Tax Calculations
An individual taxpayer's Total Tax includes:
1, 2, 3, 5
Calculate income tax as a percentage of taxable income. After income tax and any alternative minimum tax, subtract any non-refundable tax credits and add any other taxes owed. Non-refundable credits only reduce tax; the taxpayer does not receive a refund of any excess. The result is the taxpayer’s total tax.
The IRS treats refundable credits the same as payments of tax.
Which of the following is subtracted from taxable income when calculating Alternative Minimum Tax Income (AMTI)?
Refund of state and local taxes
In calculating the Alternative Minimum Tax Income, the first step is to make certain adjustments to taxable income. The more common adjustments include the following:
Itemized deductions for qualified mortgage interest, charitable contributions, and casualty and theft loss are not added back in when calculating the Alternative Minimum Tax Income.
A married taxpayer filing jointly may owe Net Investment Income Tax if modified adjusted gross income exceeds which of the following thresholds:
$250,000
The Net Investment Income Tax (NIIT) is imposed by Section 1411 of the Internal Revenue Code. The NIIT applies at a rate of 3.8% to certain net investment income of individuals, estates, and trusts that have income above the statutory threshold amounts. Individuals, estates, and trusts will use Form 8960 to compute their Net Investment Income Tax.
Which of the following statements means you may be self-employed?
All of the above.
The IRS considers all of the above to be self-employment. You do not have to carry on regular full-time business activities to be self-employed. Having a part-time business in addition to your regular job or business also may be self-employment.
If the child’s income from interest and dividends (including capital gain distributions) is less than _________ in 2021, the parent may elect to include the child's income on the parent’s return rather than file a return for the child, if the child and the parent meet all the other conditions.
$11,000
What is considered a household employee?
A taxpayer has a household employee if he/she hires someone to do household work in or around the taxpayer's house. That worker is their employee. If the worker controls how duties are performed, the worker is NOT the taxpayer's employee but is considered self-employed.
Which of the following is correct regarding tax credits on an individual income tax return?
Both A and B are correct
Non-refundable credits only reduce tax; the taxpayer does not receive a refund of any excess. The IRS treats refundable credits the same as payments of tax. Most tax credits are non-refundable.
What is the flat tax rate applied to Alternative Minimum Tax Income in calculating a taxpayer's tentative minimum tax for 2021?
26% up to $199,900, 28% thereafter
For 2021, after subtracting the AMT exemption, apply a flat tax rate of 26% on AMTI up to $199,900 on joint returns and returns for unmarried individuals other than surviving spouses ($99,950 for MFS). A 28% rate applies to the excess.
The Net Investment Income Tax applies to certain net investment income, which includes:
interest, dividends, capital gains, rental and royalty income, reduced by expenses properly allocable to the income
In general, investment income includes, but is not limited to interest, dividends, capital gains, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities, and businesses that are passive activities to the taxpayer (within the meaning of Section 469). The taxpayer may reduce investment income by certain expenses properly allocable to the income.
Net investment income does not include distributions from a qualified retirement plan.
Self-employment tax is comprised of which of the following two taxes?
Social Security and Medicare
Self-employment tax is a Social Security and Medicare tax primarily for individuals who work for themselves.
If the child and the parent meet all the conditions on Form 8814, the parent may elect to include the child's income on the parent’s return rather than file a return for the child. The parent can make the election only if the child meets the following conditions:
1, 2, 3, 4, 5
Parents can elect to include a child’s income from interest, dividends, and capital gain distributions on the parent’s return under certain circumstances. Parents making the election file Form 8814 Parents’ Election To Report Child’s Interest and Dividends, with the parent's return. If making this election, the child does not have to file a return.
The parent may be able to elect to report the child’s interest, dividends, and capital gain distributions income on the parent’s return if both the child and the parent meet certain conditions.
The parent can make the election only if the child meets all of the following conditions:
The parent can make the election only if the parent also qualifies.
