INDIVIDUAL - CREDITS Flashcards
1
Q
What is the PTC?
A
Premium Tax Credit (Health Insurance)
A credit to offset health insurance coverage purchased through an Affordable Insurance Exchange (Health Insurance marketplace).
This credit is refundable so it benefits those with little or no tax liability.
This credit can be paid in advance to the taxpayer’s insurance company to offset premiums costs.
2
Q
Who qualifies for the Premium Tax Credit?
A
Individuals and families with household incomes of at least 100 - but no more than 400 - percent of the Federal Poverty level.
Based on Income and Family Size
There are 2 exceptions
3
Q
What is the FPL (Federal Poverty Level) for 2020?
A
1 Person, 100% = $12,760 2 People, 100% = $17,240 3 People, 100% = $21,720 4 People, 100% = $26,200 5 People, 100% = $30,680 6 People, 100% = $35,160 7 People, 100% = $39,640 8 People, 100% = $44,120
Add $4480 for each person added.
4
Q
What filing categories are excluded from receiving the PTC?
A
Someone filing MFS or someone claimed as a dependent of another taxpayer
5
Q
The taxpayer is responsible to make the initial determination of eligibility for the premium tax credit. True or False?
A
False.
The Health Insurance Exchange determines if a taxpayer is eligible.
The Exchange also determines if the taxpayer is eligible for Advance Payments.
6
Q
Even if a taxpayer is not otherwise required to file a return, they still must file if they choose to receive the benefit of an Advance Credit Payment. True or False?
A
True.
7
Q
What is Form 1095-A for?
A
Form 1095-A shows the amount of the premiums for the taxpayers healthcare plan and other info needed to compute the PTC.
8
Q
When can a taxpayer expect to receive Form 1095-A?
A
By January 31st of the following tax year.
9
Q
How is Form 8962 Premium Tax Credit (PTC) filed?
A
Form 8962 is filed with the taxpayer’s return and is used to reconcile the amount of the advance credit payments to the amount of the actual premium tax credit allowable to the taxpayer.
10
Q
What happens when Advance Credit Payments exceed the amount of the actual Allowable Premium Credit?
A
The difference is reflected on the return as an additional tax amount.
However, if the taxpayer’s household income is below 400% of the poverty level, limitations to the repayment are applicable.
11
Q
What is an Individual Shared Responsibility Payment in relation to the ACA?
A
The Individual Shared Responsibility provision requires everyone on the individual tax return to have qualifying health coverage for each month of the year, or have a coverage exemption.
If that is not the case, the IRS may require an Individual Shared Responsibility Payment to be made.
The TCJA reduced the ISR payment to $0.00!!!
12
Q
The Premium Tax Credit (PTC) is only available to individuals and families with household incomes below 100% of the FPL (Federal Poverty Level). True or False?
A
False.
Premium Tax Credits are available only to individuals and families with household incomes of at least 100—but no more than 400—percent of the federal poverty level.
13
Q
Advance credit payments are amounts paid directly to the taxpayer. True or False?
A
False.
Advance credit payments are amounts paid directly to the insurance company on the taxpayer’s behalf.
14
Q
Taxpayers may be eligible for the health insurance premium tax credit if the taxpayer meets these 6 parameters.
A
The taxpayer:
- purchases coverage through the Marketplace;
- has household income that falls within a specified range;
- is not able to get affordable coverage through an eligible employer plan providing minimum value;
- is not eligible for coverage through a government program (such as Medicaid, Medicare, etc.);
- does not file a married-separate return; and
- cannot be claimed as a dependent by another person.
15
Q
PTC (Premium tax credits) are available only to individuals and families with household incomes of at least 100—but no more than 400—percent of the federal poverty level. True or False?
A
True.
16
Q
A taxpayer or family member who is able to obtain affordable coverage through an eligible employer-sponsored plan that provides minimum value or through a government program, like Medicaid, Medicare, CHIP or TRICARE, may still qualify for the Premium Tax Credit? True or False?
A
False.
17
Q
In order to be eligible for the health insurance premium tax credit, the taxpayer must purchase coverage through the Marketplace. True or False?
A
True.
18
Q
What is the difference between a tax credit and a deduction?
A
A tax credit reduces the tax liability on dollar for dollar basis.
A deduction simply reduces your taxable income.
A tax credit is a much more significant benefit compared to a deduction of your taxable income.
