gambling losses 3,000 What amount would be reported by Donna on her current year income tax return as an alternative minimum taxable income before the AMT exemption? (1) $64,500 (2) $69,500 (3) $67,500 (4) $65,000

Choice "1" is correct and is calculated as follows: Regular taxable income 60,000 Adjustments: State and local taxes 4,500 Alternative minimum taxable income before AMT exemption 64,500 Home mortgage interest, charitable contributions, and gambling losses are all deductible for regular tax purposes and AMT purposes. State and local taxes are not deductible for AMT, so must be added back to regular taxable income to arrive at AMTI.

Mitch, who is age 69, single, and has no dependents, had AGI of $100,000 during the year. His potential itemized deductions were as follows: Medical expenses (before percentage limitation) $5,000 State income taxes 3,000 Real estate taxes 7,000 Mortgage (qualified housing and residence) interest 9,000 Cash contributions to various charities 4,000 What is the amount of Mitch's AMT adjustment for itemized deductions for the year? (1) $10,000 (2) $14,000 (3) $19,000 (4) $25,000

Choice "1" is correct. Regular; A.M.T.; A.M.T.Adjustment Medical 5,000; 5,000; 0 State taxes 3,000; 0; 3,000 R.E. taxes 7,000; 0; 7,000 Home mortgage 9,000; 9,000; 0 Charity 4,000; 4,000; 0 Total diff. 10,000 Note: State income taxes and real estate taxes are not allowable deductions in calculating alternative minimum tax and therefore must be added back to taxable income.

Betty is age 34 and has AGI of $50,000. The following items may qualify as itemized deductions for Betty: Qualified medical expenses (before 10% AGI floor) $6,000 Real estate tax $1,200 State income tax $800 Charitable contributions $600 Mortgage interest on acquisition indebtedness $2,000 Home equity interest on a loan not used to improve the home $300 What is the itemized deductions allowed for the AMT? (1) $2,000 (2) $2,800 (3) $3,800 (4) $8,800

Choice "1" is correct. Rule: The itemized deductions added back for the AMT are those allowed for regular tax but disallowed for the AMT. Medical expenses are only deductible from regular tax if they exceed 10 percent of AGI. $1,000 is deductible from regular tax. The AMT allows the same amount, so the medical expenses do not have to be added back. All of the property taxes and state income taxes are deductible for regular tax and disallowed for the AMT. Charitable contributions are allowed for regular tax and the AMT. Both of the interest items are deductible for regular tax and AMT. Real estate tax $1,200 State income tax 800 Total add-back $2,000

Betty is age 34 and has AGI of $70,000. The following items may qualify as itemized deductions for Betty: Qualified medical expenses (before 10% AGI floor) $4,000 Real estate tax $1,200 State income tax $800 Charitable contributions $600 Mortgage interest on acquisition indebtedness $2,000 Home equity interest on a loan not used to improve the home $300 What is the itemized deductions allowed for the AMT? (1) $2,000 (2) $2,800 (3) $3,800 (4) $8,800

Choice "1" is correct. Rule: The itemized deductions added back for the AMT are those allowed for regular tax but disallowed for the AMT. Medical expenses are only deductible from regular tax if they exceed 10 percent of AGI. The medical expenses are not deductible for regular tax purposes. Medical expenses in excess of 10% of AGI are allowed to be deducted for both regular and AMT tax purposes. All of the property taxes and state income taxes are deductible for regular tax and disallowed for the AMT. Charitable contributions are allowed for regular tax and the AMT. Both of the interest items are deductible for regular tax and AMT. Real estate tax $1,200 State income tax 800 Total add-back $2,000

Jermaine and Kesha are married, file a joint tax return, have AGI of $50,000, and have two children, Devona and Arethia. Devona is beginning her freshman year at State University this fall and she will not be enrolled on a full-time basis. Arethia is beginning her senior year at Northeast University this fall, but will not be enrolled at least half-time in any academic period. Both Devona and Arethia qualify as dependents on their parents' tax return. Devona's qualifying tuition expenses and fees total $3,600 for the fall semester, while Arethia's qualifying tuition expenses and fees total $4,250 for the fall semester. Full payment is made for the tuition and related expenses for both children during the fall semester. The American Opportunity credit and lifetime learning credit respectively, available to Jermaine and Keesha for the year are (assume 2020 tax law): American Opportunity; Lifetime Learning Credit (1) $2,400; $850 (2) $2,400; $1,000 (3) $2,500; $2,000 (4) $2,500; $4,250

Choice "1" is correct. American opportunity credit (Devona) First $2,000 × 100% = 2,000 Second up to $2,000 × 25% = 400 [$1,600 × 25%] Maximum 2,400 Lifetime learning credit (Arethia) $4,250 × 20% = 850 Note: Maximum qualified expenses for the lifetime learning credit are $10,000 per year and the maximum credit per return is $2,000 per year. A taxpayer can claim both credits on the same return, but not for the same student. Arethia's expenses do not qualify for the American opportunity credit because she was not enrolled at least half-time for at least one academic period during the tax year. Choice "2" is incorrect. This answer would be correct had the qualified expenses for Arethia been $5,000. Choice "3" is incorrect. The American opportunity credit is calculated as 100 percent of the first $2,000 in expenses and 25 percent of the second $2,000. The lifetime learning credit is 20 percent of qualified expenses up to $10,000, not 20 percent of $10,000, regardless of the expense. Choice "4" is incorrect. The American opportunity credit is calculated as 100 percent of the first $2,000 in expenses and 25 percent of the second $2,000. The lifetime learning credit is 20 percent of qualified expenditures, not 100 percent, and the maximum credit per return is $2,000.

