Beruflich Dokumente
Kultur Dokumente
I:14-1
self-employment earnings). If he retires from his salaried job, Tony's consulting income will all
be subject to the 15.3% self-employment rate on the first $117,000 and 2.9% on income in
excess of $117,000. Tony will then receive a for AGI deduction for 50% of Social Security and
Medicare taxes paid. pp. I:14-8 and I:14-9.
I:14-8 If the engagement is set up as a consulting arrangement rather than an employment
contract, then the consulting firm will be able to avoid making matching FICA contributions for
Theresas earnings and not be required to withhold the employee's share of FICA tax. Thus, if
the compensation paid to Theresa would be the same whether she was an employee or
independent consultant, the cost of Theresas services would be less if she were a consultant
rather than an employee. Theresa, however, will be subject to the self-employment tax. If her
income as an employee (e.g., college professor) is in excess of the ceiling amount of $117,000
(2014) for the Social Security portion of self-employment income, she will not be subject to the
12.4% Social Security portion of the tax. She will however, be subject to the 2.9% Medicare
portion on her self-employment income. Thus, receiving compensation as a consultant is more
expensive to Theresa. p. I:14-8.
I:14-9
a. The couples AMT exemption equals $81,225.
$82,100 [25% X ($160,000 - $156,500)] = $81,225
b. If the couples AMTI increases by $200,000, their AMT exemption will be $31,225.
$82,100 [25% X ($360,000 - $156,500)] = $31,225
pp. I:14-3 to I:14-4.
I:14-10 a. Foreign tax credits are provided to mitigate the effect of double taxation on foreign
source income.
b. The research credit is given to encourage (reduce the after tax cost of) research and
development activities.
c. Business energy credits are incentives to encourage energy conservation measures and the
use of fuel other than petroleum.
d. The premium tax credit is designed to make the cost of health insurance more affordable for
taxpayers with relatively low household incomes.
e. The child and dependent care credit was enacted to reduce the cost of quality child care for
parents and other individuals who are employed and who must incur expenses for household and
dependent care services.
f. The earned income credit is designed to encourage low-income individuals to become
gainfully employed or to continue to work despite low earnings.
g. The purpose of the American Opportunity tax credit is to reduce the cost of postsecondary
education for low and middle income taxpayers.
h. The disabled access credit is designed to reduce the cost of adding disabled access to existing
business facilities.
i. The adoption credit is designed to reduce the financial burdens associated with adopting
children. Topic Review I:14-2 and page I:14-26.
I:14-11 To a taxpayer in the 15% marginal tax bracket, a $200 deduction is worth $30 in tax
savings and is therefore worth less than a $40 credit. To a taxpayer in the 25% marginal tax
Copyright 2015 Pearson Education, Inc.
I:14-2
bracket, the deduction is worth $50 in tax savings, more than a $40 credit. Thus, for all
taxpayers with a marginal tax rate of 25% or more, the deduction is more advantageous than the
credit. p. I:14-10.
I:14-12 The general business credit includes the rehabilitation expenditures credit, research
credit, business energy credits, and the disabled access credit. pp. I:14-19 through I:14-25.
I:14-13 a. The general business credit may not exceed the "net income tax" minus the greater of
(1) the tentative minimum tax or (2) 25% of the "net regular tax liability" in excess of $25,000.
b. The general business credit is a nonrefundable credit and has a lower priority than personal
tax credits. An individual must use personal tax credits as well as the foreign tax credit to offset
tax liability before the general business credit is used. Since the credit is nonrefundable, if
the tax liability has already been eliminated by credits with a higher priority than the general
business credit, the taxpayer will only be able to carryback or carryforward the unused general
business credit.
c. For tax years beginning after December 31, 1997, the general business tax credit may be
carried back 1 year and any remaining credit may be carried forward 20 years. Credits arising
from prior years (commencing with the earliest carryover years) are first carried back or forward
before credits arising from the current year may be used. p. I:14-23.