19
Q
What is a Refundable Tax Credit?
A
If you have a Refundable Tax Credit and your tax credit is larger than your tax liability, you can actually get the difference back as a refund.
20
Q
What does it mean to be a Non-Refundable Tax Credit?
A
A Non-Refundable tax Credit can take your tax liability down to zero, but you will not get a refund for the amount the tax credit is greater than your tax liability.
21
Q
Who can take advantage of the Foreign Tax Credit (FTC)?
A
Anyone who pays taxes outside of the U.S may take either a deduction or a credit for tax amounts paid or accrued.
22
Q
What qualifies a taxpayer for a Foreign Tax Credit (FTC)?
A
- The tax they paid must be imposed on foreign source income.
- The taxpayer must have paid or accrued the tax, and
- The tax must be the legal and actual foreign tax liability, and
- The tax must be an income tax (or tax in lieu of income tax).
23
Q
The Foreign Tax Credit is a Refundable Tax Credit. True or False?
A
False.
24
Q
How is the limit defined for the Foreign Tax Credit?
A
The FTC cannot exceed the lesser of:
- Foreign taxes paid or accrued, or
- The portion of U.S. income tax that is allocable to foreign-source income.
25
The FTC can only reduce U.S. taxes on foreign source income; it cannot reduce U.S. taxes on U.S. source income. True or False?
True.
26
If the taxpayer paid someone to care for a child or other qualifying person so that the taxpayer could work or for look for work, then the taxpayer may be able to take a credit for childcare and dependent care expenses. True or False?
True.
This is called the "Childcare and Dependent Care Credit."
27
Who qualifies as a person that is cared for under the "Childcare and Dependent Care Credit."
1. A child under the age of 13 whom the taxpayer can claim as a dependent, or
2. The disabled spouse of the taxpayer who was not physically or mentally able to care for themselves, or
3. Any disabled person who was not physically or mentally able to care for themselves whom the taxpayer can claim as a dependent, or
4. Any disabled person who was not physically or mentally able to care for themselves whom the taxpayer could claim as a dependent except that the taxpayer (or spouse if filing jointly) could be claimed as a dependent on another taxpayer’s return.
5. The dependent person must live with the taxpayer for more than one-half of the year.
28
The Childcare and Dependent Care Credit requires that the person being paid to provide care cannot be the spouse of the taxpayer, a dependent of the taxpayer or the parent of the qualifying child. True or False?
True.
The care provider cannot be a very related party to the taxpayer.
29
To qualify for the Childcare and Dependent Care Credit the taxpayer must provide one-half of the support for the dependent person. True or False?
False.
The person receiving the care must live with the taxpayer, but the taxpayer is not required to provide a majority of the needed support.
30
What is the credit amount for the Childcare and Dependent Care Credit?
A credit of between 20% and 35% of eligible childcare/dependent expenses is available up to a maximum of $3,000 of qualified expenses for one qualifying dependent and $6,000 for two or more qualifying dependents.
The 35% is available if the taxpayer’s AGI is less than $15,000. The childcare credit is reduced 1% for each $2,000 of AGI above $15,000, but not to be reduced below 20% of the childcare expenses.
NOTE:
If married at the end of the year, the percentage is based on the smaller of the taxpayer or spouse's earned income for the year.
31
The Childcare and Dependent Care Credit is Refundable. True or False?
False.
The Childcare and Dependent Care Credit is Non-Refundable.
32
Married taxpayers must file jointly to claim the Childcare and Dependent Care Credit . True or False?
True.
33
Both Dave and Kathy were laid off from their jobs on June 1st. They began looking for work immediately, but were unable to find new jobs by the end of the year. Their daughter Cindy attends day care at a cost of $250 per month. How much of the day care expenses can Dave and Kathy use to figure the child and dependent care credit?
A. Only the expenses paid while they were employed
B. Only the expenses paid while they were looking for new work
C. Both the expenses paid so they can work and the expenses paid so they could look for work
D. Up to 35% of the total amount paid, depending on AGI
C. Both the expenses paid so they can work and the expenses paid so they could look for work.
To qualify for the Child and Dependent Care Credit, expenses must be work-related.
34
Jenny filed her tax return and took the standard deduction. Within the required monetary limits, the child care costs she paid in order for her to be able to work is a deduction reducing her taxable income. True or False?
False.