Which of the following statements is correct? (1) Tax preference items for the alternative minimum tax are always added back to regular taxable income (2) Itemized deductions that are added back to regular taxable income for the alternative minimum tax are preference items (3) Tax preference items for the alternative minimum tax can be an increase or decrease to regular taxable income (4) All taxpayers are able to deduct the full exemption for the alternative minimum tax

Choice "1" is correct. All of the tax preference items are add-backs to regular taxable income. Choice "2" is incorrect. Itemized deductions that are added back for the alternative minimum tax are adjustments, not tax preference items. Choice "3" is incorrect. All of the tax preference items are add-backs to regular taxable income. Choice "4" is incorrect. The alternative minimum exemption is phased out for taxpayers with AGI over a certain amount.

For the current year, Seth and Sheila intend to file a joint return. Seth expects to earn $35,000 in wages from his teaching job. He is covered by the university's pension plan. Sheila is a volunteer at their son, Stephen's, school. In addition to Seth's income, they received $500 in interest income and $50 in prize winnings from a local radio contest. Each would like to make a deductible contribution to an individual retirement account for the current year. They also believe they will be eligible to claim a tax credit for these contributions. Which of the following is correct? Deductible Contribution; Claim Credit (1) Yes; Yes (2) Yes; No (3) No; Yes (4) No; No

Choice "1" is correct. Although Seth is covered by a plan, the second factor (the income limitation) is not exceeded, thus, both Seth's and Sheila's contributions should be deductible. In addition, both should qualify for a portion of the credit.

An employee who has had social security tax withheld in an amount greater than the maximum for a particular year, may claim: (1) The excess as a credit against income tax, if that excess was withheld by one employer (2) The excess as a credit against income tax, if that excess resulted from correct withholding by two or more employers (3) Reimbursement of such excess from his employers, if that excess resulted from correct withholding by two or more employers (4) 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

Choice "1" 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 was correctly withheld by two or more employers.

A CPA's adjusted gross income (AGI) for the preceding 12-month tax year exceeds $150,000. Which of the following methods is (are) available to the CPA to compute the required annual payment of estimated tax for the current year in order to make timely estimated tax payments and avoid the underpayment of estimated tax penalty? I. The annualization method. II. The seasonal method. (1) I only (2) II only (3) Both I and II (4) Neither I nor II

Choice "1" is correct. In computing the amount of estimated payments due, an individual taxpayer may choose between the annualized method (90% of current year's tax), or the prior year method (100% of last year's tax) unless the taxpayer's adjusted gross income exceeds $150,000 then they must use 110% of last year's tax. Therefore, the taxpayer in this example can use the annualized method. The seasonal method is not permitted.

Krete, an unmarried taxpayer with income exclusively from wages, filed her initial income tax return for Year 8. By December 31, Year 8, Krete's employer had withheld $16,000 in federal income taxes and Krete had made no estimated tax payments. On April 15, Year 9, Krete timely filed an extension request to file her individual tax return and paid $300 of additional taxes. Krete's Year 8 income tax liability was $16,500 when she timely filed her return on April 30, Year 9, and paid the remaining income tax liability balance. What amount would be subject to the penalty for the underpayment of estimated taxes? (1) $0 (2) $200 (3) $500 (4) $16,500

Choice "1" is correct. Provided the taxes due after withholdings were not over $1,000, there is no penalty for underpayment of estimated taxes. Note that there would be a failure to pay penalty on the $200 that was not paid until April 30, but this is a separate penalty. Choice "2" is incorrect. This $200 would be subject to a failure to pay penalty, but if the balance due after withholdings is not over $1,000, there is no penalty for underpayment of estimated taxes. Choice "3" is incorrect. If the balance of tax due after withholdings is not over $1,000, there is no penalty for underpayment of estimated taxes. Choice "4" is incorrect. The penalty for underpayment of estimated taxes is not assessed on the full amount of the income tax liability, only the unpaid amount after withholdings to the extent it exceeds $1,000.

Anthony entered into a long-term construction contract in Year 3. The total profit of the contract is $80,000 and does not change over the life of the contract. The contract will be completed in Year 5. The contract is 20% and 70% complete at the end of Years 3 and 4, respectively. What is the alternative tax adjustment required in Year 5? (1) ($56,000) (2) ($24,000) (3) $24,000 (4) $56,000

Choice "1" is correct. Regular tax allows the completed contract method, but the AMT requires the percentage of completion method. Under the completed contract method, regular tax reported no income in Years 3 and 4. The entire income of $80,000 is reported in Year 5. Income for the AMT is $16,000 ($80,000 × 20%) in Year 3, $40,000 ($80,000 × 50%) in Year 4, and $24,000 ($80,000 × 30%) in Year 5. The adjustment for Year 5 is a loss of $56,000, the difference between regular tax income of $80,000 and AMT income of $24,000. Choice "2" is incorrect. A loss of $24,000 is the amount of the AMT income for Year 5 expressed as a negative number, not the AMT adjustment. Choice "3" is incorrect. $24,000 is the amount of the AMT income for Year 5, not the AMT adjustment. Choice "4" is incorrect. $56,000 would be the AMT adjustment for Year 5, if it were a negative number. The AMT income for Year 5 is less than regular tax, so the adjustment is a subtraction.

