Tax Chapter 8 Examples and Solutions

Earned income credit The taxpayer's earned income and AGI are the same; the taxpayer resided in the U.S. for more than half the year; the taxpayer is not claimed as a dependent by anyone else; and any children listed are claimed as dependents by the taxpayer. How much earned income credit is the taxpayer eligible for? Mark is age 21, single with no children, and has an $8,000 AGI.

$0 Because Mark does not have any qualifying children, he must be age 25 or older and 64 or younger to be eligible to claim the earned income credit. Because he is younger than 25, he is not eligible for the earned income credit.

Earned income credit The taxpayer's earned income and AGI are the same; the taxpayer resided in the U.S. for more than half the year; the taxpayer is not claimed as a dependent by anyone else; and any children listed are claimed as dependents by the taxpayer. How much earned income credit is the taxpayer eligible for? - Mark is single and has 2 children. He has a $55,000 AGI.

$0 Per the Earned Income Credit table, singe taxpayers with 2 children are fully phased out of the earned income credit when AGI (or earned income, if greater) exceeds $49,399, which is the case here. As such, Mark is fully phased out of the earned income credit.

Education Credits: AOTC and LTLC John and Kellie are married filing jointly taxpayers and have three dependent children in college. Mike is in a graduate degree program. Sam and Emily are undergraduate students. Both Sam and Emily are at least half-time students seeking an undergraduate degree. No one has already claimed the American Opportunity Credit on Sam or Emily for 4 or more prior tax years. Sam and Emily have not yet completed 4 years of higher education. Neither Sam nor Emily has a felony drug conviction. Their children have the following expenses (net of any scholarships): Mike: $5,500 tuition, $500 books, $7,000 room and board Sam: $4,500 tuition, $500 books, $7,000 room and board Emily: $2,500 tuition, $500 books, $7,000 room and board In addition, John spent $1,000 in tuition / fees for continuing education courses related to his profession. - Before any AGI limits, how much of these credits is refundable?

$1,900 *AOTC - Tuition, fees, and books are eligible - Computed as a per-student basis *LTLC - Tuition and fees are eligible - Computed as a per-tax basis Sam and Emily = undergraduate (AOTC) Mike and John = graduate/profession (LTLC) Sam: $4,500 + 500 = $5,000 *Per student, first $2,000 + 25% of next 2,000 2,000 + 25% (2,000) = $2,500 Emily: $2,500 + 500 = $3,000 *Per student, first $2,000 + 25% of next 2,000 2,000 + 25% (1,000) = $2,250 Mike and John: $5,500 + $1,000 = $6,500 *20% of lesser of actual expenses or $10,000 20% x $6,500 = $1,300 $2,500 + $2,250 + $1,300 = $6,050 Refundable: 40% of AOTC - 40% x $4,750 = $1,900

FICA Withholdings Ian earned $160,000 of salary as an employee in 2022. How much should his employer have withheld from his paycheck for FICA taxes (rounded to the nearest whole dollar amount)?

$11,434 FICA Withholdings Step 1: Determine Social Security Tax. Step 2: Determine if wages > MFS $125,000/ Other$200,000/ MFJ $250,000 threshold for additional medicare tax. Step 3: Determine regular portion of medicare tax. Step 4: (If applicable, determine any additional medicare tax.) Step 5: Combine all amounts for FICA tax. 1) $160,000 > $147,000 - $147,000 x 6.2% = $9,114 2) $160,000 < $200,000 3) $160,000 x 1.45% = $2,320 4) - 5) $9,114 + $2,320 = $11,434 FICA Withholdings

FICA Tax Ray works for Company Alpha, earning $360,000 in salary during 2022. Assume he is single and has no other income. What amount of FICA tax (in total) will Ray pay for the year?