Money paid for child care, so that the taxpayer can be employed, is a TAX CREDIT (not a deduction) that reduces the taxpayer's income tax, rather than a deduction in arriving at adjusted gross income.
Tricky ;)
35
What are the 2 Education Credits?
1. American Opportunity Tax Credit
| 2. Lifetime Learning Credit
36
Students can claim both the American Opportunity Credit and the Lifetime Learning Credit in the same period. True or False?
False.
A student can choose one or the other in any tax year.
37
What credit amount is allowed for the American Opportunity Tax Credit?
The AOTC enables the taxpayer to claim a refund of up to $2,500 per year per student for only the first four years of post-secondary education in a degree program.
38
Who can benefit from the American Opportunity Tax Credit?
The American Opportunity Credit may be claimed for expenses paid for the taxpayer, their spouse or a dependent.
You must be enrolled at least half time as a student in a program, at minimum, to qualify.
39
How do you get to the maximum credit of $2500 for the American Opportunity Tax Credit?
The credit is equal to 100% of the first $2,000 of qualifying expenses paid and then 25% of the second $2,000 of qualifying expenses paid.
Note: this credit is phased out.
40
The American Opportunity Tax Credit is refundable. True or False?
True.
This credit is partially refundable: 40% of the eligible credit is refundable (up to a maximum of $1,000).
The remainder is not refundable.
41
What credit amount is allowed for the Lifetime Learning Credit?
The Lifetime Learning Credit enables people to claim a nonrefundable 20% credit for tuition and fees up to $10,000 for graduate and undergraduate courses, in ALL years of secondary education.
42
The Lifetime Learning Credit is limited to $4,000 per year per tax return has a limit 4 years that the credit may be claimed. True or False?
False.
The Lifetime Learning Credit is limited to $2,000 per year per tax return and there are NO limits as to how many years the credit may be claimed.
Note: the amount of this credit IS phased out.
43
What are the 2 types of Credits?
Nonrefundable and Refundable
44
Adoption Credit
Adoption Credit:
Nonrefundable but it can be carried over to future years.
Expenses can be claimed in the following year they are paid.
You can not claim the Adoption Credit when adopting a Step-child.
45
Earned Income Tax Credit - Eligibility
A Refundable Credit
- Must have earned income
- 1 or more Qualifying Children, OR
- If no Qualifying Children, age must be 25-65 years old.
- Investment Income must be below $3600
Cannot file MFS
TP (Tax Payer) and all QC's (qualifying children) must have valid SS #s
No Form 2555
Income below threshold
46
Saver's Credit
Nonrefundable
Credit = 10%, 20%, or 50% of contribution made
Total contribution to be considered
- $2,000 (most taxpayers, including MFS)
- $4,000 (MFJ)
The maximum total credit amount, then, for a Single tax payer is $1,000 and $2,000 for MFJ, since the max credit is 50% of the largest possible contribution.
2020 Saver's Credit:
50% - AGI not more than $39K (MFJ), $29K (HOH), $19,500 (All others)
20% - AGI not more than $42.5K (MFJ), $31,875K (HOH), $21,250 (All others)
10% - AGI not more than $65K (MFJ), $48,750K (HOH), $32,500 (All others)
47
Bill is Single and uses the maximum percentage to determine his Saver's Credit. His contributions total $8,000. What is the amount of his credit?
$2,000 x 50% = $1,000
48
Lorena prepares her US tax return and only owes $300 in tax. Before filing, Lorena remembers the dividends received from a French company had $500 withheld for tax by the French authorities. Lorena meets all the requirements to use the Foreign Tax Credit. Which of the following statements is correct?
A - Lorena can claim the entire amount of tax withheld as the credit and will receive a $200 refund for the overpayment?
B - Lorena can use the credit to reduce her tax liability to zero, but the remainder is non-refundable?
C- Lorena cannot apply the credit for foreign withholding to her US income tax liability
D - Lorena must request a refund from the French authorities
B - Lorena can use the credit to reduce her tax liability to zero, but the remainder is non-refundable?
49
Foreign Tax Credit (FTC)
Foreign Tax Credit (FTC)
nonrefundable
Cannot take the credit for:
- Income excluded under FEIE (Foreign Earned Income Exclusion) or FHE (Foreign Housing Exclusion)
- Income from PR (Puerto Rico) exempt from US tax
- Possession exclusion (American Samoa).
Carryover provision
- Back 1 year, Forward 10 years.