I:14-14 a. The foreign tax credit is equal to the income tax paid or accrued to a foreign country,
but limited to the taxpayer's U.S. tax liability multiplied by the ratio of foreign source taxable
income to worldwide taxable income. This limitation restricts the use of foreign tax credits when
the effective foreign tax rate exceeds the effective U.S. tax rate. In this case, the effective
foreign tax rate is lower than the effective U.S. tax rate, and the foreign tax credit would be
$24,000 ($120,000 x 0.20), the foreign tax paid.
b. In this case Sarah would be better off choosing the earned income exclusion because $99,200
(2014) of her income could be excluded from U.S. taxation.
1.
$20,800
x 0.30
$ 6,240
( 4,160)
$ 2,080
24,000
$ 26,080
Sarah is eligible for a foreign tax credit on the $20,800 of foreign earned income
subject to U.S. tax.
I:14-3
2.
$36,000
( 24,000)
$ 12,000
24,000
$ 36,000
Ultimately, Sarah pays the higher tax rate (30%) on the $120,000 income: 20% to
the foreign country and 10% (after FTC) to the U.S.
pp. I:14-18 and I:14-19.
I:14-15 The penalty tax associated with failing to obtain minimum essential health insurance
coverage is set at the greater of 1) $95 or 2) 1% of household income for 2014. For the taxpayer
described in the problem, the penalty will equal $550, the greater of 1) $95 or 2) $550
(1%*$55,000). pp. I:14-24 to I:14-26.
I:14-16 The credit is $5,000 (0.50 x $10,000). Only $10,000 of the $15,000 expenditure
qualifies for the credit (expenditures over $250 but not exceeding $10,250, or $10,000
maximum). The depreciable basis of the property is reduced by the $5,000 allowable credit.
Queen Corporation is eligible for the disabled access credit as an eligible small business.
Though the company had $1 million or more of gross receipts in the preceding year, it meets the
alternate test because it had fewer than 30 employees (24). pp. I:14-22 and I:14-23.
I:14-17 a. The credit applies to expenditures for the rehabilitation of older industrial and
commercial buildings and certified historic structures. Expenditures may not be for residential
real estate unless the structure is a certified historic structure.
b. A rate of 10% applies to expenditures on structures placed in service before 1936 and a rate
of 20% to expenditures on certified historic structures.
c. Depreciation of qualifying expenditures must be computed using the straight-line
depreciation method.
d. For the purpose of depreciation, the basis of the property must be reduced by the full amount
of the credit taken.
e. The rehabilitation credit must be recaptured at a rate of 20% per year in the event of an early
disposition of the property (within 5 years). pp. I:14-19 to I:14-20.
I:14-18 Solar energy property and geothermal energy property qualify for the business energy
credit. Solar energy property is eligible for an increased credit of 30% of basis for years
2006-2016. p. I:14-20.
I:14-19 Many personal tax credits are motivated by both economic and social policy objectives.
For example, the dependent care credit makes it profitable for more parents to work and provide
adequate child care. p. I:14-10.
Copyright 2015 Pearson Education, Inc.
I:14-4
I:14-20 A refundable tax credit resembles a direct subsidy. It is a type of negative income tax.
If the credit exceeds the tax liability, the government pays the taxpayer the excess credit.
A nonrefundable tax credit may only be used to offset the taxpayers tax liability. Therefore, if
the credit exceeds the tax liability, the taxpayer receives no payment and, at best, can only
carryback or carryforward the excess credit. The earned income credit is a refundable tax credit.
Child and dependent care credits and tax credits for the elderly are examples of nonrefundable
credits. p. I:14-23.
I:14-21 If an individual is unemployed and has no earned income, it is generally not possible to
receive a child and dependent care credit because eligible expenses are limited to earned income.
One exception to this rule is a spouse who is either a full-time student or incapacitated. Such
individuals are deemed to have earned income of $250 per month (one qualifying dependent) or
$500 per month (two or more qualifying dependents). pp. I:14-11 and I:14-12.
I:14-22 There are several significant differences between the American Opportunity Tax Credit
(AOTC) and the Lifetime Learning Credit (LLC). First, the AOTC only applies during a
students first four years of post-secondary education, whereas the LLC applies to undergraduate,
graduate, and professional education. Second, the AOTC applies per student (maximum $2,500
per student) whereas the LLC applies per taxpayer, based on the dollars spent on qualified
tuition and related expenses by the taxpayer. Finally, the AOTC and LLC have different
phaseout rules. Low- and middle- income taxpayers most likely qualify for both credits.