Robert had current-year adjusted gross income of $100,000 and potential itemized deductions as follows: Medical expenses (before percentage limitations) $12,000 State income taxes 4,000 Real estate taxes 3,500 Qualified housing and residence mortgage interest 10,000 Home equity mortgage interest (used to consolidate personal debts) 4,500 Charitable contributions (cash) 5,000 What are Robert's itemized deductions for alternative minimum tax? (1) $17,000 (2) $19,500 (3) $21,500 (4) $25,500

Choice "1" is correct. Robert's itemized deductions for alternative minimum tax purposes are calculated as follows: Medical expenses (exceeding 10% of AGI) 2,000 State income taxes (not allowed) − Real estate taxes (not allowed) − Qualified housing and residence interest 10,000 Home equity mortgage interest (not used to buy, build, or improve the home-not allowed) − Charitable contributions 5,000 Alternative Minimum Itemized deductions 17,000

Beginning in 2013, a new Medicare tax was levied on certain income. Which of the following statements is true regarding this new tax? (1) The tax is 3.8% and is levied on the lesser of (1) the taxpayer's net investment income; or (2) the excess of modified AGI over a threshold amount (2) The tax is 3.8% and is levied on the greater of (1) the taxpayer's net investment income; or (2) the excess of modified AGI over a threshold amount (3) The tax is 2.8% and is levied on the lesser of (1) the taxpayer's net investment income; or (2) the excess of modified AGI over a threshold amount (4) The tax is 2.8% and is levied on the greater of (1) the taxpayer's net investment income; or (2) the excess of modified AGI over a threshold amount

Choice "1" is correct. Starting in 2013, a 3.8% Medicare tax is levied on the lesser of (1) the taxpayer's net investment income; or (2) the excess of modified AGI over a threshold amount. Choice "2" is incorrect. The tax is levied on the lesser amount rather than the greater amount. Choices "3" and "4" are incorrect. The tax rate is equal to 3.8% rather than 2.8%.

Which of the following credits can result in a refund, even if the individual had no income tax liability? (1) Earned income credit (2) Child and dependent care credit (3) Adoption Credit (4) Credit for the Elderly or Permanently Disabled

Choice "1" 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.

How is the alternative minimum tax credit handled? (1) It is carried forward indefinitely and applied to regular tax only (2) It is carried back five years and applied to regular tax (3) It is carried forward indefinitely and can be applied to regular tax or AMT (4) It is carried forward five years and applied to regular tax only

Choice "1" is correct. The alternative minimum tax credit is carried forward indefinitely and can be applied only to regular tax. Choice "2" is incorrect. The alternative minimum tax credit is not carried back. Choice "3" is incorrect. The alternative minimum tax credit cannot be applied to AMT. Choice "4" is incorrect. The alternative minimum tax credit is carried forward indefinitely, not only five years.

Which of the following statements about the child and dependent care credit is correct? (1) The credit is nonrefundable (2) The child must be under the age of 18 years (3) The child must be a direct descendant of the taxpayer (4) The maximum credit is $600

Choice "1" 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), 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 "2" 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 "3" 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 "4" is incorrect. The maximum child and dependent care credit is 35% of eligible expenses, with a phase-out for excessive AGI. There is no pure $600 limit.

Mike and Janet are married and file jointly. For Year 1, their alternative minimum taxable income (AMTI) is $1,536,800. What amount is their AMT exemption using the rules in effect for the current year? (1) $0 (2) $10,000 (3) $101,700 (4) $113,400

Choice "1" is correct. The full exemption amount is $113,400. When the AMTI exceeds $1,036,800 for married taxpayers filing jointly, the full exemption is reduced by 25% of the overage. $1,536,800 exceeds $1,036,800 by $500,000. 25% of $500,000 is $125,000. This reduction exceeds the full exemption amount of $111,700, so the exemption is fully phased out and is zero. Choice "2" is incorrect. $10,000 would be correct if the exemption was partially phased out. But the AMTI of $1,536,800 results in a full phase-out. Choice "3" is incorrect. $101,700 would be correct if the exemption was partially phased out. But the AMTI of $1,536,800 results in a full phase-out. Choice "4" is incorrect. $113,400 would be correct if the exemption was allowed in full. But the AMTI of $1,536,800 results in a full phase-out.

Ted, who is single, owns a personal residence in the city. He also owns a condo near the ocean. He uses the condo as a vacation home. In March 2016, he borrowed $50,000 on a home equity loan and used the proceeds to acquire a luxury automobile. During the current year, he paid the following amounts of interest: On his personal residence $15,500 On the condo $6,200 On the home equity loan $4,800 On credit card obligations $1,700 What amount, if any, must Ted recognize as an AMT adjustment for the year? (1) $0 (2) $4,800 (3) $6,200 (4) $11,000

Choice "1" is correct. The interest on the personal residence and condo are deductible for regular tax and AMT purposes, so they are not AMT adjustments. The credit card interest and home equity line not used to improve the home are not deductible at all. Therefore, they are also not an AMT adjustment.

West is single, has no dependents, and does not itemize. West provides the following information regarding his current-year's return: Long-term capital gain $15,000 Percentage depletion in excess of property's adjusted basis 9,000 Dividends from publicly-held companies 10,000 What is the amount of West's AMT tax preference items? (1) $9,000 (2) $19,000 (3) $24,000 (4) $34,000

Choice "1" is correct. The percentage depletion in excess of the property's adjusted basis is an AMT tax preference item. Depletion is limited to the property's adjusted basis for AMT purposes. Choice "2" is incorrect. Dividends are not AMT tax preference items. Choice "3" is incorrect. Long-term capital gains are not AMT tax preference items. Choice "4" is incorrect. Dividends and long-term capital gains are not AMT tax preference items.

Which of the following is not a refundable tax credit? (1) Retirement savings contribution credit (2) Earned income credit (3) Child tax credit (4) Excess social security paid

Choice "1" 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.