$15,774 FICA tax Step 1: Determine S.S. tax which is 6.2% of lesser of 1) earned income $360,000 or 2) $147,000 S.S. wage cap - 6.2% x 147,000 = $9,114 Step 2: Determine regular portion of medicare tax which is 1.45% of earned income. - 1.45% x 360,000 = $5,220 Step 3: Determine .9% additional medicare tax to portion of earnings in excess of threshold ($200,000 single). - .9% (360,000 - 200,000) = $1,440 Step 4: $9,114 + $5,220 + $1,440 = $15,774

Earned income credit The taxpayer's earned income and AGI are the same; the taxpayer resided in the U.S. for more than half the year; the taxpayer is not claimed as a dependent by anyone else; and any children listed are claimed as dependents by the taxpayer. How much earned income credit is the taxpayer eligible for? - Mark files jointly with his spouse Jane. They have 1 qualifying child and have an $8,000 AGI.

$2,720 *Preliminary credit (before phaseout) = applicable % x lesser of 1) earned income $8,000 or 2) max. base earned income $10,980 MFJ, 1 qualifying child = 34% x $8,000 = $2,720 *AGI & earned income < $26,260 threshold

Education Credits: AOTC and LTLC John and Kellie are married filing jointly taxpayers and have three dependent children in college. Mike is in a graduate degree program. Sam and Emily are undergraduate students. Both Sam and Emily are at least half-time students seeking an undergraduate degree. No one has already claimed the American Opportunity Credit on Sam or Emily for 4 or more prior tax years. Sam and Emily have not yet completed 4 years of higher education. Neither Sam nor Emily has a felony drug conviction. Their children have the following expenses (net of any scholarships): Mike: $5,500 tuition, $500 books, $7,000 room and board Sam: $4,500 tuition, $500 books, $7,000 room and board Emily: $2,500 tuition, $500 books, $7,000 room and board In addition, John spent $1,000 in tuition / fees for continuing education courses related to his profession. - How much total credit is allowable if their AGI is $168,000?

$3,630 *AOTC - Tuition, fees, and books are eligible - Computed as a per-student basis *LTLC - Tuition and fees are eligible - Computed as a per-tax basis Sam and Emily = undergraduate (AOTC) Mike and John = graduate/profession (LTLC) Sam: $4,500 + 500 = $5,000 *Per student, first $2,000 + 25% of next 2,000 2,000 + 25% (2,000) = $2,500 Emily: $2,500 + 500 = $3,000 *Per student, first $2,000 + 25% of next 2,000 2,000 + 25% (1,000) = $2,250 Mike and John: $5,500 + $1,000 = $6,500 *20% of lesser of actual expenses or $10,000 20% x $6,500 = $1,300 $2,500 + $2,250 + $1,300 = $6,050 Because their AGI as a married filing jointly taxpayer is above $160,000 but below $180,000, they are subject to a partial phaseout. 168,000 - 160,000 = 8,000 8,000/20,000 (phaseout range) = 40% $6,050 x 60% = $3,630

Earned income credit The taxpayer's earned income and AGI are the same; the taxpayer resided in the U.S. for more than half the year; the taxpayer is not claimed as a dependent by anyone else; and any children listed are claimed as dependents by the taxpayer. How much earned income credit is the taxpayer eligible for? - Mark files jointly with his spouse Jane. They have 1 qualifying child and have a $16,000 AGI.

$3,733 *Preliminary credit (before phaseout) = applicable % x lesser of 1) earned income $16,000 or 2) max. base earned income $10,980 MFJ, 1 qualifying child = 34% x $16,000 = $3,733 *AGI & earned income < $26,260 threshold

Estimated Tax Payments How much in tax payments (withholdings and estimated payments) must the taxpayer make for the year to avoid underpayment penalties (assume that any estimated payments by the taxpayer were made ratably in the year)? - Current year liability of $40,000; prior year liability of $30,000; prior year AGI of $120,000

$30,000 *If prior year AGI is $150,000 or less ($75,000 MFS), 1) 90% of current tax or 2) 100% of prior tax - 90% x 40,000 = $36,000 - 100% x 30,000 = $30,000

Estimated Tax Payments How much in tax payments (withholdings and estimated payments) must the taxpayer make for the year to avoid underpayment penalties (assume that any estimated payments by the taxpayer were made ratably in the year)? - Current year liability of $40,000; prior year liability of $38,000; prior year AGI of $140,000

$36,000 *If prior year AGI is $150,000 or less ($75,000 MFS), 1) 90% of current tax or 2) 100% of prior tax - 90% x $40,000 = $36,000 - 100% x $38,000 = $38,000

Earned income credit The taxpayer's earned income and AGI are the same; the taxpayer resided in the U.S. for more than half the year; the taxpayer is not claimed as a dependent by anyone else; and any children listed are claimed as dependents by the taxpayer. How much earned income credit is the taxpayer eligible for? - Mark is single and has 2 children. He has a $30,000 AGI.