However, the LLC phase-out occurs at lower income levels. Because the LLC phaseout ranges
are adjusted annually for inflation (and AOTC ranges are fixed), over time, this may decrease in
importance as a disadvantage. pp. I:14-14 to I:14-16.
I:14-23 The maximum amount of child and dependent care expenses that qualify for the credit
for a taxpayer with two or more qualifying individuals is $6,000. A taxpayer who has $8,000 of
eligible expenses may claim a maximum credit of $2,100 ($6,000 x 0.35). The credit rate
decreases to a minimum of 20% as the taxpayers AGI increases from $15,000 to $43,000. If the
taxpayers AGI exceeds $43,000, the maximum credit is $1,200 ($6,000 x 0.20). pp. I:14-11 and
I:14-12.
I:14-24 The allowable credit equals $600 (30% credit rate x $2,000 allowed expenses).
Vivian's child and dependent care expenses are limited first by the $6,000 ceiling amount, and
second, the $6,000 is reduced to $2,000 by the $4,000 employer reimbursement. Her credit rate
is 30% because her AGI of $24,500 exceeds the base AGI of $15,000 by $9,500. Thus, the basic
35% credit is reduced by 5% to 30% ($9,500/$2,000 = 4.75, rounded to 5%). pp. I:14-11 and
I:14-12.
I:14-25 a. The adoption credit allowed is the amount of qualified adoption expenses incurred up
to a maximum of $13,190 (2014). The credit must be used in the year adoption is finalized for
qualified expenses paid both in the finalized year and in prior years. The credit must be used in
the year qualified expenses are paid if paid in years after the finalized year. This rule is intended
to prevent taking a credit for adoption expenses where the adoption is not finalized. Finally,
there is a phase-out of the credit based on the taxpayer's AGI. For taxpayers with AGI above
$197,880 (2014), the credit is ratably phased-out and is fully phased-out when AGI reaches
$237,880.
Copyright 2015 Pearson Education, Inc.
I:14-5
b. As with other phase-outs in the tax law, Congress did not intend this credit for higher-income
taxpayers. Whether adoption is affordable may not influence adoption decisions for high income
households. pp. I:14-13 and I:14-14.
I:14-26 The credit allowed equals $4,666 ($5,460 - $794).
Alice is eligible for the earned income credit (EIC) since she has qualifying children and has
earned income which does not exceed the phase-out limitation amounts. Her initial credit
amount for 2014 is $5,460 (40% of the lesser of $18,000 earned income or $13,650). The phaseout amount is $794 (.2106 ($21,600 -$17,830)). The provision allowing for advance payment
of EIC expired after 2010. pp. I:14-23 to I:14-24.
I:14-27 Most elderly people are unable to qualify for the credit because they receive Social
Security benefits which exceed the ceiling limitation, or they have AGI in excess of the
limitation, or both. p. I:14-13.
I:14-28 Penalties are imposed if an employer fails to withhold federal payroll tax and income tax
and pay them to the IRS. Corporate officers, directors, and other officials may be held
personally liable for payment of the tax. p. I:14-25.
I:14-29 a. Given the budget constraints of lower and middle income households, Congress
wanted to enact this credit to further encourage saving for retirement. Further, Congress
acknowledged that the United States has a low savings rate, especially among lower and middle
income households.
b. The credit is computed by multiplying qualifying contributions (maximum $2,000 per
taxpayer per year) by an applicable percentage between 50% and 10%, depending on the
taxpayers adjusted gross income and filing status. Therefore, the maximum annual credit equals
$1,000 ($2,000 x 0.50). p. I:14-17.
I:14-30 a. The two components of the credit for employer-provided childcare are (1) qualified
childcare expenses (expenses paid to acquire, construct, rehabilitate, expand, and operate a
qualified childcare facility), and (2) qualified child care resource and referral expenditures
(expenses paid to provide child care resource and referral services for employees).
b. The credit equals 25% of qualified childcare expenses plus 10% of qualified childcare
resources and referral expenditures. The total credit for an employer is limited to $150,000 for
any given tax year. Finally, if an employer ceases its childcare operations within the first three
years, 100% of the credit is recaptured. pp. I:14-20 to I:14-21.
