Chapter 9 Flashcards
What are some nonrefundable tax credits?
Foreign tax credit, education credits, credit for child and dependent care, non business and business tax credits, credit for the elderly or disabled, child tax credit, and qualified adoption expense credit.
What is the difference between a refundable tax credit and a nonrefundable tax credit?
Refundable tax credits can result in a tax refund. Non refundable credits can only reduce your taxes to 0.
What is a foreign tax credit?
A taxpayer who pays income taxes to a foreign country on foreign source income, and also pays U.S. income taxes on the same income, is usually eligible to claim a foreign tax credit for some or all of the taxes paid to the foreign country. TI OUS/WTI times Wold INC
Credit for Child and Dependent Care expenses
The credit for child and dependent care expenses is intended to provide some financial relief to individuals who incur employment-related expenses for the care of one or more qualifying individuals. The amount of the credit is equal to employment-related expenses of up to 3,000 for one qualifying individual multiplied by the applicable percentage. AGI=1,000,00 20 percent of amount of qualifying expenses.
Why makes an individual qualify for the dependent care tax credit.
A dependent who is a qualifying child or under the age of 13. 2. A depended of the taxpayer who is physically or mentally incapable of caring for himself and has the same principal place of abode as the taxpayer for more than half of the year. 3. The spouse of the taxpayer who is physically or mentally incapable of caring for himself and 2. has the same princip place of abode for more than half of the year.
Special rule for a child of divorced or separated parents
Even if the custodial parent of the qualifying child cannot claim the child as a dependent , the custodial parent of the qualifying child can treat the child as a qualifying child for determining the child and dependent care if the child is under 13 or physically or mentally incapable of caring for himself.
Employment related expenses
Are expenses incurred for the care of qualifying individuals that enable the taxpayer to be employed. Eligible expenses include expenses for household services and expenses for the care of a qualifying individual. To qualify, the child and dependent care expenses must be incurred to enable the taxpayer to work or to actively look for work. Expenses paid from qualified expense reimbursement such as FSA or DCEA do not qualify towards the credit.
Earned income limit
In order to claim the credit for the child and dependent care expenses, the taxpayer must have earned income such as wages, salary, tips, net earnings from self employment, and certain nontaxable fringe benefits. The eligible employment-related expenses cannot exceed the earned income of the taxpayer, or for married taxpayers, the earned income of the spouse with the lesser amount of earned income.
Earned income limit continued
For each month that an unemployed spouse is 1. a full time student of 2. physically or mentally unable to care for himself and who lives with the taxpayer for more than half the year, the spouse is deemed to earn 250 if the married couple pays for the care of one qualifying individual.
Payments to relatives or dependents
Payments for employement related care that are made to relatives of the taxpayer may qualify fo rthe credit even if the relatives live with the taxpayer.
Joint return
Married taxpayers must normally file a joint return to claim the child and dependent care credit.
Credit for the elderly or disabled
Intended to provide financial assistance to elderly or disabled individuals with modest incomes. Reitired or permanently and totally disabled taxpayers with taxable retirement income are allowed a credit designed to partially equate their tax treatment with that of retired persons whose retirement income consists of nontaxable ss benefits. A qualified individual must be 65 or older at the end of the tax year or under the age of 65 and retired on total or permanent disability. 2. the recipient of taxable disability benefits from an employer’s plan for the tax year and 3. younger than the mandatory retirement age of the employer at the beginning of the tax year.
Credit for the elderly or disabled continued.
The amount of the credit is a fixe dbase amount less three possible reductions, multiplied by a rate of 15 percent. The initial amount is 5,000 for a qualifying taxpayer who uses the single, head of household, or surviving spouse filing status.
Education tax credits
Two education tax credits are available to an individual taxpayer who pays qualified tuition and related expenses to an eligible education institution for the taxpayer , the spouse of the taxpayer, or deponent whom the taxpayer claims a dependency exemption. The two credits, the American Opportunity Tax Credit and the Lifetime Learning Credit, are calculated for the tax year and on each applicable student, added together, and then subjected to income phaseout limits. The American Opportunity tax credit is up to 40 percent refundable. The Lifetime Learning Credit is nonrefundable.
American Opportunity Tax Credit
Allowed for qualified education expenses of an eligible student during all four years of post secondary education. Eligible student must be enrolled at least half time for one quarter, semester, or other academic period. Be enrolled in a program leading to a degree, certificate, or other educational credential, be free of any federal or state conviction for possessing or distributing a controlled substance.
