Chapter 7 Flashcards
A credit is a
direct reduction in tax liability instead of a deduction from income (below the line)
Credits are used because
Credits are used because
Because of the progressive rate structure of the income tax, a deduction provides ____ benefit to higher-income taxpayers, while a tax credit provides ____ benefit, regardless of the taxpayer’s income level.
greater;equal
A deduction reduces ____ ____ by the amount of the deduction and thus results in a tax _____ equal to the deduction multiplied by the___ ____
taxable income;savings; tax rate
A credit is a ____-___-_____ reduction of the taxpayer’s tax liability.
dollar for dollar
If a taxpayer has a choice between a credit or a deduction of equal amounts, generally the ___ will result in greater tax savings.
credit
The child tax credit permits individual taxpayers to take a tax credit based on the number of their ___ ____.
dependent children
Child tax credit comes in two parts
refundable/non refundable
Most tax credits are limited to the ____ __ ____ ____ ____ that a taxpayer has and thus are “nonrefundable.”
amount of total tax liability
Certain credits allow taxpayers to claim the credit even when the amount of the credit ___ their tax liability – these are known as ______credits since they result in a “refund” of taxes that were never actually paid by the taxpayer.
exceeds ; refundable
Credit per child
2000
credit for qualified dependents
500
child must be
under 17, citizen/alien, a dependent, have a ssn
child tax credit phase outs
400000 Joint AGI/ 200000 S/MFS/HOH AGI= less 50 credit per 1000 over limit no child credit at AGI 440000.
Eugene has a tax liability of $2,200 before any tax credits. Eugene has determined he is eligible for an education credit of $400 and a child tax credit of $2,000. Because his two nonrefundable credits exceed his tax liability, Eugene will take a $400 education credit and his nonrefundable child tax credit will be limited to $____
1800 (2200-400)
The refundable portion of the child tax credit is the amount of child tax credit that was limited by the taxpayer’s ___ ____.
tax liability
Eugene in the previous example, was eligible for a total child tax credit of $2,000; however, he could only take a credit of $1,800 due to the tax liability limitation. The $200 unclaimed child tax credit ___ be refundable
may
If the taxpayer has fewer than three children that are eligible for the child tax credit, the refundable portion of the child tax credit is subject to ___ additional limitations.
two
The first limitation to refundable child tax credits is that the additional child tax credit cannot exceed $____ per child. The second limitation is that the refundable child tax credit cannot exceed __% of the taxpayer’s earned income less $2,500. The ____ of these two amounts will apply.
1400;15%; lower
In 2019, Mike and Laura, married filing jointly taxpayers, have two qualifying children, AGI of $72,000 (all earned income) and tax liability before any credits of $1,043. As a result, their child tax credit of $4,000 is limited to $____. Mike and Laura can claim the refundable portion of child tax credit of $____; the lesser of the unclaimed child tax credit or 15 percent of earned income limited to ____ per child
1043;2800;1400
For taxpayers with three or more qualifying children, the child tax credit amount in excess of tax liability is subject to limitations. The same overall $____limit per child applies. The refundable child tax credit is also limited by the greater of either 15 percent of earned income over $2,500 or the amount of ___ ___ and ____ taxes paid up to the unclaimed child tax credit.
1400; social security; medicare
Molly and Sam are married, file a joint tax return, have five qualifying children, and earned income of $6,000. The children are qualifying children for purposes of the child tax credit, but do not qualify under the earned income tax credit. Molly and Sam had $459 of Social Security and Medicare taxes withheld by their employers. Their pre-credit tax liability is $0. Because their pre-credit tax liability is $0, Molly and Sam are ______ for the child tax credit. The refundable portion of the child tax credit is $___ which starts at $_____ but is first limited to ____ and then further limited to the greater of FICA or EI-2500.
not eligible;525;10000;7000;
No form is required for the ____ child tax credit. It is simply claimed on Line ___ of Form ____
nonrefundable; 13a; 1040
The _____ child tax credit is available to taxpayers whose child tax credit was limited by their tax liability and requires completion of Form ____
refundable ; 8812
The amount from Form 8812 is carried over to Form____ Line ___
1040; 18B
a dependent parent or dependent child age 17 or older can still be eligible dependents for the ____ _____ ____.
other dependent credit
A Social Security number is _____ for the other dependent credit and the credit is ______
not required ; nonrefundable
The other dependent credit is reported in combination with the child tax credit on Line ___ of Form ____
13a ; 1040
A taxpayer who erroneously claims the child tax credit due to reckless or intentional disregard of rules or regulations is ineligible to claim the credit for a period of ___ tax years. If the IRS determines the claim for the credit was fraudulent, the ineligibility window is extended to ___ years.