I:14-31 The research credit is allowed for increasing research expenditures. The credit is 20% of
the excess of qualified research expenses for the taxable year over an established base amount.
The objective of increasing research activity is met by the incremental nature of the credit. An
exception exists. The simplified approach to calculating the research credit allows a credit of 6%
of qualified research expenses if the taxpayer had no such expenses in the 3 prior years.
pp. I:14-23 and I:14-24.
I:14-6
I:14-7
I:14-8
Problems
I:14-42 a.
b.
Taxable income
Plus: Tax preference items
Plus: AMT Adjustments
Personal and dependency exemptions ($3,950 x 2)
Adjustment related to itemized deductions
AMTI
Minus: Exemption (no phaseout)
Alternative minimum tax base
Tentative minimum tax ($30,800 x 0.26)
$ 70,000
20,000
( 9,593)
$
0
Taxable income
Plus: Tax preference items
Plus: AMT Adjustments
Personal and dependency exemptions ($3,950 x 1)
Adjustment related to itemized deductions
AMTI
Minus: Exemption (no phaseout)
$ 70,000
20,000
$
$
(
$
7,900
15,000
$112,900
( 82,100)
$ 30,800
$ 8,008
3,950
15,000
$108,950
(52,800)
56,150
14,599
13,356)
1,243
$160,000
10,000
$ 44,931
( 37,976)
$ 6,955
I:14-9
30,000
3,950
$203,950
( 31,138)
$172,812
I:14-44 a.
Harry and Marys regular tax and AMT are computed as follows:
Regular Tax:
Salary
Interest and dividends
AGI
Standard deduction
Personal exemptions (14 x $3,950)
Taxable income
$100,000
8,000
$108,000
$12,400
55,300
(67,700)
$ 40,300
$ 5,138
(6,000)
$ (862)
$ 40,300
55,300
12,400
$108,000
(82,100)
$ 25,900
$ 6,734
(6,000)
$
734
(
-0-)
$
734
b. The imposition of AMT on Harry and Mary likely is not what Congress intended when the
AMT was enacted. pp. I:14-3 through I:14-7.
I:14-45 a.
Medical expenses [($2,500 ($10,000 - $7,500) for regular tax
- $2,500 ($10,000 - $7,500) for AMT)]
Real estate taxes
State income taxes
Total adjustments related to itemized deductions
I:14-10
0
8,000
5,000
$13,000
b.
Taxable income
Plus: Tax preferences
Plus/Minus: AMT Adjustments
Personal Exemption
Related to itemized deductions
AMTI
Minus: Exemption (no phaseout)
Alternative minimum tax base
Tentative minimum tax ($32,150 x 0.26)
Minus: Regular tax liability
Alternative minimum tax
$48,000
20,000
3,950
13,000
$84,950
( 52,800)
$32,150
$ 8,359
( 7,856)
$ 503
$ 8,589
2,009
$10,598
Note: Though Arnie and Angela are married, their self-employment taxes are computed
separately.
Angelas earnings as an employee are not considered in evaluating Arnies SE income
relative to the Social Security ceiling.
Copyright 2015 Pearson Education, Inc.
I:14-11
Angela is not self-employed and is therefore, not subject to the SE tax. She pays the employee
share of FICA (Social Security and Medicare) via wage withholding.
pp. I:14-8 and I:14-9.
I:14-48
a. Director Fees
Consulting loss
Gross SE income
$11,000
(6,000)
$ 5,000
.9235
$ 4,618
Net SE income
Social Security tax: $4,618 x 0.124 = 573
Medicare tax:
4,618 x 0.029 = 134
SE tax
$707
Taxpayers may deduct losses from self-employment activities against self-employment income.
Anita incurred a $6,000 loss from her consulting practice, and this amount offset her $11,000 of
directors fees.
b. SE tax = Social Security tax + Medicare tax = $0 + $134 = $134 Anita will not pay Social
Security tax because her salary is greater than the maximum OASDI amount of $117,000. The
Medicare portion of her SE tax equals $134 ($4,618 x 0.029). pp. I:14-8 and I:14-9.
I:14-49
a. Allowable personal tax credits total $3,200 ($2,000 + $1,200).
b. Total business tax credits are $1,500 ($900 + $600).
