Ch 12

Question 1

Adoption expenses credit

Answer 1

A provision intended to assist taxpayers who incur nonrecurring costs directly associated with the adoption process, such as legal costs, social service review costs, and transportation costs. Up to $13,190 ($13,190 for a child with special needs regardless of the actual adoption expenses) of costs incurred to adopt an eligible child qualify for the credit. A taxpayer may claim the credit in the year qualifying expenses are paid or incurred if the expenses are paid during or after the year in which the adoption is finalized. For qualifying expenses paid or incurred in a tax year prior to the year the adoption is finalized, the credit must be claimed in the tax year following the tax year during which the expenses are paid or incurred. ? 23.

Question 2

American opportunity credit

Answer 2

This credit replaces the HOPE scholarship credit for 2009, 2010, 2011, 2012, and 2013 and applies for qualifying expenses for the first four years of postsecondary education. Qualified expenses include tuition and related expenses and books and other course materials. Room and board are ineligible for the credit. The maximum credit available per student is $2,500 (100 percent of the first $2,000 of qualified expenses and 25 percent of the next $2,000 of qualified expenses). Eligible students include the taxpayer, taxpayer’s spouse, and taxpayer’s dependents. To qualify for the credit, a student must take at least one-half of the full-time course load for at least one academic term at a qualifying educational institution. The credit is phased out for higher-income taxpayers. ? 25A.

Question 3

Child tax credit

Answer 3

A tax credit based solely on the number of qualifying children under age 17. The maximum credit available is $1,000 per child through 2013. A qualifying child must be claimed as a dependent on a parent’s tax return to qualify for the credit. Taxpayers who qualify for the child tax credit may also qualify for a supplemental credit. The supplemental credit is treated as a component of the earned income credit and is therefore refundable. The credit is phased out for higher-income taxpayers. ? 24.

Question 4

Credit for certain retirement plan contributions

Answer 4

A nonrefundable credit is available based on eligible contributions of up to $2,000 to certain qualified retirement plans, such as traditional and Roth IRAs and ? 401(k) plans. The benefit provided by this credit is in addition to any deduction or exclusion that otherwise is available resulting from the qualifying contribution. The amount of the credit depends on the taxpayer’s AGI and filing status. ? 25B.

Question 5

Credit for child and dependent care expenses

Answer 5

A tax credit ranging from 20 percent to 35 percent of employment-related expenses (child and dependent care expenses) for amounts of up to $6,000 is available to individuals who are employed (or deemed to be employed) and maintain a household for a dependent child under age 13, disabled spouse, or disabled dependent. ? 21.

Question 6

Credit for employer-provided child care

Answer 6

A nonrefundable credit is available to employers who provide child care facilities to their employees during normal working hours. The credit, limited to $150,000, is comprised of two components. The portion of the credit for qualified child care expenses is equal to 25 percent of these expenses, while the portion of the credit for qualified child care resource and referral services is equal to 10 percent of these expenses. Any qualifying expenses otherwise deductible by the taxpayer must be reduced by the amount of the credit. In addition, the taxpayer’s basis for any property used for qualifying purposes is reduced by the amount of the credit. ? 45F.

Question 7

Credit for small employer pension plan startup costs

Answer 7

A nonrefundable credit available to small businesses based on administrative costs associated with establishing and maintaining certain qualified plans. While such qualifying costs generally are deductible as ordinary and necessary business expenses, the availability of the credit is intended to lower the costs of starting a qualified retirement program and therefore encourage qualifying businesses to establish retirement plans for their employees. The credit is available for eligible employers at the rate of 50 percent of qualified startup costs. The maximum credit is $500 (based on a maximum $1,000 of qualifying expenses). ? 45E.

Question 8

Disabled access credit

Answer 8

A tax credit designed to encourage small businesses to make their facilities more accessible to disabled individuals. The credit is equal to 50 percent of the eligible expenditures that exceed $250 but do not exceed $10,250. Thus, the maximum amount for the credit is $5,000. The adjusted basis for depreciation is reduced by the amount of the credit. To qualify, the facility must have been placed in service before November 6, 1990. ? 44.

Question 9

Earned income credit

Answer 9

A tax credit designed to provide assistance to certain low-income individuals who generally have a qualifying child. This is a refundable credit. To receive the most beneficial treatment, the taxpayer must have qualifying children. However, it is possible to qualify for the credit without having a child. See Chapter 12 for the computation procedure required in order to determine the amount of the credit allowed.

Question 10

Employment taxes

Answer 10

Taxes that an employer must pay on account of its employees. Employment taxes include FICA (Federal Insurance Contributions Act) and FUTA (Federal Unemployment Tax Act) taxes. Employment taxes are paid to the IRS in addition to income tax withholdings at specified intervals. Such taxes can be levied on the employees, the employer, or both.

Question 11

Energy tax credits

Answer 11

Various tax credits are available to those who invest in certain energy property. The purpose of the credit is to create incentives for conservation and to develop alternative energy sources.

Question 12

Estimated tax

Answer 12

The amount of tax (including alternative minimum tax and self-employment tax) a taxpayer expects to owe for the year after subtracting tax credits and income tax withheld. The estimated tax must be paid in installments at designated intervals (e.g., for the individual taxpayer, by April 15, June 15, September 15, and January 15 of the following year).