Which of the following statements is correct with regard to the payment of household employment taxes?
Household employment taxes are included on the employer's individual income tax return and are due by April 15th of the following year.
Household employment taxes are included on the employer's individual income tax return using Schedule H (Form 1040), Household Employment Taxes, and are due by April 15. However, the employer may choose to include the wages with those of an existing sole proprietorship or farming business.
Which of the following, when greater than total tax due, can result in a refund?
All of the above
Generally, a refund results when the taxpayer has made tax payments in excess of tax calculated on Form 1040. Tax payments include taxes already withheld on Form W-2 and 1099, and estimated tax payments made during the taxable year. Additionally, specifically listed credits such as the earned income credit can offset any tentative tax owed. Form 1040 Instructions.
Which of the following deductions is NOT added back into taxable income to arrive at alternative minimum taxable income?
Charitable contributions
n calculating the alternative minimum taxable income, the first step is to add certain adjustments to taxable income. These include:
Itemized deductions for medical expenses, charitable contributions, and casualty and theft loss are not added back when calculating the alternative minimum taxable income.
Which of the following types of income could be subject to the Net Investment Income Tax?
taxable mutual fund distribution
In general, investment income includes, but is not limited to: interest, dividends, capital gains, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities and businesses that are passive activities to the taxpayer (within the meaning of section 469).
For purposes of the Net Investment Income Tax (NIIT), net investment income does not include distributions from a qualified retirement plan (for example, 401(a), 403(a), 403(b), 457(b) plans, and IRAs). Distributions from a nonqualified retirement plan are included in net investment income.
The Net Investment Income Tax does not apply to any amount of gain that is excluded from gross income for regular income tax purposes.
Britney is a pet sitter who watches her neighbors' pets while they are away. Last year, she made $875 pet sitting. Which of the following is true?
She must pay SE tax.
The self-employed must pay self-employment tax (SE tax) and file Schedule SE (Form 1040) if net earnings from self-employment were $400 or more.
Since she made $875 from pet sitting, she is self-employed, is required to report the pet sitting income, and must pay SE tax.
Which of the following statements about a parent’s election to report their child’s interest and dividend income on the parent’s return is incorrect?
At the end of the tax year, the child must be under age 17 (or under 21 if a full-time student)
The question is asking for the incorrect statement. At the end of the tax year, the child must be under age 19 (or under age 24 if a full-time student). All the other statements are correct.
Maria, a single taxpayer, hired a nanny through a placement agency and pays her $200 cash a week to care for her 6-month-old daughter. The nanny watches Maria's daughter at Maria's home. Maria provides a schedule for the nanny regarding when to feed her daughter and when to lay her down for a nap. How much, if any, can Maria withhold from the nanny's weekly pay for Social Security and Medicare taxes in 2021?
$15.30
You have a household employee if you hire someone to do household work and that worker is your employee. The worker is your employee if you can control not only what work is done, but how it is done. If you pay cash wages of $2,300 or more to any one household employee in 2021, then you need to report and pay Social Security and Medicare taxes.
The nanny is considered a household employee and Maria must report and pay social security and Medicare taxes. The total of Social Security and Medicare taxes are 15.3% of wages (7.65% employer, 7.65% employee). Maria is required to report 7.65% of wages or $15.30 which is the amount she can withhold from the nanny's pay (the employee's share). The employer may either pay or withhold the employee's share.
The employer's share is also 7.65%, but this is not withheld from the nanny's check. Maria is required to pay the full 15.3% or $30.60 ($15.30 employer, $15.30 employee) regardless of whether or not she withholds any amount from the nanny's pay.
Cash wages include wages you pay by cash, check, money order, etc.
A taxpayer uses Form 5329 to calculate additional taxes. Which of the following taxes is NOT reported on Form 5329?
Additional tax due to the Alternative Minimum Tax
Individuals use Form 6251 to calculate their AMT liability.