The allowable amount of the business tax credit is $800 ($4,000 tax - $3,200 of personal tax
credits).
c. Unused business tax credits of $700 ($1,500 - $800) may be carried back one year and carried
forward 20 years. pp. I:14-10 through I:14-24.
I:14-50
a. The credit equals $1,200 ($6,000 x 0.20). The limitation on qualifying expenses is $6,000
(2 qualifying dependents $3,000 each). Since AGI is greater than $43,000, the credit rate is 20%.
b. The credit is still $1,200.
Payments to relatives are qualified payments as long as the relative is not a dependent or child
(under age 19) of the taxpayer.
c. The credit is $580 [(0.29 x ($3,000 - $1,000)].
Qualifying expenses are limited to $3,000 for the one child under age 13. The $1,000 excluded
from Bruce's gross income under Sec. 129 must reduce qualified expenses. AGI exceeds
$15,000 by $12,000, so the credit rate is 29%.
d. The credit is $800 (0.20 x $4,000).
Qualifying expenses are limited to $4,000. (The lower earned income of Candice). The credit
rate is 20% because AGI exceeds $43,000.
Copyright 2015 Pearson Education, Inc.
I:14-12
2014
$ 4,000
400
0
0
1,500
$ 5,900
Total
$13,700
The publications qualify if they are directly related to, and have the principal purpose of the legal
adoption of an eligible child. [Sec. 23(d)]. The kennel fees for the dog and the cost of nursery
furniture are not qualified expenses. The qualified adoption expenses paid in 2013 are not
eligible for the credit until the year the adoption is finalized, 2014. So, no credit is allowable in
2013.
b. The maximum credit is $13,190, which may be taken in 2014, the year the adoption is final.
They incurred $13,700 of qualified expenses, but the credit amount is limited to $13,190.
c. The credit would still equal $13,190. $13,190 is the maximum even for a child with special
needs. The law also provides that an adoption credit of $13,190 is allowed for a child with
special needs regardless of how much the taxpayer has paid qualified adoption expenses.
pp. I:14-13 and I:14-14.
I:14-52
a. AOTC = 100% of first $2,000 qualified education expenses + 25% of up to next $2,000 of
qualified education expenses
Because the Norths 2014 AGI does not exceed $160,000, their AOTC will not be reduced by
phaseout.
Phil :
2014 Qualified education expenses = $17,350 = ($7,500 + $8,000 + $500 + $500 + $400 + $450)
Tentative & Allowed AOTC = 100%($2,000) + 25%( $2,000) = $2,500
Jaci:
2014 Qualified education expenses = $3,900 = ($1,600 + $1,750 + $250 + $300)
Tentative & Allowed AOTC = 100% ($2,000) + 25% ($1,900) = $2,475
I:14-13
Notes:
For Phil and Jaci to qualify as eligible students, each must
1) not have used the AOTC for 4 prior tax years,
2) not have completed the first 4 years of postsecondary education (evaluated at beginning of 2013),
3) have been enrolled at least half-time in a degree program (or other credential), AND
4) not have been convicted of a felony drug offense (evaluated at end of tax year)
Jaci appears to meet all 4 conditions.
Phil appears to meet conditions 2), 3), and 4).
The solution above assumes he meets condition 1) for 2014 (AOTC has not been used for Phils
expenses in 4 prior tax years), meaning for Spring 2014 and Fall 2014, he qualifies as an
eligible student for AOTC.
If instead, the AOTC has already been used for Phils expenses in 4 tax years before 2014, his
qualified education expenses do not qualify for the AOTC. Instead, the Lifetime Learning Credit
(LLC) should be used for Phils 2014 qualified education expenses.
LLC = 20% (qualified education expenses up to $10,000 per year)
Phil:
Qualified education expenses = ($7,500 + $8,000 + $500 + $500) = $16,500
Tentative LLC = 20% ($10,000) = $2,000
LLC after phaseout = $2,000 $400 ** = $1,600
**LLC Phaseout: $2,000*($112,000 - $108,000)/$20,000 = $400
a
IRC Section 25A(b)(2)(C), IRC Section 25A(i)(2), and Reg. Section 1.25A-3(d)(1)(iii)
consistently indicate evaluation of whether a student has completed four years of study should
occur at the beginning of the tax year. Example 2 in IRS Publication 970 (dated 3/21/2012)
characterizes as an eligible student one who was considered a second-semester senior for the
2011 spring semester and a first semester graduate student in the 2011 fall semester. The
example indicates the qualified education expenses for both spring and fall semesters in 2011
are eligible for the AOTC in 2011.
b. Phils qualified education expenses must be reduced by the scholarship ($17,350-2($3,000) =
$11,350). His expenses remain high enough to yield the maximum tentative AOTC (and
tentative LLC if as described in part a he has already used AOTC in 4 prior tax years).