50
Joan files as head of household and has 4 children who reside in her home, her own children who are 15, 16, and 17, and her friend's child, age 10. Joan adopted and provides for all the support for her friends child. Joan and all the children are U.S. citizens. her AGI is $85,700. Her tax is $15,748. How much child tax credit (including any credit for other dependents) is she allowed in 2019?
$6,500
$6,000 - 10, 15, and 16 year-olds - $2,000 each
$500 - 17 year-old (credit for other dependents)
51
Gloria filed as head of household and would like to take the $2,000 Child Tax Credit for Sara in 2019. Which of the following statements is FALSE regarding the Child Tax Credit (CTC)?
A - Gloria must have taxable income to claim the full $2,000 CTC
B - Sara must be a citizen of the united States
C - The additional child tax credit can generate a refund
D - Gloria must claim Sara as a dependent on her tax return
B - Sara must be a citizen of the united States
52
CTC / ACTC / ODC
3-part Credit
- Child Tax Credit (CTC) - nonrefundable
- $2,000 per qualifying child
- Additional Child Tax Credit (ACTC) - partially refundable
- Up to $1,400
- Credit for Other Dependents (ODC) - nonrefundable
- $500
53
Which of the following taxpayers may claim the EIC (Earned Income Credit) for 2019?
A- Ginger, 50 years old, who has a qualifying child for whom she provides sole support. She received $15,000 in Social Security benefits and $500 in interest income.
B- Cinnamon - 42 years old, who was divorced the entire year. She had investment income of $2,500 and had W-2 wages of $7,000.
C- Woody, age 51, who is single and lived in a homeless shelter and received retirement benefits of $5,000.
D - Cherrie, age 35, who is single and has one qualifying child. She had $35,000 in wages and her adjusted gross income is $55,000.
B- Cinnamon - 42 years old, who was divorced the entire year. She had investment income of $2,500 and had W-2 wages of $7,000.
A - Social Security is not earned income
C - Retirement benefits are not earned income
D - AGI is too high
54
Margaret Michelson began the process of adopting Sahara in 20X1. She incurred over $20,000 in qualified expenses, including airfare to Sahara's native country of Kenya. Margaret did not finalize the adoption until 20X2. She did not incur any expenses in 20X2.
1. When can Margaret claim the credit for her qualified adoption expenses? 20X1 or 20X2?
2. Does the answer change if Sahara is a US citizen?
1. 20X2 - after the adoption becomes final
| 2. No, still 20X2 - even if the adoption is never final
55
Jerry has two dependent children, Greg and Mandy, who are attending an accredited college. Greg is a senior who spent $7,000 for tuition and fees for his 4th year. Mandy, a freshman with no prior postsecondary education, has tuition expenses of $4,000. Jerry meets all the income and filing status requirements for the education credits. There is no tax-free assistance to pay these expenses. Jerry's tax liability before credits equals $14,000. What is the maximum education credit that Jerry may claim on his tax return?
$5,000 AOTC
$2,500 each for Greg and Mandy
56
Which of the following taxpayers may be eligible for the PTC (Premium Tax Credit)?
A - Jason who is married but files separately from his spouse
B - Lucas who is a dependent of another taxpayer and earns less than 100% of the federal poverty level.
C - Tyra, who purchases health insurance on the exchange, with an income that is 200% of the Federal Poverty Level
D - Joe, who is covered by his employers health plan that provides minimum value.
C - Tyra
NOTES:
Individuals and families can take a PTC (Premium Tax Credit) to help them afford health insurance coverage purchased through an Affordable Insurance Exchange. Premium tax credits are available only to individuals and families with household incomes of at least 100—but no more than 400—percent of the federal poverty level.
A taxpayer CANNOT receive the credit if he or she files a MFS (Married Filing Separate) return OR if he or she can be claimed as a dependent of another taxpayer.
Also, no credit is available with respect to a taxpayer or family member who is able to obtain affordable coverage through an eligible employer-sponsored plan that provides minimum value or through a government program, like Medicaid, Medicare, CHIP or TRICARE.
57
In which of the following situations could a taxpayer possibly claim the Child and Dependent Care Credit?
A - Noncustodial parent who pays child support for childcare?
B - A taxpayer does not work and is enrolled full-time for the entire year at an online school
C - An unmarried taxpayer diligently looks for work but was unsuccessful and had no earned income
D - A taxpayer who has their 20-year-old niece provide childcare for $150/week.
