Identify and define the two Tax Credit classifications - 1) Refundable Tax credits - are
allowed to reduce a taxpayers tax liability to ZERO and, if some credit remains, are
refundable (paid) by the government to taxpayers.
2) Nonrefundable tax credits - are allowances that have been created by congress for
social, economic, and political reasons such as child and dependent care credits.
Assume the same facts as in Example I:2-3 except that Joan is not a homeowner. Thus,
she has no property taxes or mortgage interest but does pay rent of $800 per month for
an apartment. Her taxable income is computed as follows: - Joan would use the
standard deduction of $5,700 because it is greater than her itemized deductions of
$500. Rent paid for a personal apartment is not deductible.
A special rule applies to any individual for whom the dependency exemption is
allowable to another taxpayer. - The standard deduction of the dependent is limited to
the greater of
(1) the dependent's earned income plus $300 or
(2) $950 (in 2010 and 2011).
The purpose of this limitation is to prevent parents from shifting unearned income, such
as interest and dividends, to their children and avoid paying tax on such income.
Without this rule, children could use the standard deduction to offset interest and
dividends.
Webb and Beth are married, in the 35% marginal tax rate bracket, and have one son,
Vincent, age 15. Vincent has no income and is claimed as a dependent by his parents.
Webb and Beth transfer stocks and bonds that earn $3,000 in dividends and interest to
Vincent. Their goal is to shift the $3,000 of income to Vincent to utilize his standard
deduction. However, since Vincent is claimed as a dependent by his parents on their
return, Vincent's standard deduction is limited to $950, i.e., the greater of $950 or his
earned income plus $300 ($0 + $300).
Assume the same facts as in Example I:2-6 except Vincent has a part-time job and
earns $2,000 in wages. Vincent's standard deduction would be $2,300 ($2,000 + $300).
Alternatively, if Vincent's wages were $6,000, his standard deduction would be $5,800
(the maximum for a single individual).
Identify all major "income" Exclusions. - 1) Gifts and inheritances
2) Life Insurance proceeds
3) Welfare and certain other transfer payments
4) Certain scholarships and fellowships
, 5) Certain payments of injury and sickness (e.g. personal physical injury settlements,
Worker's Comp, and medical expense reimbursements)
6) Certain employee fringe benefits (Health plan premiums, Group term life insurance
premiums, meals and lodging, Employee discounts, Dependent care).
7) Certain foreign-earned income
8) Interest on state and local gov. bonds
9) Certain Int. of Series EE bonds
Certain improvements by lessee to lessor's property.
10) Child support payments received
11) Property settlements pursuant to a divorce
12) Gain from the sale of a personal residence (limited)
Identify Refundable Tax credits items - 1) Withholding from wages and back-up
withholding
2) Estimated tax payments
3) Overpayment of prior yr's tax
4) Excess social security tax paid
5) Non highway-use gasoline tax
6) Earned Income credit
7) Regulated investment company credit
8) Payments made with extension request
9) Child credit (in some cases)
Who actually itemizes and who does not? - High-income taxpayers are more likely to
itemize than low-income taxpayers simply because they incur more expenses that can
be itemized. This is true even though the AGI floors (previously discussed) affect high-
income taxpayers more than low-income taxpayers. Another characteristic of taxpayers
who generally itemize their deductions are individuals who own their homes and incur
home mortgage expenses and property taxes. These two expenses are deductible and
alone often exceed the standard deduction.
Identify all deductions "For" AGI - 1) Trade and business deductions
2) Reimbursed employee expenses and certain expenses of performing artists.
3) Losses from the dale or exchange of property
4) Deductions attributable to rents and royalties
5) Contributions to retirement plans (keoghs & IRA)
6) Penalties forfeited b/c of premature withdrawal of funds from time savings accounts
7) 1/2 of self-employment taxes paid
8) Health insurance costs incurred by a self-employed person
9) Alimony
10) Moving expenses
11) Certain required repayments of supplemental unemployment compensation
12) Jury duty pay remitted to an individual's employer.
13) Certain environmental expenditures (reforestation and clean fuel)
14) Interest on educational loans
15) Contribution to medical savings account
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