Tentative AOTC = 100%($2,000) + 25%( $2,000) = $2,500
Tentative LLC = 20%($10,000) = $2,000
LLC after phaseout = $2,000 - $400 = $1,600
c. With AGI of $175,000, phaseout will reduce the AOTC allowed for the Greens.
Combined tentative AOTC = $2,500 + $2,475 = $4,975
Allowed AOTC = $4,975 - $4,975[($175,000 - $160,000)/$20,000] = $1,244
Copyright 2015 Pearson Education, Inc.
I:14-14
d. The answer would have been the same. Phils status as a qualified student for AOTC is based
on his progress as a student at the beginning of each tax year. In both scenarios with Phil as a
junior and as a senior Phil has not completed the first four years of postsecondary education.
pp. I:14-14 through I:14-16.
I:14-53 a. Tentative Tax credit:
Initial ceiling amount
Minus: Nontaxable social security benefits
Minus: One-half of AGI in excess of $7,500
(0.50 x [$8,500 - $7,500])
Credit base
Times: Rate
Total credit
$5,000
$3,000
500
(3,500)
$1,500
x 0.15
$ 225
b. Only $200 of Carolines $225 tentative tax credit is allowed because it cannot exceed her $200
pre-credit tax liability. pp. I:14-12 to I:14-13.
I:14-54 a.
Regular tax before credits
I:14-15
I:14-56
The affordable premium amount for the Walls is set at 9.5% of the 2014 household income:
9.5%($47,200) = $4,484.
The benchmark plan costs $5,616.
Maximum premium tax credit = $1,132 ($5,616 - $4,484).
a. Under a Gold plan, the Walls personal share of their health insurance premiums equals $5,888
($7,020 $1,132).
b. Under the Silver plan, the Walls personal share of their health insurance premiums equals
$4,484 ($5,616 $1,132).
c. Under a Bronze plan, the Walls personal share of health insurance premiums $3,548 ($4,680 $1,132)
pp. I:14-24 to I:14-26.
I:14-57 a.
The $40,000 expenditures qualify for the credit because they renovate a historic
structure; they exceed the larger of the propertys basis ($20,000) or ($5,000; and the structure is
used in Bobs business. The rehabilitation tax credit is $8,000 (0.20 x $40,000).
b. The buildings basis is $52,000 [$20,000 building costs + ($40,000 renovation costs $8,000 tax credit)]. p. I:14-20.
c. Straight-line depreciation must be used for the $32,000 in basis from the renovation costs.
Though regular MACRS depreciation rules apply to the $20,000 basis that is not eligible for the
credit, nonresidential real estate must be depreciated using straight-line over 39 years.
4.5months
(20,000 + 32,000) / 39 yrs
=
$500
12months
pp. I:14-19 to I:14-20.
I:14-58 Pharm, Inc. may claim a credit for research activities in the current year as follows:
Regular Research Credit:
Salaries
Supplies and materials
Depreciation
Total qualified research expenses
Base amount: greater of 1) 3% ($5,000,000)
2) 50% ($372,000)
Excess
Credit percentage
Regular research credit
I:14-16
$180,000
162,000
30,000
$372,000
( 186,000)
$186,000
x
0.20
$ 37,200
Pharm, Inc. would also be entitled to a research and experimentation deduction of $334,800
(Sec. 174).
Research expenses for the regular research credit
Less research credit
Deduction allowed for current year
$372,000
( 37,200)
$334,800
b. Carolyns allowable EIC is $3,278 (3,305 - 27). Her earned income credit is partially phased out
because her AGI of $18,000 exceeds the phaseout floor. The phaseout is $27 [0.1598 x ($18,000 $17,830)].
c.
d. If Carolyn is married filing a joint return, the tentative EIC remains $3,305, but the phaseout
is $0 because neither AGI ($18,000) nor earned income ($12,000) exceeds the phaseout floor of
$23,260.
pp. I:14-25 and I:14-26.