D - the niece
NOTES:
To qualify the TP must meet these tests:
Filing status S, HOH, QW w/ dependent child, or MFJ.
The care must be for 1 or more Qualifying Persons
Must have Earned Income
TP must pay the expenses so they can work or look for work.
Payments can't go to a close relative (ie. Spouse, Dependent, etc)
The care provider must be ID'd on Tax Return.
The total exclusion must be less than the dollar limit for qualifying expenses. (Generally $3,000 for one or $6,000 for 2 or more.)
58
Billy and Kathy, a married couple, paid $5,500 in child care expenses for their 3-year-old daughter to allow them to work. Billy earned wages of $88,500 and Kathy earned wages of $2,000 during the tax year. If their tax before credits is $7,500 how much is their child and dependent care credit using the 0.20 decimal amount?
$2,000 x 0.20 = $400
Expenses are limited to the spouse's income
59
Mary earns $18,000 as a hostess at a local steakhouse. Her husband Bill was a full-time student for 6 months of the year and did not have any income. They have 2 children, ages 3 and 5, who attend daycare so Mary can work, and Bill can attend college. Total daycare expenses for the year are $4,500. How much of the expenses can Mary and Bill use to figure the child and dependent care credit?
$3,000
Normally, the expense limit is $3,000 per child (up to $6,000 maximum)
Expense cannot exceed taxpayer (or spouse's) earned income.
Spouse is considered to earn $500/month for each month as a full-time student.
$500 x 6 months = $3,000
60
Which of the following statements is true regarding the advance premium tax credit?
A. Advance credit payments are amounts paid directly to the taxpayer.
B. An eligible taxpayer can take the advance premium tax credit in advance to lower his monthly health insurance payment.
C. A taxpayer does not need to file an income tax return to receive the credit.
D. The taxpayer must determine eligibility for the premium tax credit prior to selecting a plan.
B. An eligible taxpayer can take the advance premium tax credit in advance to lower his monthly health insurance payment.
Notes:
An eligible taxpayer can take the advance premium tax credit in advance to lower his monthly health insurance payment.
Advance credit payments are amounts paid directly to the insurance company on the taxpayer’s behalf.
The taxpayer must file a return even if usually not required to do so. Failing to file a tax return will prevent the taxpayer from receiving the benefit of advance credit payments in future years.
The Exchanges are responsible for the initial determination of eligibility for the premium tax credit. During enrollment through the Exchange, the Exchange will also determine if the taxpayer is eligible for advance payments of the premium tax credit.
61
In order to be eligible for the health insurance premium tax credit, the taxpayer must_______?
A. Be unemployed
B. Be employed by an employer who does not provide any health coverage
C. Receive eligible coverage through a government program
D. Purchase coverage through the Marketplace
D. Purchase coverage through the Marketplace
NOTES:
Individuals and families can take a premium tax credit to help them afford health insurance coverage purchased through an Affordable Insurance Exchange (also known as a Health Insurance Marketplace). The premium tax credit is refundable so taxpayers who have little or no income tax liability can still benefit. The credit also can be paid in advance to a taxpayer’s insurance company to help cover the cost of premiums.
The credit is not available for the purchase of insurance outside of the Exchange.
62
Bob is married filing a married-separate return, cannot be claimed as a dependent by any other taxpayer, and has income that falls below the threshold for the health insurance premium tax credit. He is not able to get affordable coverage through an eligible employer plan providing minimum value and is not eligible for coverage through a government program. Bob obtains insurance through the Marketplace exchange. In this case
A. Bob is not eligible for the health insurance premium tax credit because he files a married-separate return
B. Bob is not eligible for the health insurance premium tax credit because he obtained insurance through the Marketplace exchange
C. Bob is eligible for the health insurance premium tax credit
D. None of the above
A. Bob is not eligible for the health insurance premium tax credit because he files a married-separate return
NOTES:
Generally, taxpayers may be eligible for the health insurance premium tax credit if the taxpayer:
1. purchases coverage through the Marketplace;
2. has household income that falls within a specified range;
3. is not able to get affordable coverage through an eligible employer plan providing minimum value;
4. is not eligible for coverage through a government program (such as Medicaid, Medicare, etc.);
5. does not file a married-separate return; and
6. cannot be claimed as a dependent by another person.
