17 Computation of Tax and Credits Flashcards
Describe the child tax credit.
A credit of up to $2,000 is allowed for each qualifying child under the age of 17.
Describe the American Opportunity Credit.
It is allowed up to $2,500 per year for each eligible student.
It covers 100% of the first $2,000 and 25% of the next $2,000 on qualified educational expenses.
Qualified educational expenses are nondeductible tuition and academic fees incurred during first four years of postsecondary education.
The student must be enrolled in a degree program at least half time for at least one academic period during the year.
Describe the Lifetime Learning Credit.
It is allowed up to $2,000 per taxpayer.
20% of up to $10,000 of educational expenses.
Qualified educational expenses are nondeductible tuition and academic fees incurred by a taxpayer, spouse, or any dependent of the taxpayer.
The student can be part time; he or she does not have to be enrolled in a degree program.
List the eligibility requirements for the dependent care credit.
Care must be provided for:
A dependent who has not reached the age of 13.
A dependent (or spouse) who is mentally or physically incapacitated and lives with the taxpayer for more than half the year.
How is the dependent care credit calculated?
It begins at 35% if adjusted gross income (AGI) is $15,000 or less and is reduced by 1% for each $2,000 increment (or portion thereof) of AGI above $15,000. The minimum credit is 20%.
It is limited to $3,000, or $6,000 if more than one dependent. The credit cannot exceed the wages of the lowest-paid spouse.
What expenses qualify for the adoption credit?
Qualified expenses include adoption fees, court costs, attorney fees, and travel expenses.
Distinguish between a refundable and nonrefundable credit.
A nonrefundable credit can reduce the tax liability to zero; any excess is not refunded to the taxpayer. It expires without providing tax benefits unless it can be carried over to a different year. However, with a refundable credit, the excess is refunded to the taxpayer. Note that the credit may be fully or partially refundable.
This year, Patrick has calculated his taxable income at $9,800 and his gross tax liability at $980. He is entitled to a credit for other dependents of $500 and an earned income tax credit of $2,200. Will Patrick receive a refund and if so, how much?
Patrick will be able to use the credit for other dependents to reduce his tax liability to $480. Because the earned income credit is refundable, Patrick will use it to reduce his tax liability to zero and will receive an income tax refund of $1,720 ($980 − $500 − $2,200).
Is the adoption credit allowed in the year the expense is paid or in the year the adoption is finalized?
The credit is allowed in the year the adoption is finalized.
True or False: The American Opportunity Tax Credit (AOTC) is allowed for qualified expenses paid for high school.
False: The AOTC is for post-secondary (i.e. post-high school) education.
True or False: The child and dependent care credit is available if the taxpayer requires care for a child under age 17 or a disabled dependent in order to be gainfully employed.
False: The child and dependent care credit is available if the taxpayer requires care for a child under age 13 or a disabled dependent in order to be gainfully employed.
True or False: Taxpayers can pay their estimated federal tax liability when the tax return is due.
False: Taxpayers must pay their estimated federal tax liability as the income is earned or received during the year rather than when the tax return is due.
Describe the de minimis exception in regard to the underpayment penalty.
A de minimis exception to the underpayment penalty exists if the tax owed on the current tax return is < $1,000.
Describe the three safe harbor exceptions in regard to the underpayment penalty.
- Prior year tax liability – No penalty is assessed if the withholdings and estimated payments totaled at least 100% of the prior year tax liability unless the taxpayer had more than $150,000 of AGI in the prior year. In the latter case, payments must exceed 110% of the prior year tax liability to utilize this exception in the current year
- Current tax liability – No penalty is assessed if the payments covered at least 90% of the current year tax liability
- Annualized income method – No penalty is assessed if the cumulative payments for each quarter cover the tax on the income to date (assuming it continues at the same rate for the remainder of the year).
If estimated tax payments are required, when are they due for an individual taxpayer?
If estimated tax payments are required, they are due by the 15th day of the 4th, 6th & 9th months of the taxable year and by the 15th of January the following year (1040-ES).
