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Outline_3_Credits-Payments_Student - Outline 3 Tax Credits...

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Outline 3 Tax Credits and Payment Procedures February 27, 2011 Reading Assignment Nolo Press Pages 14-16 Chapter 13: 1 to 6(middle) (Effect of credits, refundable vs. non-refundable credits) Pages 13-15 to 13-31(top): (Earned income credit, credit for the elderly, foreign tax credit, adoption credit, child tax credit, child and dependent care credit, First time homebuyer credit, energy credits, other credits) Pages 31 to 35 bottom, 39 top to 47 (Section 13.5 payment procedures, 13.6, 13.8, 13.9) Chapter 5: Pages 27 to 29 (Section 5.11-Foreign earned income exclusion) Chapter 13: Pages 19-20 (foreign tax credit also); Chapter 13 Section 13.6 PROBLEMS o Problems: Chapter 13: 52, 47, 53, 35, 36, 37, 38, 42, 18, 43, 44. 14, 39, 40, 20, 45 o Problems: Chapter 5: 21, 49 Section 13.5 ESTIMATED TAX o QUESTION: What is the purpose of paying estimated tax? o QUESTION: Peter’s AGI was $90,000 and he paid $10,000 federal income tax in 2010. The income was from interest, dividends, capital gains, and rental income. He had no salary. In 2011 he expects to owe $7000 in taxes from these sources. Does he owe estimated tax? QUESTION: How much should he pay in estimated taxes to avoid a penalty? QUESTION: Same as above except that Peter expects to owe $15,000 in income tax for 2011. QUESTION: What dates are the payments due? o QUESTION: Mary Knox filed a declaration of estimated tax for year 2010 and paid $20,000 in four equal installments of $5,000 each. She had $9,000 withheld from her salary during year 2010. Her actual year 2009 and 2010 taxes were $40,000 each year. Mary's AGI in year 2009 was $146,000. Mary made no other payments but elected to apply her year 2009 overpayment of income tax of $1,200 to her year 2010 estimated tax. What is her underpayment of tax for the first installment? What is her underpayment of tax for the second installment? If Mary forgets to pay estimated tax for the first 3 quarters is there a way for her to avoid the penalty? Answer: Yes, see Section 13.8 page 13-46 in text—increase withholding or have the employer continue Social Security withholding beyond the base amount. 1
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o Required installment Lesser of: 90% of tax due this year, 2010 (90,000 x $40,000)= $36,000 Or 100% of last year’s tax, 2009 or $40,000 Required quarterly installment: $36,000 Divided by 4 payments $ 9,000 Less actual payments: o Actual 1 st installment -5000 o Withheld from salary -2250 o 2009 overpayment -1200 8,450 UNDERPAYMENT FOR FIRST QUARTER 550 o Penalty calculated from 6/15/10 to 4/15/11 (or until paid if earlier) Second quarter underpayment: $9000 - $5000- $2250 = $1750 o Penalty calculated from 9/15/10 to 4/15/11 (or until paid if earlier) o Any taxpayer (employee or self-employed) who will owe at least $1,000 in taxes for the year (and meets none of the exceptions) must make estimated tax payments. o To avoid penalties for underpayment, the taxpayer must pay the smaller of: 90% of the current year’s tax, or 100% of last year’s tax (Exception: 110% of last year’s tax if AGI last year exceeded $150,000 ($75,000 if married filing separately) o For calendar year individual taxpayer, estimated tax payments are 1/4 of annual amount are due Due dates: April 15, June 15, and September 15 of the tax year (2010), and January 15 of the following year (2011) Section 13.5 Payment Procedures
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