During the tax year, Marco exercised an incentive stock option (ISO) offered by his employer and still owns the stock. He is calculating his Alternative Minimum Tax. Which of the following options should Marco take?
Include the excess of the fair market value over the amount he paid for the stock
ISO income is accorded preferential treatment in the tax code but does not receive special treatment under AMT rules. In calculating the AMT, you should include the excess, if any, of the fair market value of the stock acquired through exercise of the option over the amount you paid for the stock, including any amount you paid for the ISO used to acquire the stock.
Form 8960 is used to compute the Net Investment Income Tax for the following taxpayers that have income above the statutory threshold amounts:
Individuals, Estates and Trusts
The Net Investment Income Tax applies to certain net investment income of individuals, estates, and trusts that have income above the statutory threshold amounts. Individuals, estates, and trusts will use Form 8960 to compute their Net Investment Income Tax.
Kristin picked up some odd jobs over the holiday break and made $385. This is her income for the entire year. Which of the following statements is true?
She does not need to report the income.
You do not have to file an income tax return if your net earnings from self-employment were less than $400.
Andrea, an 18-year-old who qualifies as a dependent on her parents’ return, has income from the following sources during 2021:
Which of the following statements is true?
Andrea’s parents cannot include her income on their tax return because the babysitting money is earned income
Although Andrea’s income is below the filing threshold, the reason her income cannot be included on her parents’ return is that she has earned income (babysitting).
The parent can make the election only if the child meets all of the following conditions:
Claudia is single and hires a nanny through a placement agency. Claudia's daughter is dropped off at the nanny's home while Claudia works. The nanny is paid $1,000 cash per week. How much should Claudia withhold from the nanny's weekly wages for Social Security and Medicare taxes?
None because Claudia's nanny is not a household employee since she works out of her own home.
A household employee is someone hired for household work that is an employee. A worker who performs childcare services in their own home generally is not an employee of the taxpayer.
Which of the following applies to the allowable credit for prior year minimum tax?
The allowable credit cannot reduce the current year's tax below the current year's tentative minimum tax.
A taxpayer with AMT liability in the current year may recapture that amount in future years in the form of a credit. This non-refundable credit can offset future AMT liability only to the extent prior AMT tax paid was due to deferral items.
The Net Investment Income Tax applies to certain net investment income, which includes:
Distributions from a nonqualified retirement plan
For purposes of the Net Investment Income Tax, net investment income does not include distributions from a qualified retirement plan (for example, 401(a), 403(a), 403(b), and 457(b) plans) and IRAs. Distributions from a nonqualified retirement plan are included in net investment income.
For 2021, a .9% Additional Medicare Tax applies when income exceeds one of the following threshold amounts:
Both A and B are correct
For higher-income taxpayers, a .9% Additional Medicare Tax applies when income exceeds one of the following threshold amounts (based on filing status) for 2021:
When certain children have more than _________ of unearned income in 2021, part of that income may be taxed at the parent's tax rates instead of the child’s tax rates.
$2,200
When certain children have more than $2,200 of unearned income in 2021, part of that income may be taxed at the parent’s tax rates instead of the child’s tax rates. The parent may be able to elect to report the child’s interest, dividends, and capital gain distributions income on the parent’s return if both the child and the parent meet certain conditions. 2,200
You hire a household employee (who is an unrelated individual over age 18) to care for your child and agree to pay cash wages of $100 every week. You expect to pay your employee $2,300 or more in 2021. If you decide to not withhold the employee's share of social security and Medicare taxes and instead pay them from your own funds, what is the weekly gross income you must report for the employee's wages?
If you prefer to pay your household employee's social security and Medicare taxes from your own funds, do not withhold them from your employee's wages. The social security and Medicare taxes you pay to cover your household employee's share must be included in the employee's wages for income tax purposes. However, they are not counted as social security and Medicare wages or as federal unemployment (FUTA) wages.
$100 Weekly Wage + $7.65 employee share of Social Security and Medicare tax = $107.65 wages each payday for income tax purposes. $107.65