Question 13

Foreign tax credit

Answer 13

A U.S. citizen or resident who incurs or pays income taxes to a foreign country on income subject to U.S. tax may be able to claim some of these taxes as a credit against the U.S. income tax. ?? 27 and 901905.

Question 14

General business credit

Answer 14

The summation of various nonrefundable business credits, including the tax credit for rehabilitation expenditures, business energy credit, work opportunity credit, research activities credit, low-income housing credit, and disabled access credit. The amount of general business credit that can be used to reduce the tax liability is limited to the taxpayer’s net income tax reduced by the greater of (1) the tentative minimum tax or (2) 25 percent of the net regular tax liability that exceeds $25,000. Unused general business credits can be carried back 1 year and forward 20 years. ? 38.

Question 15

Lifetime learning credit

Answer 15

A tax credit for qualifying expenses for taxpayers pursuing education beyond the first two years of postsecondary education. Individuals who are completing their last two years of undergraduate studies, pursuing graduate or professional degrees, or otherwise seeking new job skills or maintaining existing job skills are all eligible for the credit. Eligible individuals include the taxpayer, taxpayer’s spouse, and taxpayer’s dependents. The maximum credit is 20 percent of the first $10,000 of qualifying expenses and is computed per taxpayer. The credit is phased out for higher-income taxpayers. ? 25A.

Question 16

Low-income housing credit

Answer 16

Beneficial treatment to owners of low-income housing is provided in the form of a tax credit. The calculated credit is claimed in the year the building is placed in service and in the following nine years. ? 42.

Question 17

Nonrefundable credit

Answer 17

A credit that is not paid if it exceeds the taxpayer’s tax liability. Some nonrefundable credits qualify for carryback and carryover treatment.

Question 18

Permanent and total disability

Answer 18

A person is considered permanently and totally disabled if he or she is unable to engage in any substantial gainful activity due to a physical or mental impairment. In addition, this impairment must be one that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than 12 months. The taxpayer generally must provide the IRS a physician’s statement documenting this condition.

Question 19

Refundable credit

Answer 19

A credit that is paid to the taxpayer even if the amount of the credit (or credits) exceeds the taxpayer’s tax liability.

Question 20

Rehabilitation expenditures credit

Answer 20

A credit that is based on expenditures incurred to rehabilitate industrial and commercial buildings and certified historic structures. The credit is intended to discourage businesses from moving from older, economically distressed areas to newer locations and to encourage the preservation of historic structures. ? 47.

Question 21

Rehabilitation expenditures credit recapture

Answer 21

When property that qualifies for the rehabilitation expenditures credit is disposed of or ceases to be used in the trade or business of the taxpayer, some or all of the tax credit claimed on the property may be recaptured as additional tax liability. The amount of the recapture is the difference between the amount of the credit claimed originally and what should have been claimed in light of the length of time the property was actually held or used for qualifying purposes. ? 50.

Question 22

Research activities credit

Answer 22

A tax credit whose purpose is to encourage research and development. It consists of three components: the incremental research activities credit, the basic research credit, and the energy credit. The incremental research activities credit is equal to 20 percent of the excess qualified research expenditures over the base amount. The basic research credit is equal to 20 percent of the excess of basic research payments over the base amount. ? 41.

Question 23

Self-employment tax

Answer 23

A tax of 12.4 percent is levied on individuals with net earnings from self-employment (up to $117,000 in 2014) to provide Social Security benefits (i.e., the old age, survivors, and disability insurance portion) for such individuals. In addition, a tax of 2.9 percent is levied on individuals with net earnings from self-employment (with no statutory ceiling) to provide Medicare benefits (i.e., the hospital insurance portion) for such individuals. If a self-employed individual also receives wages from an employer that are subject to FICA, the self-employment tax will be reduced. A partial deduction is allowed in calculating the self-employment tax. Individuals with net earnings of $400 or more from self-employment are subject to this tax. ?? 1401 and 1402.

Question 24

Tax credit for the elderly or disabled

Answer 24

An elderly (age 65 and over) or disabled taxpayer may receive a tax credit amounting to 15 percent of $5,000 ($7,500 for qualified married individuals filing jointly). This amount is reduced by Social Security benefits, excluded pension benefits, and one-half of the taxpayer’s adjusted gross income in excess of $7,500 ($10,000 for married taxpayers filing jointly). ? 22.

Question 25

Tax credits

Answer 25

Amounts that directly reduce a taxpayer’s tax liability. The tax benefit received from a tax credit is not dependent on the taxpayer’s marginal tax rate, whereas the benefit of a tax deduction or exclusion is dependent on the taxpayer’s tax bracket.

Question 26

Work opportunity tax credit

Answer 26

Employers are allowed a tax credit equal to 40 percent of the first $6,000 of wages (per eligible employee) for the first year of employment. Eligible employees include certain hard-to-employ individuals (e.g., qualified ex-felons, high-risk youth, food stamp recipients, and veterans). The employer’s deduction for wages is reduced by the amount of the credit taken. For qualified summer youth employees, the 40 percent rate is applied to the first $3,000 of qualified wages. See welfare-to-work credit for the calculation for long-term recipients of family assistance welfare benefits. ?? 51 and 52.