2; 10
If the IRS rejects a child tax credit for any reason other than a ___ __ ____ ____, the taxpayer must complete a Form ____ in a year after a rejection
math or clerical error; 8862
Tax preparers that prepare returns on which the child tax credit is claimed will be required to complete Form ____
8867
Form 8867 is a ___ ____ _____ that was previously used for only the earned income credit.
due diligence checklist
The IRS will not issue refunds for any tax returns that claim a child tax credit (or earned income credit) until _____ __ of the year following the tax year
February 15th
The earned income credit (EIC or sometimes EITC) is available to
qualifying individuals with earned income and AGI below certain levels.
The earned income credit is meant to ____ ___ ____ ___ by reducing their___ _____ and to supplement wage income through a refundable credit when earnings are less than the taxpayer’s maximum income for their filing status.
assist the working poor; tax burden
Qualifying taxpayers can receive a refundable EIC even in situations when they have no
filing requirement, owe no tax, and had no income tax withheld
There are 7 rules for
Earned income credit
7 rules to qulaify for EIC
Within AGI limit, SSN, not MFS, US Citizen/RA, no Foreign income Exlcusion, Investment income limit, Earned income Required.
AGI Limits for EIC
Investment Income limit
Disqualified income includes most typical forms of investment income such as interest, dividends, net income from rents and royalties and most forms of capital gains. >3600
Earned income requirement
must have earned income. For self-employed taxpayers, earned income includes income reported on Schedule SE
Earned income limits
Doug is married but files separately in 2019. Doug ____ Qualify for EIC because.
does not; he is married filing separately
Jane has income of $7,000, is single, has a valid Social Security number, and is not a qualifying child of another taxpayer. Her income includes $4,500 of interest on a corporate bond. Jane ___ eligible for the EIC because
not; her investment income exceeds $3,600
Eddie and Lindsey had a new baby. Their earned income and AGI in 2019 was $12,500, they filed jointly, lived in the United States, and had no investment income. Eddie and Lindsey have Social Security numbers but have not had the time to get a Social Security number for the baby yet. Eddie and Lindsey ___ claim an EIC in 2019 but only with ___ ____ _____since the baby does not have a valid ___ ____ ____.
may; no qualifying child; Social Security number
Jerry earns wages of $16,000 from his job and has no adjustments or other forms of income. He has no qualifying children and no investment income. Even if Jerry meets all the other requirements (Social Security number, U.S. residence, etc.), he will ____ eligible for the EIC as his ______ _____ ____ ____ ___
not be; AGI exceeds the threshold amount for an unmarried taxpayer with no qualifying children
If a tax payer wants to claime an EIC but has no qualifying children they must meet _ additional rules
4
Taxpayers with no children seeking EIC must be at least ___ years old but under __
25;65
Taxpayers with no children seeking EIC must not be eligible to be ___ ___ _ _____ by anyone else
claimed as a dependent
Taxpayers with no children seeking EIC must not be a ____ ____
Qualifying child
Taxpayers with no children seeking EIC must live in ___ for at least ____ of the tax year
the US; for one half
Taxpayers with qualifying children seeking EIC must meet _ additional rules
3
Taxpayers with qualifying children seeking EIC must meet all _____ _____ tests
Qualifying children tests
Taxpayers with qualifying children seeking EIC must ensure the Qualifying child is ___ ____ by anyone else
not claimed
Taxpayers with qualifying children seeking EIC must ensure their Qualifying child is not the ____ ____ of another taxpayer
Qualified Child
IRS Publication ___ contains an EIC Eligibility Checklist as shown.
596
If the IRS rejects an earned income credit for any reason other than a math or clerical error, the taxpayer must complete a Form ____ in order to claim the earned income credit in a future year.
8862
a taxpayer who erroneously claims the earned income credit due to reckless or intentional disregard of rules or regulations is ineligible to claim the credit for a period of _ tax years. If the IRS determines the claim for the credit was fraudulent, the ineligibility window is extended to _ years.
2;10
The IRS will not issue refunds for any tax returns that claim an earned income credit until ____ __
February 15th
EIC amount must be derived from the EIC Tables in Appendix _ and should not be calculated using the statutory credit percentages to avoid _____ _____
b; rounding issues
To find the correct amount of EIC in the EIC Tables, the taxpayer must compare the ___ ____ ____ based on the taxpayer’s earned income with the EIC Table amount associated with the ____ ____
EIC Table amount; taxpayer’s AGI