Bob meets all of these requirements except for (5) because he files a married-separate return.
Obtaining insurance through the Marketplace exchange is one of the eligibility requirements.
63
Which of the following statements is NOT true regarding tax benefits for education?
A. The American Opportunity credit may be claimed for tuition expenses incurred in the first 4 years of post-secondary education.
B. The dollar limitations for the American Opportunity credit are calculated on a per student basis.
C. The Lifetime Learning Credit is allowed for tuition paid for graduate program studies.
D. Room and board are qualifying expenses for the American Opportunity Credit.
D. Room and board are qualifying expenses for the American Opportunity Credit.
NOTES:
The American Opportunity credit is calculated per student (and not per return like the Lifetime Learning credit). The Lifetime Learning credit covers ALL post-secondary education as well as courses to acquire or improve job skills. Room and board do not qualify as educational expenses for either the American Opportunity or Lifetime Learning credits.
64
What is the minimum number of courses that must be taken to be eligible for the Lifetime Learning Credit?
A. One
B. Two
C. Three
D. Five
A. One
NOTES:
For purposes of the Lifetime Learning Credit, an eligible student is a student who was enrolled at least one course at an eligible educational institution.
65
Floyd and Lucy tried adopting a child who is a US citizen. They paid $10,000 in qualified adoption expenses in 2019. The adoption never became final. How much of the adoption credit can Floyd and Lucy take?
A. $5,000 – unfinalized adoptions of US citizen children qualify for a 50% credit
B. $14,080 – the adoption credit maximum
C. $10,000 – the amount of expenses paid – even though the adoption never finalized
D. $0 – because the adoption never finalized
C. $10,000 – the amount of expenses paid – even though the adoption never finalized
NOTES:
If the eligible child is a U.S. citizen or resident, a taxpayer may claim the adoption credit even if the adoption never became final. A taxpayer may claim expenses paid prior to finalization in the year following the year of payment. The credit is up to $14,080 of qualified adoption expenses paid in 2019.
NOTE: A nonrefundable credit is subtracted from your tax. It may reduce your tax to zero. If the credit is more than your tax, the excess is not refunded to you. Because the adoption credit is not refundable, you may be able to carry forward any unused credit amounts to future tax years.
66
Margaret Michelson began the process of adopting Sahara in 20X1. She incurred over $20,000 in qualified expenses, including airfare to Sahara's native country of Kenya. Margaret did not finalize the adoption until 20X2. She did not incur any expenses in 20X2. When can Margaret claim the credit for her qualified adoption expenses?
A. She can claim the credit in 20X1 since that is when she incurs the expenses
B. She can claim the credit in 20X1 only if she files Form 8839 along with a court document ordering or approving the placement of the child for legal adoption
C. Since Sahara was not a U.S. citizen, Margaret cannot claim the credit until the adoption becomes final in 20X2
D. She cannot claim the credit because Sahara is not a U.S. citizen
C. Since Sahara was not a U.S. citizen, Margaret cannot claim the credit until the adoption becomes final in 20X2
NOTES:
If the eligible child is not a U.S. citizen or resident, a taxpayer cannot take the adoption credit or exclusion unless the adoption becomes final. Since Sahara was not a U.S. citizen, Margaret cannot claim the credit until the adoption becomes final in 20X2.
67
Daniel and Lindsey have recently adopted a little boy from Ethiopia. They incurred various expenses throughout this adoption process. Which of the following costs is not a qualified adoption expense?
A. Adoption fees related to their new son
B. Costs relating to the formal adoption of Daniel's step-son from Lindsey's previous marriage.
C. Travel expenses (including meals and lodging) while Daniel and Lindsey were away from home
D. Court costs involved in the adoption process
B. Costs relating to the formal adoption of Daniel's step-son from Lindsey's previous marriage.
NOTES:
Expenses incurred to adopt a spouse's child are not qualified adoption expenses.
Qualified adoption expenses are reasonable and necessary expenses directly related to, and whose principal purpose is for, the legal adoption of an eligible child. These expenses include:
- Adoption fees
- Court costs
- Attorney fees
- Travel expenses (including meals and lodging) while away from home, and
- Re-adoption expenses to adopt a foreign child.