Betty is age 34 and has AGI of $50,000. The following items may qualify as itemized deductions for Betty: Qualified medical expenses (before 10% AGI floor) $3,000 Real estate tax $1,200 State income tax $800 Charitable contributions $600 Mortgage interest on acquisition indebtedness $2,000 Home equity interest on a loan not used to improve the home $2,000 What is the itemized deductions allowed for the AMT? (1) $2,500 (2) $2,900 (3) $3,400 (4) $3,700

Choice "2" is correct. Rule: The itemized deductions for the AMT are the deductions allowed for regular tax and the AMT. Medical expenses are only deductible from regular tax if they exceed 10 percent of AGI. None of the medical expenses are deductible for regular tax, so none are deductible for the AMT. All of the property taxes and state income taxes are deductible for regular tax and disallowed for the AMT. Charitable contributions are allowed for regular tax and the AMT. Both of the interest items are deductible for regular tax and AMT. Charitable contributions $600 Mortgage interest on acquisition indebtedness 2,000 Home equity interest on a loan used to improve the home 300 Total allowed deductions for AMT $2,900

How may taxes paid by an individual to a foreign country be treated? (1) As an itemized deduction subject to the 2% floor (2) As a credit against federal income taxes due (3) As an adjustment to gross income (4) As a nondeductible

Choice "2" 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 instead. Note that the only correct response to this question is choice "2"; however, also note that the other option for treating the taxes paid to the foreign country is not included as an answer option. Choice "1" is incorrect. Although taxes paid by an individual to a foreign country are allowable itemized deductions, they are not subject to a 2% floor. Choice "3" 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 instead. Choice "4" 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 instead.

Carol reports taxable income of $48,000. Included in that calculation are the following items: Real estate taxes on her home $2,000 Mortgage interest on acquisition indebtedness $1,200 Charitable contribution $550 Carol also had excluded municipal bond interest income of $8,000, $3,000 of which was deemed to be private activity bond interest. What are Carol's total adjustments for alternative minimum tax? (1) $1,200 (2) $2,000 (3) $3,000 (4) $6,750

Choice "2" is correct. All taxes, including real estate taxes, are adjustments for alternative minimum tax. The mortgage interest and charitable contributions are allowed deductions for AMT, so are not adjustments for AMT. The private activity bond interest is added in for AMT as a preference item, not an adjustment.

A 22-year-old full-time student earned $11,000 in salary and received $9,000 in interest from corporate bonds. The bonds were a gift from the student's grandparents. The student's parents pay more than half of the student's support, including $25,000 in tuition. Which of the following statements is correct regarding the student's current year income tax? (1) The student's salary income and no other income will be subject to the "kiddie tax." (2) A portion of the student's interest income and no other income will be subject to the "kiddie tax." (3) Both the student's interest income and a portion of the interest income will be subject to the "kiddie tax." (4) Neither the student's interest income nor the interest income will be subject to the "kiddie tax."

Choice "2" is correct. Only a portion of the student's interest income is subject to the kiddie tax. Net unearned income of a dependent child is taxed at the parent's marginal rate ("kiddie tax"). Net unearned income is unearned income minus $2,200. Choice "1" is incorrect. The student's salary income is earned income, so it is not subject to the kiddie tax. Choice "3" is incorrect. Only a portion of the interest income, not the salary income, is subject to the kiddie tax. Choice "4" is incorrect. A portion of the student's interest income is subject to the kiddie tax.

Anthony entered into a long-term construction contract in Year 3. The total profit of the contract is $80,000 and does not change over the life of the contract. The contract will be completed in Year 5. The contract is 20% and 70% complete at the end of Years 3 and 4, respectively. What is the alternative minimum tax adjustment required in Year 4? (1) $16,000 (2) $40,000 (3) $56,000 (4) $80,000

Choice "2" is correct. Regular tax allows the completed contract method, but the AMT requires the percentage of completion method. Under the completed contract method, regular tax reported no income in Years 3 and 4. The entire income of $80,000 is reported in Year 5. Income for the AMT is $16,000 ($80,000 × 20%) in Year 3, $40,000 ($80,000 × 50%) in Year 4, and $24,000 ($80,000 × 30%) in Year 5. The adjustment for Year 4 is $40,000, the difference between regular tax income of $0 and the AMT income of $40,000. Choice "1" is incorrect. $16,000 is the amount of the adjustment for Year 3, not Year 4. Choice "3" is incorrect. $56,000 is the total adjustment in Years 3 and 4 together, not the adjustment for Year 4. Choice "4" is incorrect. $80,000 is the total income for the contract, not the adjustment for Year 4.

Alternative minimum tax preferences include: Tax exempt interest from private activity bonds; Charitable contributions of appreciated capital gain property (1) Yes; Yes (2) Yes; No (3) No; Yes (4)No; No

Choice "2" is correct. Tax-exempt interest from private activity bonds (generally) and accelerated depletion, depreciation, or amortization are alternative minimum tax preference items. Charitable contributions of appreciated capital gain property are not alternative minimum tax preferences.

The Tiller family has a modified adjusted gross income of $50,000. The Tillers have 2 children, ages 12 to 13, who qualify as dependents. All of the Tillers' income is from wages and their tax liability is $1,000 before the child tax credit. What total amount of the child tax credit will the Tillers use a credit? What portion of this amount is refundable? Child Tax Credit Taken; Refundable Portion (1) $4,000; $0 (2) $3,800; $2,800 (3) $2,000; $1,400 (4) $2,000; $0

Choice "2" is correct. The Tillers' maximum child tax credit is $4,000 ($2,000 × 2 children). The Tillers will take the first $1,000 against the tax liability. Of the remaining $3,000 credit, only $2,800 is refundable and can be taken as a credit. The refundable portion of the child tax credit for 2020 is the lesser of: 1. the excess child tax credit over tax liability ($3,000) 2. earned income less $2,500 × 15% ($50,000 − $2,500 = $47,500 × 15% = $7,125), or 3. $1,400 per qualifying child ($1,400 × 2 = $2,800) Therefore, $2,800 of the child tax credit is refundable. The total amount of the child tax credit utilized by the Tillers is $3,800 ($2,800 refundable + $1,000 taken against tax liability).