$4,085 *Preliminary credit (before phaseout) = applicable % x lesser of 1) earned income $30,000 or 2) max. base earned income $15,410 MFJ, 2 qualifying children = 40% x $15,410 = $6,164 $30,000 > $20,130 threshold 30,000 - 20,130 = 9,870 9,870 x 21.06% = 2,079 6,164 - 2079 = $4,085

Child/Dependent Credit Thomas has three dependents: a son age 18, a daughter age 15, and a son age 7. Thomas will file as married filing jointly with his spouse. Assume that Thomas, his spouse, and his children are all U.S. citizens with valid SSNs. - Before AGI phaseouts, what amount of child and dependent credit can Thomas claim?

$4,500 credit Age 5 and 7 = $2,000 child tax credit each Age 18 > 17 or younger = $500 credit for other dependents $2,000 + $2,000 + $450 = $4,500

Estimated Tax Payments How much in tax payments (withholdings and estimated payments) must the taxpayer make for the year to avoid underpayment penalties (assume that any estimated payments by the taxpayer were made ratably in the year)? - Current year liability of $80,000; prior year liability of $50,000; prior year AGI of $180,000

$55,000 *If prior year AGI is $150,000 or more ($75,000 MFS), 1) 90% of current tax or 2) 110% of prior tax - 90% x $80,000 = $72,000 - 110% x $50,000 = $55,000

Education Credits: AOTC and LTLC John and Kellie are married filing jointly taxpayers and have three dependent children in college. Mike is in a graduate degree program. Sam and Emily are undergraduate students. Both Sam and Emily are at least half-time students seeking an undergraduate degree. No one has already claimed the American Opportunity Credit on Sam or Emily for 4 or more prior tax years. Sam and Emily have not yet completed 4 years of higher education. Neither Sam nor Emily has a felony drug conviction. Their children have the following expenses (net of any scholarships): Mike: $5,500 tuition, $500 books, $7,000 room and board Sam: $4,500 tuition, $500 books, $7,000 room and board Emily: $2,500 tuition, $500 books, $7,000 room and board In addition, John spent $1,000 in tuition / fees for continuing education courses related to his profession. - Before considering AGI limits, what is their allowable education credits?

$6,050 *AOTC - Tuition, fees, and books are eligible - Computed as a per-student basis *LTLC - Tuition and fees are eligible - Computed as a per-tax basis Sam and Emily = undergraduate (AOTC) Mike and John = graduate/profession (LTLC) Sam: $4,500 + 500 = $5,000 *Per student, first $2,000 + 25% of next 2,000 2,000 + 25% (2,000) = $2,500 Emily: $2,500 + 500 = $3,000 *Per student, first $2,000 + 25% of next 2,000 2,000 + 25% (1,000) = $2,250 Mike and John: $5,500 + $1,000 = $6,500 *20% of lesser of actual expenses or $10,000 20% x $6,500 = $1,300 $2,500 + $2,250 + $1,300 = $6,050

Child/Dependent Credit Julie paid a day care center to watch her two-year-old son while she worked as a computer programmer. What amount of child and dependent care credit can Julie claim in 2022 in the following scenario? - Julie paid $2,500 to the day care center, and her AGI is $53,000 (all salary).

Child and Dependent Credit = $500 Eligible expenses = least of the following 3: 1) $2,500 actual expenses paid 2) $3,000 statutory cap for 1 qualifying individual 3) $53,000 earned income *AGI $53,000 > $43,000, she is fully phased down to the 20% credit rate. - $2,500 x 20% = $500

Child/Dependent Credit Julie paid a day care center to watch her two-year-old son while she worked as a computer programmer. What amount of child and dependent care credit can Julie claim in 2022 in the following scenario? - Julie paid $3,000 to the day care center, and her AGI is $13,000 ($1,500 salary and $11,500 unearned income from corporate bond interest).