I:14-60 a. $496 (0.0765 x $6,480)
b. $466 [$496 - 0.0765($8,500 - $8,110)].
c. Yes, because the earned income credit is refundable.
d. Yes. Jose would not be entitled to the earned income credit because his investment income
exceeds $3,300. pp. I:14-23 and I:14-24.
I:14-61 1. Latishas taxable income is $1,450 ($22,400 - 3($3,950) - $9,100).
Regular tax before credits is $145 ($1,450 x 0.10).
2. The tentative EIC is $5,460 (0.40 x $13,650).
The allowable credit is $4,498 ($5,460 - $962). The phaseout is $962
(0.2106 x ($22,400 - $17,830)).
3. Latishas refund will be $6,353.
Regular tax before credits
$ 145
Regular child tax credit
(145)
Additional child tax credit
(1,855)
Earned income credit
(4,498)
Tax due (refund)
$(6,353)
pp. I:14-23 and I:14-24.
I:14-62 a. It is vital that the corporation forward FICA and withholding payments to the IRS.
Penalties must be imposed if Lake fails to pay these amounts to the IRS.
b. The liability for payment can extend beyond the corporation. Responsible individuals such as
the treasurer, in this case, can be held personally liable for payment of the tax.
Copyright 2015 Pearson Education, Inc.
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Comprehensive Problem
I:14-68 a.
Salary
Consulting practice net income
Novelty business net loss
Interest income
Qualified dividend income
Long-term capital gain
Short-term capital loss
of self-employment tax
AGI
$150,000
$53,000
(18,000)
35,000
3,000
9,000
24,000
( 4,000) 20,000
(469)a
$ 216,531
$ 4,350
$25,396
$29,746
$
0b
600c
(600)
$29,146
937a
$ 30,083
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b.
$ 163,731
0
+ 19,000
+ 15,800
$ 198,531
( 71,592)
________
$ 126,959
$ 29,814
( 29,746)
$
68
$ 30,751
29,746
937
68
(600)
(35,000)
21,000
14,000
________
(4,849)
d.
The Webbs avoid the under payment penalty by having prepayments ($35,000) that
exceed both 110% of their prior year liability and 90% of current year liability.
Safe harbor 1)110% x prior year tax $29,000 = $31,900
Safe harbor 2)90% x current year tax $30,751 = $27,676
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The IRC contains no specific penalty for failure to file quarterly estimated tax
payments. There is an underpayment penalty for not paying income taxes on a
timely basis, but this penalty may be avoided by paying taxes either through
withholding or quarterly estimated payments.
2.
3.
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However, Bruce Smith (1) was one the incorporators; (2) was authorized to sign bank
checks; (3) had authority to make management decisions, and (4) was a key officer and member
of the board of directors, and (5) was responsible for insuring that payroll taxes were paid. Thus,
he does meet the definition of "responsible person." Furthermore, he did willfully fail to pay the
taxes as evidenced by the decision to prefer other creditors to the IRS. Thus, he is liable for the
penalties under Sec. 6672.
In Schiff v. U.S., the court held that Jones and Schiff were responsible for collecting and
paying taxes for employees because they both were responsible persons with significant control
over the corporation's finances even though they did not hold official corporate titles. The court
explains that the actual mechanics of decision making instead of the absence of official title will
help determine one who is a responsible person and those with significant control can be liable
for willful avoidance of payment of taxes.
In Tsouprake v. U.S., the sole shareholder and chairman of the corporation did not
partake in daily management of the corporation. However, he was held liable for the penalty for
failure to pay employment taxes because he was a responsible person and willfully avoided the
tax payments. The court looked at his stock ownership, check-signing authority, and corporate
financing ability.
In Guito, Jr. v. U.S., an officer of the corporation was a responsible party for payment
of employment taxes. He willfully did not pay the taxes and was held partly liable because he
participated in major decision making, was chief policymaker, corporate boss, and held sufficient
power to insure timely payments of the corporate tax liability.
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