Which of the following tax credits may result in a refund even if the taxpayer had no income tax liability? (1) Adoption credit (2) Additional child tax credit (3) Dependent care credit (4) Elderly and permanently disabled credit

Choice "2" is correct. The additional child tax credit may result in a refund to the extent of the lesser of (1) excess child tax credit over the tax liability or (2) earned income less certain thresholds. Choices "1", "3", and "4" are incorrect. These allowable credits are personal tax credits that are not deemed "refundable" credits, which means that they can reduce the total tax liability to zero, but may not result in a cash refund in excess of the liability.

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? (1) $16,000 (2) $11,000 (3) $8,000 (4) $5,000

Choice "2" is correct. The legal fees and agency fee would be qualifying expenses for the tax credit (medical expenses do not qualify). Choice "1" is incorrect. $5,000 of the $16,000 of total expenses are not eligible. Choice "3" is incorrect. The agency fee is also a qualifying expense. Choice "4" is incorrect. Medical expenses are not eligible for the credit.

Andre Davis is 17 years old and lives at home with his parents. He earned $5,000 in the current tax year mowing lawns. Andre also received $3,000 in interest on a corporate bond that his grandmother gave him. Assuming the 2019 "kiddie tax" threshold of $2,200 at what marginal tax rate is Andre's $8,000 of income taxed? (1) $8,000 less the standard deduction is taxed at his parents' marginal rate (2) $7,200 less the standard deduction is taxed at Andre's marginal rate. $800 is taxed at his parents' marginal rate (3) $5,000 less the standard deduction is taxed at Andre's marginal rate. $3,000 is taxed at his parents' marginal rate (4) $8,000 less the standard deduction is taxed at Andre's marginal rate

Choice "2" is correct. The net unearned income of a dependent child under 18 years of age (or a child age 18-24 who does not provide over half of his or her own support and is a full-time student) is taxed at the parents' marginal rate. The net unearned income is calculated by taking the child's net unearned income (in this case, interest) and subtracting the allowable standard deduction for dependents ($1,100 for 2020) plus an additional $1,100 taxed at the child's marginal rate. Andre's net unearned income is $800 ($3,000 - $2,200). Therefore, $800 is taxed at his parents' marginal rate and $7,200 (less Andre's standard deduction) is taxed at Andre's marginal tax rate. Note that because Andre has both earned income and unearned income, his standard deduction is the greater of: (1) $1,100; or (2) earned income + $350 ($5,000 + $350 = $5,350). All of the income is reported on Andre's income tax return. Choices "1", "3", and "4" are incorrect. The "kiddie tax" applies only to unearned income in excess of $2,200, not total earned income, as calculated in the above explanation.

Chris, age 5, has $3,000 of interest income and no earned income this year. Assume the current applicable standard deduction for dependents is $1,100 how much of Chris' income will be taxed at his parents' marginal rate? (1) $0 (2) $800 (3) $1,900 (4) $3,000

Choice "2" is correct. The net unearned income of a dependent child under age 18 is taxed at the parents' marginal rate under the "kiddie tax" rules. Net unearned income is calculated by taking the child's unearned income and reducing it by the dependent child's allowable standard deduction of $1,100 plus an additional $1,100 (which is taxed at the child's marginal tax rate). Chris' net unearned income taxed at his parents' marginal rate is $800 ($3,000 interest income - $1,100 standard deduction - $1,100 taxed at child's marginal rate). Choice "1" is incorrect. The $0 indicates that nothing is taxed at the parents' marginal rate. Taxing net unearned income at the parents' marginal rate is the whole idea of the "kiddie tax." Choice "3" is incorrect. The $1,900 uses only the $1,100 standard deduction, but the next $1,100 would be taxed at the child's marginal rate. Choice "4" is incorrect. The $3,000 indicates that the entire $3,000 interest income is taxed at the parents' marginal rate.

Carol has taxable income of $48,000. Included in that calculation are the following items: Real estate taxes on her home $2,000 Mortgage interest on acquisition indebtedness $1,200 Charitable contribution $550 Carol also had excluded municipal bond interest income of $8,000, $3,000 of which was deemed to be private activity bond interest. What is Carol's alternative minimum taxable income (AMTI)? (1) $50,000 (2) $53,000 (3) $54,200 (4) $54,750

Choice "2" is correct. The private activity bond interest is added in for the AMT as a preference item. All taxes, including real estate taxes, are added back as adjustments for the alternative minimum tax. The mortgage interest and charitable contributions are allowed deductions for the AMT, and are not adjustments or preference items. Taxable income $48,000 Real estate tax 2,000 Private activity bond interest 3,000 AMTI $53,000

Sam's Year 2 taxable income was $175,000 with a corresponding tax liability of $30,000. For Year 3, Sam expects taxable income of $250,000 and a tax liability of $50,000. In order to avoid a penalty for underpayment of estimated tax, what is the minimum amount of year 3 estimated tax payments that Sam can make? (1) $30,000 (2) $33,000 (3) $45,000 (4) $50,000

Choice "2" is correct. To avoid penalties, if a taxpayer owes $1,000 or more in tax payments beyond withholdings, such taxpayer will need to have paid in for taxes the lesser of: 90% of the current year's tax ($50,000 x 90%) = $45,000, or 100% of the previous year's tax ($30,000 x 100%) = $30,000 However, if the taxpayer had adjusted gross income in excess of $150,000 in the prior year, 110% of the prior year's tax liability is used to compute the safe harbor for estimated payments. (Previous year's tax $30,000 x 110% = $33,000). Choice "1" is incorrect. $30,000 is 100% of last year's tax. This would be sufficient if the previous year's income were $150,000 or less. Choice "3" is incorrect. $45,000 is 90% of this year's tax, which is sufficient, but we are looking for the minimum amount. Choice "4" is incorrect. $50,000 is 100% of the current year's tax, which is sufficient, but more than required.