Child and Dependent Credit = $535 Eligible expenses = least of the following 3: 1) $$3,000 actual expenses paid 2) $3,000 statutory cap for 1 qualifying individual 3) $1,500 earned income *AGI $1,500 < $43,000 - Based on the credit table and her AGI, her credit rate is 35%. - 35% x $1,500 = $535

Child/Dependent Credit Julie paid a day care center to watch her two-year-old son while she worked as a computer programmer. What amount of child and dependent care credit can Julie claim in 2022 in the following scenario? - Julie paid $5,000 to the day care center, and her AGI is $53,000 (all salary).

Child and Dependent Credit = $600 Eligible expenses = least of the following 3: 1) $5,000 actual expenses paid 2) $3,000 statutory cap for 1 qualifying individual 3) $53,000 earned income *AGI $53,000 > $43,000, she is fully phased down to the 20% credit rate. - $3,000 x 20% = $600

Child/Dependent Credit Julie paid a day care center to watch her two-year-old son while she worked as a computer programmer. What amount of child and dependent care credit can Julie claim in 2022 in the following scenario? - Julie paid $4,500 to the day care center, and her AGI is $27,000 (all salary).

Child and Dependent Credit = $870 Eligible expenses = least of the following 3: 1) $4,500 actual expenses paid 2) $3,000 statutory cap for 1 qualifying individual 3) $27,000 earned income *AGI $27,000 < $43,000 - Based on the credit table and her AGI, her credit rate is 29%. - $3,000 x 20% = $870

Child/Dependent Credit Thomas has three dependents: a son age 18, a daughter age 15, and a son age 7. Thomas will file as married filing jointly with his spouse. Assume that Thomas, his spouse, and his children are all U.S. citizens with valid SSNs. - How much child and dependent credit can Thomas claim if his AGI is $425,731?

Credit after phase-out = $3,200 Step 1: Determine credit before AGI phaseouts. - $2,000 + $2,000 + $500 = $4,500 Step 2: $425,731 AGI - threshold ($400,000 MFJ) = $25,731 *Credits phase out by $50 for every $1,000 of excess Step 3: $25,731/1,000 = 26 (rounded) x $50 = $1,300 phaseout amount Step 4: $4,500 - 1,300 = $3,200

Net Taxes Due/Overpayment This year Luke has calculated his gross tax liability at $2,400. Luke is entitled to a $2,800 nonrefundable personal tax credit, a $500 business tax credit, and an $800 refundable personal tax credit. In addition, Luke has had $2,500 of income taxes withheld from his salary. - What is Luke's net tax due or overpayment?

Credits are subtracted in the following order from tax liability: 1) nonrefundable personal tax credits 2) business tax credits 3) refundable personal tax credits $2,400 - $2,800 = below 0 Do not use business credit since below 0 *Refundable personal tax credit and taxes withheld are subtracted from 0. = ($3,300) net overpayment

Self-Employment Amy is single and self-employed. She reported $180,000 of net profit on her Schedule C for tax year 2022 and had no other income source. - What is her "net earnings from self-employment"?

Net earnings from self employment = $166,230 *Net earnings from self-employment equals net income from Schedule C (plus certain partnership distributive share amounts) times 92.35%. - $180,000 x 92.35% = $166,230

Net Investment Income Tax Henry is a single taxpayer. What is Henry's net investment income tax under the following scenario? - His taxable income includes $10,000 of interest income; and his modified AGI is $150,000.

Net investment income tax = $0 3.8% of lesser of 1) net investment income tax or 2) modified AGI in excess of threshold 200,000-150,000 = (50,000) *Since $150,000 < $200,000 (single threshold) = 0$

Net Investment Income Tax Henry is a single taxpayer. What is Henry's net investment income tax under the following scenario? - His taxable income includes $10,000 of interest income; and his modified AGI is $203,000.

Net investment income tax = $114 3.8% of lesser of 1) net investment income tax $10,000 or 2) modified AGI in excess of threshold 203,000-200,000 = $3,000 3.8% x 3,000 = $114

Filing Requirements Determine if the following taxpayer is required to file a return. - Mike and Jannette are married filing jointly taxpayers with $27,000 of gross income. Mike and Jannette are both age 70.