Nonqualified expenses:
- That violate state or federal law
- For carrying out any surrogate parenting arrangement
- For the adoption of spouse's child
- For which taxpayer received funds under any federal, state, or local program
- Allowed as a credit or deduction under any other federal income tax rule
- Paid or reimbursed by employer or any other person or organization
- Paid before 1997
68
Many individual tax credits are nonrefundable. That term means that the credit cannot be larger than the amount of income tax. If a taxpayer has income taxes of $200 but a Lifetime Learning Credit of $290, the extra $90 does not generate a refund to the taxpayer. Which of the following income tax credits is refundable? In other words, it can generate a refund even if no tax payments have been made by the taxpayer.
A. Foreign tax credit
B. Credit for adoption expenses
C. Earned income credit
D. Child and dependent care credit
C. Earned income credit
NOTES:
Under normal circumstances, income tax credits are nonrefundable. The taxpayer can use them to reduce income taxes to zero but cannot use them to create credits. One major exception to that rule does exist—the earned income credit. This credit is designed to provide benefit to low-income workers who have wages or salaries (and, in most cases, a qualifying child). Because the purpose is to benefit workers with low income, the earned income credit was designed to be refundable; the benefit is available regardless of the amount of income tax that is owed.
Also, the American opportunity credit is 40% refundable.
69
Which of the following conditions would NOT prevent an individual from claiming the earned income credit for the year 2020?
A. Married filing separately filing status
b. Being a qualifying child of another person
C. Age 25
D. Investment income of $3,800
C. Age 25
NOTES:
You cannot claim the earned income credit (EIC) if you file as MFS or are the qualifying child of another person. In addition, investment income in excess of $3,650 for 2020 will prevent a taxpayer from claiming the EIC.
An individual must be at least age 25 but under 65 at the end of the year to claim the EIC if they do not have a qualifying child.
70
Peter and his son lived with his mother all year in 2019. Peter is 25 years old, and his only income was $9,300 from a part-time job. His mother's adjusted gross income was $15,000 and all her income was from her job. Which of the following is NOT correct?
A. Peter's son meets the conditions to be a qualifying child for purposes of the earned income credit for both Peter and his mother.
B. Peter may claim the earned income credit.
C. Peter is a qualifying child for his mother.
D. The person with the higher AGI may be able to claim the earned income credit.
C. Peter is a qualifying child for his mother.
NOTES:
This question is looking for the only incorrect statement. Peter is not a qualifying child for his mother because he is over the age of 24 and is not permanently and totally disabled.
Peter's son satisfies the relationship, age, and residency test for both Peter and his mother.
Peter can choose to claim his son for the earned income credit (EIC) or let his mom claim the EIC.
If a parent can claim the child as a qualifying child but no parent claims the child, the child is treated as the qualifying child of the person who had the highest AGI for the year, but only if that person's AGI is higher than the highest AGI of any of the child's parents who can claim the child.
71
Which of the following is NOT a test to determine if a child is a qualifying child for the Earned Income Tax Credit (EITC)?
A. Relationship
B. Age
C. Residency
D. Support
D. Support
NOTES:
For EIC purposes, a qualifying child must meet three tests:
1. Relationship - Must be a son, daughter, foster child, adopted child, brother, sister, half-brother, half-sister, step-brother, step-sister, or a descendant of any of them.
2. Age - must be younger than the taxpayer and under age 19, a full-time student under 24, or any age if permanently disabled, and
3. Residency - Must live with the taxpayer in the US more than half the year.
72
Which of the following is NOT a requirement for a qualifying child for purposes of the Child Tax Credit?
A. The child is claimed as your dependent
B. The child was under age 19 at the end of the year or under age 24 at the end of the year and was a student
C. The child is your son, daughter, adopted child, grandchild, stepchild, or foster child
D. The child is a citizen, national or resident of the United States
B. The child was under age 19 at the end of the year or under age 24 at the end of the year and was a student
NOTES:
The test listed under B is a test for claiming an individual as a dependent and for determining if you have a qualifying child for the earned income tax credit. A qualifying child for purposes of the child tax credit is a child who:
- Is the taxpayer's son, daughter, stepchild, foster child, adopted child, brother, sister, stepbrother, stepsister, or a descendant of any of them (a grandchild, niece, or nephew)
- Was under age 17 at the end the tax year and younger than the taxpayer (and spouse)
- Did not provide over half of his own support for the year
- Lived with the taxpayer for more than half of the year
- Is claimed as a dependent on the return
- Is a U.S. citizen, a U.S. national, or a resident of the United States
73
Kim files head of household and has adjusted gross income of $80,500, no foreign source income and a tax before credits of more than $10,000. Her dependents include her son Richard, who turned 17 in 2019, her daughter, Sheila, who turned 12 and her niece, Andrea, who turned 6. All of the children are U. S. citizens and lived with her all year. What is the amount of child tax credit (including any credit for other dependents) she may claim on her 2019 tax return?