An employee who has had social security tax withheld in an amount greater than the maximum for a particular year, may claim: (1) 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 (2) Reimbursement of such excess from his employers, if that excess resulted from correct withholding by two or more employers. (3) The excess as a credit against income tax, if that excess resulted from correct withholding by two or more employers (4) The excess as a credit against income tax, if that excess was withheld by one employer

Choice "3" 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 "1" 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 "2" is incorrect. The employee may not seek reimbursement of the excess if the excess resulted from correct withholding by two or more employers. Choice "4" 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.

Chris Baker's adjusted gross income on her current year tax return was $160,000. The amount covered a 12-month period. For the next tax year, Baker may avoid the penalty for the underpayment of estimated tax if the timely estimated tax payments equal the required annual amount of: I. 90% of the tax on the return for the current year paid in four equal installments. II. 110% of prior year's tax liability paid in four equal installments. (1) I only (2) II only (3) Both I and II (4) Neither I nor II

Choice "3" is correct. Both I and II. I. Payment of 90% of the tax on the return for the current year avoids the penalty for underpayment of estimated tax. II. Generally, payment of 110% of the prior year's tax liability avoids the penalty for underpayment of estimated tax when the taxpayer's AGI from the prior year exceeds $150,000. Note: Payment of the lesser of the two above will provide "safe harbor" to the taxpayer.

Farr, an unmarried taxpayer, had $70,000 of adjusted gross income and the following deductions for regular income tax purposes: Home mortgage interest on a loan to acquire a principal residence $11,000 Miscellaneous itemized deductions above the threshold limitation 2,000 What are Farr's total allowable itemized deductions for computing alternative minimum taxable income? (1) $0 (2) $2,000 (3) $11,000 (4) $13,000

Choice "3" is correct. Both mortgage interest and real estate property taxes are deductible for regular (schedule A) tax purposes. However, real estate property taxes are not allowed as a deduction for alternative minimum tax (AMT) purposes. Choice "1" is incorrect. Mortgage interest is allowed as a deduction for AMT purposes. Choice "2" is incorrect. Real estate property taxes are not allowed for AMT purposes Choice "4" is incorrect. The $2,000 real estate property taxes are an add back for AMT purposes.

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? (1) $1,600 (2) $800 (3) $500 (4) $1,200

Choice "3" 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 one 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. The credit is 20% of $2,500, or $500.

Don Mills, a single taxpayer, had $70,000 in taxable income before personal exemptions in the current year. Mills had no tax preferences. His itemized deductions were as follows: State and local income taxes $ 5,000 Home mortgage interest on loan to acquire residence 6,000 Miscellaneous deductions that exceed 2% of adjusted gross income 2,000 What amount did Mills report as alternative minimum taxable income before the AMT exemption? (1) $72,000 (2) $75,000 (3) 77,000 (4)$83,000

Choice "3" is correct. Mills' alternative minimum taxable income starts with his taxable income ($70,000). This is increased by state and local taxes paid ($5,000) and property taxes paid ($2,000) for a total of $77,000. The home mortgage interest on a loan to acquire the residence ($6,000) does not increase alternative minimum taxable income. Choice "1" is incorrect. State and local income taxes must be added back to Mills' taxable income in calculating alternative minimum taxable income. Choice "2" is incorrect. Property taxes paid and deducted as itemized deductions must be added back to Mills' taxable income in calculating alternative minimum taxable income. Choice "4" is incorrect. Home mortgage interest is not added back to Mills' taxable income to calculate alternative minimum taxable income.

Poole, 45 years old and unmarried, is in the 15% tax bracket. He had adjusted gross income of $30,000. Assume a 10% gross income floor for medical expenses. The following information applies to Poole: Medical expenses $16,000 Standard deduction 12,000 Poole wishes to minimize his income tax. What is Poole's total income tax? (1) $3,000 (2) $1,845 (3) $2,550 (4) $1,350

Choice "3" is correct. Poole's total income tax would be calculated as follows: Adjusted gross income (AGI) 30,000 Itemized deductions 13,000* Taxable income 17,000 Tax rate × 0.15 Total income tax 2,550 * Larger of $12,000 standard deduction or $13,000 itemized deduction ($16,000 medical expenses less 10% × $30,000 AGI).

Which of the following may not be deducted in the computation of alternative minimum taxable income of an individual? (1) Traditional IRA account contribution (2) One-half of the self-employment tax deduction (3) State income taxes (4) Charitable contributions

Choice "3" is correct. State income taxes are allowed as an itemized deduction for regular tax purposes, but not for AMT purposes. Choice "1" is incorrect. Traditional IRA account contributions are allowed for both regular tax purposes and AMT purposes. Choice "2" is incorrect. One-half of the self-employment tax deduction is allowed for both regular tax purposes and for AMT purposes. Choice "4" is incorrect. Charitable contributions are allowed as deductions for both regular tax purposes and for AMT purposes.

Mike and Janet are married and file jointly. For Year 1, their alternative minimum taxable income (AMTI) is $1,076,800. What amount is their AMT exemption using the rules in effect for the current year? (1) $0 (2) $10,000 (3) $103,400 (4) $113,400

Choice "3" is correct. The full exemption amount is $113,400 (2020). When the AMTI exceeds $1,036,800 for married taxpayers filing jointly, the full exemption is reduced by 25% of the overage. $1,076,800 exceeds $1,036,800 by $40,000. 25% of $40,000 is $10,000. So the exemption of $113,400 is reduced by $10,000 to $103,400. Choice "1" is incorrect. Zero would be correct if the exemption was fully phased out. Choice "2" is incorrect. $10,000 is the amount of the exemption that is phased out, not the remaining amount allowed. Choice "4" is incorrect.$113,400 is the full exemption amount, but it is partially phased out because the AMTI exceeds the current year threshold.