No, not required to file a return Basic Standard deduction = $25,900 *Because both are older than 65, they receive two additional $1,400 standard deduction amounts. Total Standard Deduction = $28,700 Gross income < Standard Deduction

Filing Requirements Determine if the following taxpayer is required to file a return. - Mike and Jannette are married filing jointly taxpayers with $23,000 of gross income.

No, not required to file a return Standard Deduction = $25,900 Gross income < standard deduction

Self-Employment Amy is single and self-employed. She reported $180,000 of net profit on her Schedule C for tax year 2022 and had no other income source. - What is her "self-employment" tax? Round your final answer to a whole dollar.

Self-Employment Tax = $23,049 Step 1: Determine S.S. tax - lesser of 1) total earned income or 2) 147,000 wage cap - 147,000 x 1.24% = $1,822.8 Step 2: Determine medicare tax (regular): net earnings from self-employment (180,000 x 92.35% = 166,230 - 166,230 x 2.9% = $4,820.67 Step 3: No Additional medicare tax b/c salary, wages, and net earnings < 200,000 threshold (single) Step 4: $18,228 + $4,820.67 = $23,049

Dependent's Tax Liability In 2022, Sheryl is claimed as a dependent on her parents' tax return. Her parents report taxable income of $575,000 (married filing jointly). Sheryl did not provide more than half her own support. What is Sheryl's tax liability for the year in the following circumstance? - She received $7,000 of qualified dividend income. This is her only source of income. She is 16 years old at year-end.

Tax Liability = $1,140 *Subject to Kiddie Tax Step 1: Determine earned income = $0 Step 2: Determine Standard Deduction = $1,150 Step 3: Determine taxable income 8,000 - 1,150 = $6,850 Step 4: Preferential tax rates for standard ded. & q. div. - $1,150 x 0% = $0 - ($6,850 - 1,150) = $5,700 x parent's 20% rate = $1,140

Dependent's Tax Liability In 2022, Sheryl is claimed as a dependent on her parents' tax return. Her parents report taxable income of $575,000 (married filing jointly). Sheryl did not provide more than half her own support. What is Sheryl's tax liability for the year in the following circumstance? - She received $8,000 of interest income from corporate bonds she received several years ago. This is her only source of income. She is 20 years old at year-end and is a full-time student.

Tax Liability = $2,110 *Subject to Kiddie Tax Step 1: Determine earned income = $0 Step 2: Determine Standard Deduction = $1,150 Step 3: Determine taxable income 8,000 - 1,150 = $6,850 Step 4: Tax on standard deduction 1,150 x 10% (Sin.) = 115 Step 5: Tax on remaining amount 6,850 - 1,150 = $5,700 - 5,700 x parent's marginal rate (35%) = 1,995 Step 6: $115 + $1,995 = $2,110 * 1) under 24 and full-time 2) earned income does not cover more than half of support

Dependent's Tax Liability In 2022, Sheryl is claimed as a dependent on her parents' tax return. Her parents report taxable income of $575,000 (married filing jointly). Sheryl did not provide more than half her own support. What is Sheryl's tax liability for the year in the following circumstance? - She received $8,000 of interest income from corporate bonds she received several years ago. This is her only source of income. She is 16 years old at year-end.

Tax Liability = $2,110 *Subject to Kiddie Tax Step 1: Determine earned income = $0 Step 2: Determine Standard Deduction = $1,150 Step 3: Determine taxable income 8,000 - 1,150 = $6,850 Step 4: Tax on standard deduction 1,150 x 10% (Sin.) = 115 Step 5: Tax on remaining amount 6,850 - 1,150 = $5,700 - 5,700 x parent's marginal rate (35%) = 1,995 Step 6: $115 + $1,995 = $2,110

Tax Liability Lacy is a single taxpayer. In 2022, her taxable income is $45,000. What is her tax liability in the following situation? Use Tax Rate Schedule, Dividends and Capital Gains Tax Rates for reference. - Her taxable income includes $3,000 of qualifying dividends.