A. $2,000
B. $4,000
C. $4,500
D. $6,000
C. $4,500
NOTES:
Effective for tax years 2018 through 2025, the TCJA temporarily increases the child tax credit to $2,000 per qualifying child.
A child must be under the age of 17 at the end of the tax year to qualify for the $2,000 child tax credit per qualifying child.
Also, the TCJA temporarily enhances the child tax credit for 2018 through 2025 by allowing an additional $500 nonrefundable credit for qualifying dependents other than qualifying children. The new provision generally retains the present-law definition of dependent. The $500 nonrefundable credit may be claimed only with respect to any dependent who is a citizen, national or resident of the United States.
Sheila and Andrea are qualifying children (younger than age 17); Richard is not because he turned 17 during 2019.
Sheila and Andrea are qualifying children for the $2,000 child tax credit; Richard qualifies for the $500 child tax credit for other qualifying dependents.
The total child tax credit (including credit for other dependents) Kim is allowed is $4,500.
74
For purposes of claiming the Child Tax Credit, which of the following is a requirement for a qualifying child:
A. Child cannot be adopted.
B. Child must be a resident of the United States, Canada or Mexico.
C. Child must be under 13 years of age.
D. Child must be claimed as a dependent.
D. Child must be claimed as a dependent.
NOTES:
For purposes of claiming the child tax credit (CTC) or additional child tax credit (ACTC), a qualifying child must be claimed as a dependent on the taxpayer's return. In addition, the following requirements must be met:
- A qualifying child can be a taxpayer's son, daughter, stepchild, adopted child, brother, sister, stepbrother, stepsister, or a descendant of any of them (a grandchild, niece, or nephew) or an eligible foster child. An adopted child is always treated as your own child. An adopted child includes a child lawfully placed with you for legal adoption.
- A qualifying child must be a U.S. citizen, a U.S. national, or a U.S. resident alien.
- A qualifying child must be under the age of 17 at the end of the tax year.
- The qualifying child must have the required SSN.
For the Child and Dependent Care Credit the qualifying child must be under age 13. It is easy to get these two credits confused.
75
What is the Earned Income Credit and who is eligibe?
The EIC (Earned Income Credit) is:
- a refundable credit
- available to people eligible to work in the US, with Earned Income, and an AGI that is below a certain level.
- they also must have less than $3600 of investment income.
76
The Maximum Adjusted Gross Income (AGI) to qualify for EIC is determined by:
The maximum AGI to be eligible for the EIC depends on filing status and number of qualifying children.
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2019 examples
MFJ Max Income:
0 children - $21,370
1 child - $46,884
2 children - 52,493
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All other filing statuses:
0 children - $15,570
1 child - $41,094
2 children - 46,703
77
EIC Taxpayer Requirements
The taxpayer, or the taxpayer spouse, and all others listed on Schedule EIC, must have a Social Security number that is valid for employment
The taxpayer must have earned income from working for someone else or owning or running a farm or business
The taxpayer’s filing status cannot be MFS
The taxpayer must be a U.S. citizen or resident alien all year
The taxpayer cannot be a qualifying child of another person
The taxpayer cannot file Form 2555 or 2555EZ
Have a qualifying child, or If no qualifying child, they must:
- be age 25 but under 65 at end of the year,
- live in the U.S. for more than half the year, and
- not qualify as a dependent of another person.
78
EIC - Qualifying Child
- Be related by birth or adoption
- Have 50% of his/her residence supplied by the taxpayer
- Must be under 19, or under 24 if a student or permanently disabled
79
Amount of the EIC based on number of children
The amount of the EIC is increased for individuals having at least one qualifying child.
0 - $529
1 - $3,526
2 - $5,828
3+ - $6,557
80
Disallowance penalties of the EIC
If the denial of the EIC is because of taxpayer error due to reckless or intentional disregard of the rules, the taxpayer cannot claim the EIC for the next two years.
If the error is due to fraud, the taxpayer cannot claim the EIC for the next 10 years.