The Welles family has three children. Which of the children listed below would be subject to the "kiddie tax"? (1) Willy: 20 years old, not a college student, supports himself fully (2) Walker: 25 years old, full-time college student, supports himself fully (3) Wilson: 20 years old, full-time college student, fully supported by his parents (4) None of these

Choice "3" is correct. The net unearned income of a dependent child under 18 years of age (or a child age 18-24 who does not provide over half of his or her own support and is a full-time student) is taxed at the parents' marginal rate under the "kiddie tax" rules. Because Wilson is under the age of 24 and is a full-time college student who does not support himself, his net unearned income over the allowable threshold is taxed at his parents' marginal rate. If Wilson's unearned income is less than $11,000 and consists solely of interest, dividends, and capital gain distributions, his parents can elect to include the income on the parents' return, rather than file a separate income tax return for Wilson. Choice "1" is incorrect. Because Willy supports himself fully, his income is not subject to the "kiddie tax." Choice "2" is incorrect. Because Walker is over the age of 24, his income is not subject to the "kiddie tax." Choice "4" is incorrect. The net unearned income of a dependent child under 18 years of age (or a child age 18-24 who does not provide over half of his or her own support and is a full-time student) is taxed at the parents' marginal rate.

On their joint tax return, Sam and Joann, who are both over age 65, had adjusted gross income (AGI) of $150,000 and claimed the following itemized deductions: Interest of $15,000 on a $100,000 home equity loan to purchase a motor home Real estate tax and state income taxes of $10,000 Unreimbursed medical expenses of $15,000 (prior to AGI limitation) Miscellaneous itemized deductions of $5,000 (prior to AGI limitation) Based on these deductions, what would be the amount of AMT add-back adjustment in computing alternative minimum taxable income? (1) $15,000 (2) $25,000 (3) $10,000 (4) $28,750

Choice "3" is correct. The only AMT add-back adjustment in computing alternative minimum taxable income is the real estate tax and state income tax of $10,000. The taxes were deducted as itemized deductions, but are not allowed for AMT purposes and, therefore, must be added back. The interest on the home equity loan to purchase a boat is not allowed for regular tax purposes or AMT purposes. The unreimbursed medical expenses are treated the same for regular and AMT purposes, so there is no add-back amount. The charitable contributions are also allowed for both regular and AMT purposes, so there is no add-back amount.

Carol reports taxable income of $48,000. Included in that calculation are the following items: Real estate taxes on her home $2,000 Mortgage interest on acquisition indebtedness 1,200 Charitable contribution 550 Carol also had excluded municipal bond interest income of $8,000, $3,000 of which was deemed to be private activity bond interest. What are Carol's total preference items for the alternative minimum tax? (1) $1,200 (2) $2,000 (3) $3,000 (4) $6,750

Choice "3" is correct. The private activity bond interest is added in for the AMT as a preference item. All taxes, including real estate taxes, are adjustments for the alternative minimum tax. The mortgage interest and charitable contributions are allowed deductions for the AMT, so are not adjustments or preference items for AMT purposes.

Which of the following statements is false? (1) If an individual fails to pay estimated taxes for a year, there is no underpayment penalty due under any circumstances if the balance of tax due at filing is less than $1,000 (2) If tax payments are withheld from payroll checks, regardless of the dollar amounts withheld at any particular time throughout the year, the payments are deemed to have been paid evenly throughout the year (3) If an individual files a tax return with a zero tax liability in the prior year, the individual must pay in at least 90 percent of the current year's tax to avoid underpayment penalties, as the ability to use the 100 percent of prior year tax is lost (4) The Internal Revenue Service may waive the penalty for underpayment of taxes if the failure to pay was due to casualty, disaster, illness, or death of the taxpayer

Choice "3" is correct. The statement is false. If an individual files a tax return with a zero tax liability in the prior year, the individual is allowed to use the 100 percent of prior year's tax rule (as the "lesser" of 90 percent of the current year's tax or 100 percent of the prior year's tax) to avoid underpayment penalties.

Which of the following statements about the alternative minimum tax (AMT) of an individual is correct? (1) It is determined from the tax rate schedules and computed on income that exceeds $100,000 (2) It is computed on an individual's regular taxable income at a rate of 28% (3) It is calculated after certain tax preference items that may be used as an alternative to the regular tax are deducted (4) AMT credits may be carried forward to future tax years

Choice "4" is correct. AMT credits may be carried forward indefinitely against regular tax. Choice "1" is incorrect. The AMT of an individual is determined by adjusting the individual's regular taxable income by certain tax preference items and adjustments, subtracting the AMT exemption, and applying the applicable AMT rates to the resulting AMT income. Choice "2" is incorrect. AMT is based on tax rates of both 26% and 28%. Choice "3" is incorrect. Tax preference items are added back to taxable income in computing alternative minimum taxable income (AMTI).

The credit for prior year alternative minimum tax liability may be carried: (1) Forward for a maximum of five years (2) Back to the three preceding years or carried forward for a maximum of five years (3) Back to the three preceding years (4) Forward indefinitely

Choice "4" is correct. Alternative minimum tax (AMT) paid can be claimed as a credit against other years if the tax was paid on items that increased AMT that year but will reverse in later years. The concept is the same as deferred taxes for financial accounting purposes. The credit is carried forward indefinitely.