Tax Liability = $5,307 Step 1: Split taxable income into ordinary and qualified dividends. ~ Ordinary = $42,000 ~ Qualified Dividends = $3,000 Step 2: Compute tax liability for ordinary income. $42,000 - 41,775 = ($225 x 22%) = 49.5 + 4,857 = $4,857 Step 3: Compute tax liability for qualified dividends. ~ Both $42,000 and $45,000 are below threshold of $459,750 (single). Entire $3,000 is taxed at 15% = 450 Step 4: $4,857 + 450 = $5,307

Tax Liability Lacy is a single taxpayer. In 2022, her taxable income is $45,000. What is her tax liability in the following situation? Use Tax Rate Schedule, Dividends and Capital Gains Tax Rates for reference. - All income is salary income.

Tax Liability = $5,517 Step 1: Taxable income - ordinary bracket threshold ~ ($45,000 - $41,775) = 3,225 Step 2: Amount in step 1 x bracket rate ~ (3,225 x 22%) = 709.5 Step 3: Amount in step 2 + base bracket tax ~ (709.5 + 4,807.50) = $5,517

Dependent's Tax Liability In 2022, Sheryl is claimed as a dependent on her parents' tax return. Her parents report taxable income of $575,000 (married filing jointly). Sheryl did not provide more than half her own support. What is Sheryl's tax liability for the year in the following circumstance? - She received $8,000 from a part-time job. This was her only source of income. She is 16 years old at year-end.

Tax liability = $0 Step 1: Determine earned income. - $8,000 Step 2: Determine standard deduction. - greater of $1,150 or earned income + $400 =$8,400 (cap for single is $12,950) Step 3: Determine tax liability. - Since standard deduction > earned income, tax liability = $0

Tax Liability Lacy is a single taxpayer. In 2022, her taxable income is $45,000. What is her tax liability in the following situation? Use Tax Rate Schedule, Dividends and Capital Gains Tax Rates for reference. - Her taxable income includes $7,000 of qualifying dividends.

Tax liability = $4,853.25 Step 1: Split taxable income into ordinary and qualified dividends. ~ Ordinary = $38,000 ~Qualified Dividends = $7,000 Step 2: Compute tax liability for ordinary income. $38,000 - 10,275 = 27,725 x 12% = 3,327 + 1,027.5 = $4,354.5 Step 3: Compute tax liability for qualified dividends. ~ $45,000 > $41,675 threshold (single) **38,000 < 41,675 ~ $45,000 tax rate = 15% ; ~ $38,000 tax rate = 0% 3a) 41,675 - 38,000 = 3,675 x 15% = $498.75 3b) 45,000 - 41,675 = 3,325 x 0% = $0 4) $4,354.50 + $498.75 + $0 = $4,853.25

Net Taxes Due/Overpayment This year Luke has calculated his gross tax liability at $2,400. Luke is entitled to a $2,800 nonrefundable personal tax credit, a $500 business tax credit, and an $800 refundable personal tax credit. In addition, Luke has had $2,500 of income taxes withheld from his salary. - What happens to any unused portion of the non-refundable personal tax credit?

The unused $400 is forfeited.

Net Taxes Due/Overpayment This year Luke has calculated his gross tax liability at $2,400. Luke is entitled to a $2,800 nonrefundable personal tax credit, a $500 business tax credit, and an $800 refundable personal tax credit. In addition, Luke has had $2,500 of income taxes withheld from his salary. - What happens to any unused portion of the business tax credit?

The unused $500 is carried back and/or forward for a specified period (depending on which specific business credit is claimed) Like non-refundable personal credits, business credits offset liabilities to $0 and no further. However, unused business credits have carryback and carryforward provisions wherein the unused portion may be used in a different tax year.

Filing Requirements Determine if the following taxpayer is required to file a return. - Mark is a single taxpayer with $14,000 of gross income.

Yes, required to file a return Standard Deduction = $12,950 Gross income > standard deduction

Filing Requirements Determine if the following taxpayer is required to file a return. Mike and Jannette are married filing jointly taxpayers with $27,000 of gross income.

Yes, required to file a return Standard Deduction = $25,900 Gross income > standard deduction