8. Tax Credits & Payments Flashcards
Some examples of nonrefundable personal credits include the
1.Foreign Tax Credit
2.Lifetime Learning Credit
3.Retirement Savings Contribution Credit
4.Child and Dependent Care Credit
5.Child Tax Credit
6.Credit for Other Dependents
7.Credit for the Elderly or Disabled
8.Adoption Credit
9.Residential Mortgage Interest Credit
10.Minimum Tax Credit
Some examples of refundable personal credits include the
1.American Opportunity Tax Credit (partially)
2.Additional Child Tax Credit
3.Health Insurance Premium Tax Credit
4.Earned Income Credit
What is the difference between refundable and nonrefundable tax credits?
*Most credits are nonrefundable, meaning that once the tax liability reaches zero, no more credits can be taken to produce refunds.
*Refundable credits are treated as payments and can result in refunds for the taxpayer.
May a taxpayer both elect to take the Foreign Tax Credit and deduct taxes paid to other countries?
No, a taxpayer may elect either a credit or deduction for taxes paid to other countries or U.S. possessions.
What is the maximum amount of tax that may be claimed for the Foreign Tax Credit (FTC)?
FTC = U.S. income tax before FTC ×
(Foreign earned taxable income ÷ Worldwide taxable income)
In order to claim the Foreign Tax Credit on Form 1040 instead of Form 1116, a taxpayer must meet certain conditions, which include
1.The taxpayer is an individual,
2.The only foreign-source income for the year is passive income that is reported on a qualified payee statement, and
3.The qualified foreign taxes for the year do not exceed $300 ($600 for a joint return).
In order to claim the Foreign Tax Credit on Form 1040 instead of Form 1116, a taxpayer must meet certain conditions, which include
1.The taxpayer is an individual,
2.The only foreign-source income for the year is passive income that is reported on a qualified payee statement, and
3.The qualified foreign taxes for the year do not exceed $300 ($600 for a joint return).
If a taxpayer has foreign tax paid in excess of the Foreign Tax Credit (FTC) limit, to what years may those excess foreign taxes be carried over?
Foreign tax paid in excess of the FTC limit may be carried back 1 year and forward 10, in chronological order.
A taxpayer is eligible for the Child and Dependent Care Credit only if
1.Child and dependent care expenses are incurred to enable the taxpayer to be gainfully employed, and
2.The taxpayer provides more than half the cost of maintaining a household for a dependent under age 13 or a physically or mentally incapacitated spouse or dependent.
Qualifying employment related expenses for the Child and Dependent Care Credit include
1.Household services, such as baby-sitting, housekeeping, and nursery;
2.Outside services, such as day care (must be in qualified facilities);
3.The cost of sending a child to school if the child is in a grade below kindergarten; and
4.Payments to certain relatives for the care of a qualifying individual.
Qualifying employment related expenses for the Child and Dependent Care Credit include
1.Household services, such as baby-sitting, housekeeping, and nursery;
2.Outside services, such as day care (must be in qualified facilities);
3.The cost of sending a child to school if the child is in a grade below kindergarten; and
4.Payments to certain relatives for the care of a qualifying individual.
The limits on child and dependent care expenses for one qualifying individual and for two or more qualifying individuals are
$3,000 and $6,000 respectively, less excludable employer dependent-care assistance program payments.
What are the limits of the actual Child and Dependent Care Credit?
The credit is equal to 35% of the child and dependent care expenses paid during the year. This rate is reduced by 1% (but not below 20%) for each $2,000 (or part thereof) by which AGI exceeds $15,000. Taxpayers with AGI over $43,000 will have a credit of 20%.
What are the limits of the actual Child and Dependent Care Credit?
The credit is equal to 35% of the child and dependent care expenses paid during the year. This rate is reduced by 1% (but not below 20%) for each $2,000 (or part thereof) by which AGI exceeds $15,000. Taxpayers with AGI over $43,000 will have a credit of 20%.
What is the maximum amount allowed for the American Opportunity Tax Credit?
The American Opportunity Tax Credit provides a maximum nonrefundable tax credit of $2,500 per student for each of the first 4 years of post-secondary education.
To what expenses does the American Opportunity Tax Credit apply?
This credit applies to tuition and tuition-related fees, books, and other required course materials.
The American Opportunity Tax Credit cannot be claimed if
1.An exclusion for an education IRA or a state tuition program is claimed for the same expenses,
2.The student has been convicted of a federal or state felony offense consisting of the possession or distribution of a controlled substance, or
3.The student is not taking at least one-half of the normal full-time workload for at least one academic period that begins during the calendar year in which the credit is claimed.
The American Opportunity Tax Credit cannot be claimed if
1.An exclusion for an education IRA or a state tuition program is claimed for the same expenses,
2.The student has been convicted of a federal or state felony offense consisting of the possession or distribution of a controlled substance, or
3.The student is not taking at least one-half of the normal full-time workload for at least one academic period that begins during the calendar year in which the credit is claimed.
What is the maximum amount allowed for the Lifetime Learning Credit?
The maximum credit allowed per year is $2,000. The credit is figured on a per-taxpayer basis, while the AOTC is allowed per student.
Can a person claim the American Opportunity Tax Credit for their 5th year of post-secondary education?
No, this credit can only be claimed for the first 4 years of post-secondary education.
Can a person claim the Lifetime Learning Credit for their 5th year of post-secondary education?
Yes, this credit is available for an unlimited number of years and can be used for both graduate- and undergraduate-level courses.
Can the education credits be used for room and board?
No. Neither credit may be used for room and board, activity fees, athletic fees, insurance expense, or transportation.
Who is a qualifying child for the purposes of the Child Tax Credit?
A qualifying child is a child who
*Is the taxpayer’s son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, half brother, half sister, or a descendant of any of them
*Was under the age of 17 as of the close of the tax year
*Did not provide over half of his or her own support for the tax year
*Lived with the taxpayer for more than half of the tax year
*Is claimed as a dependent on the taxpayer’s return
*Was a U.S. citizen, U.S. national, or U.S. resident alien
*Has a Social Security number issued before the due date of the return
Is the Additional Child Tax Credit refundable?
The credit is refundable up to the lesser of 15% of earned income in excess of $2,500 or the unclaimed portion of the nonrefundable credit. The refund is capped at $1,500 per child.