Which of the following is not an adjustment or preference to arrive at alternative minimum taxable income? (1) Individual taxpayer net operating losses (2) Passive activity losses (3) Deductible state and local taxes (4) Deductible contributions to individual retirement accounts

Choice "4" is correct. Deductible contributions to individual retirement accounts are not an adjustment or preference in calculating a taxpayer's alternative minimum taxable income. They are an adjustment in calculating adjusted gross income for regular (not alternative minimum) tax purposes. Choices "1", "2", and "3" are incorrect. Adjustments to arrive at AMTI include individual net operating losses, passive activity losses, and deductible state and local taxes.

Madison and Nick Koz have two children, ages 8 and 10. Both children meet the definition of qualifying child. The Koz family has adjusted gross income of $300,000. What is the amount of the child tax credit on the couple's income tax return? (1) $1,000 (2) $2,000 (3) $3,000 (4) $4,000

Choice "4" is correct. The child tax credit is available fully for taxpayers with AGI up to $400,000 for a joint return (2020). The eligible children must be under the age of 17. The two Koz children qualify for the child tax credit of $2,000 each ($4,000 total).

How is the earned income credit handled for AMT? (1) It is allowed only as carryback against previous AMT (2) It is allowed only as a carryforward against future AMT (3) It is not allowed as a credit against AMT (4) It is allowed as a credit against AMT in the current year

Choice "4" is correct. The earned income credit is allowed as a credit against the current-year AMT.

Dawn White's adjusted gross income on her Year 1 tax return was $100,000. The amount covered a 12-month period. For the Year 2 tax year, the minimum payments required from White to avoid the penalty for the underpayment of estimated tax is: (1) 90% of the current tax on the return for the current year paid in four equal installments or 110% of the prior year's tax liability paid in four equal installments (2) 110% of the prior year's tax liability paid in four equal installments only (3) 100% of the prior year's tax liability paid in four equal installments only (4) 90% of the current tax on the return for the current year paid in four equal installments or 100% of the prior year's tax liability paid in four equal installments

Choice "4" is correct. The requirement is 90% of the current tax on the return for the current year paid in four equal installments or 100% of the prior year's tax liability paid in four equal installments. Choice "1" is incorrect. 110% of the prior year's tax liability is only required if AGI is in excess of $150,000. Choices "2" and "3" are incorrect. There is always an option to pay 90% of the current year's tax.

An individual taxpayer's tax return included the following: Regular tax before tax credits $5,000 Current-year estimated tax payments 6,000 Amount paid with current-year extension 1,000 Federal income tax withheld 1,000 What amount, if any, is the taxpayer's overpayment? (1) $0 (2) $1,000 (3) $2,000 (4) $3,000

Choice "4" is correct. The total tax payments applied against the $5,000 current year regular tax liability is $8,000, which includes $6,000 current year estimated tax payments, $1,000 current year withholding, and $1,000 paid with current year extension. Overpayment = $5,000 current year tax liability − $8,000 tax payments = $3,000. Choice "1" is incorrect. The amount of the overpayment is $3,000, not $0. All of the tax payments are applied against the current year regular tax liability. Choice "2" is incorrect. The amount of the overpayment is $3,000, not $1,000. All of the tax payments are applied against the current year regular tax liability. Choice "3" is incorrect. The amount of the overpayment is $3,000, not $2,000. All of the tax payments are applied against the current year regular tax liability.

When computing alternative minimum tax, the individual taxpayer may take a deduction for which of the following items? (1) State income taxes (2) Standard deduction (3) Real estate property taxes (4) Casualty losses

Choice "4" is correct. Casualty losses are not added back in the alternative minimum tax (AMT) calculation. Therefore, they are allowed as a deduction. Choice "1" is incorrect. State income taxes are added back in the AMT calculation. Therefore, they are not allowed as a deduction. Choice "2" is incorrect. Standard deductions are added back in the AMT calculation. Therefore, they are not allowed as a deduction. Choice "3" is incorrect. Real estate property taxes are added back in the AMT calculation. Therefore, they are not allowed as a deduction.

Which of the following credits can result in a refund, even if the individual had no income tax liability? (1) Credit for prior year minimum tax (2) Elderly and permanently and totally disabled credit (3) Earned income credit (4) Child and dependent care credit

Choice "3" is correct. The earned income credit is refundable. Eligible taxpayers can get advance payments from their employers because the credit is assured.

Mike and Janet are married and file jointly. For Year 1, their alternative minimum taxable income (AMTI) is $128,900. What amount is their AMT exemption using the rules in effect for the current year? (1) $0 (2) $10,000 (3) $101,700 (4) $113,400

Choice "4" is correct. The full exemption amount is $113,400. When the AMTI exceeds $1,036,800 for married taxpayers filing jointly, the full exemption is reduced by 25% of the overage. $128,900 does not exceed $1,036,800, so the exemption is the full $113,400. Choice "1" is incorrect. Zero would be correct if the exemption was fully phased out. The AMTI of $128,900 results in no phase-out. Choice "2" is incorrect. $10,000 would be correct if the exemption was partially phased out. The AMTI of $128,900 results in no phase-out. Choice "3" is incorrect. $101,700 would be correct if the exemption was partially phased out. The AMTI of $128,900 results in no phase-out.

Which of the following disqualifies an individual from the earned income credit? (1) The taxpayer's qualifying child is a 17-year-old grandchild (2) The taxpayer has earned income of $5,000 (3) The taxpayer's five-year-old child lived in the taxpayer's home for only eight months (4) The taxpayer has a filing status of married filing separately

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 "4" is correct. Based on the above rules, the filing status of married filing separately disqualifies a taxpayer from claiming the earned income credit. Choice "1" 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 "2" 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 "3" is incorrect. The taxpayer's 5-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.