Individual Taxation - Tax Credits

Question 1

Tax Credit

Answer 1

Amount TP is able to reduce “Tax Liability” $ for $ (value depends on Nature of Credit)

Question 2

Two of the most popular “legal” ways to reduce TP’s obligation to government:

Answer 2

Deductions and Exemptions - Reduce Regular Taxable Income

Tax Credits - Reduce the ACTUAL Amount of Taxes owed (Regular Income Tax Liability)

Question 3

Deduction reduction limited by individuals marginal tax rate

Answer 3

TP in 15% bracket would save .15 for every 1 dollar

Question 4

Tax Credit reduction not limited by individuals marginal tax rate

Answer 4

Tax Credit reduce tax liability 1 dollar for every 1 dollar;

Question 5

Two types of Tax Credits

Answer 5

Refundable

Non-Refundable

Question 6

Refundable Tax Credit

Answer 6

Most versatile
Subtracted from RIT dollar for dollar
CAN reduce tax liability below zero
TC more than tax liability, excess given back as refund

Question 7

Types Refundable Tax Credits

Answer 7

Types related to Children:

• Additional Child Tax Credit
• Education Credit
• Earned Income Credit

Types not related to Children:

• Health Coverage Tax Credit
• Small Business Health Care Tax Credit

Question 8

Non-Refundable Tax Credits

Answer 8

Not as versatile
Subtracted from RIT dollar for dollar
CAN’T reduce tax liability below zero
TC more than tax liability, excess not given back as refund

Question 9

Types of Non-Refundable Tax Credits

Answer 9

Types related to Children:

• Adoption Tax Credit
• Child Tax Credit

Types not related to Children:

• Foreign Tax Credit
• Mortgage Interest Tax Credit
• Savers Credit
• Credit for the Elderly and Disabled

Question 10

EIC

Answer 10

• TP must file a tax return
• Age 25-64
• Not claimed as another’s dependent
• Married couples must file MFJ
• Investment income below $3,000
• TP has earned income from working from someone else, owning business, farming
• Apply % to Earned Income up to maximum amount
• Maximum amount based on number of children
• Phase out exists
• Refundable Credit

Question 11

Education Credit Types

Answer 11

Hope Credit (now American Opp. Tax Credit)

Lifetime Learning Credit

Question 12

Hope / American Opp. Tax Credit

Answer 12

Applies to TP, Spouse or Dependents
Reduced by Scholarships
Used for Qualified Expenses (tuition, fees, books)
Applies to first 4 years of post-secondary (college)
Max Credit $2500 per STUDENT
50% of Full time Academic load
Degree required
40% of credit is refundable

Question 13

Lifetime Learning Credit

Answer 13

Applies to TP, Spouse or Dependents
Reduced by Scholarships
Used for Qualified Expenses (tuition, fees, books)
Applies years AFTER post-secondary
Max Credit $2000 per TAX PAYER
No 50% requirement
No Degree requirement
Non-refundable

Question 14

Child and Dependent Care Credit

Answer 14

TP must file return

Child less than 13

Based on Lesser of:
1 -Actual dependent care expenses

2 -Earned Income
*based on lower spouses EI

3 -$3,000 for care of 1 dependent
-$6,000 for care of multiple

Phase out based on AGI

Refundable

Question 15

Child Tax Credit

Answer 15

TP must File return

Child less than 17

$1000 per child

Phase out based on AGI

Generally Nonrefundable

Question 16

Adoption Credit

Answer 16

TP must file return

Child less than 18

Based on Lesser of:
1 -Adoption credit

2 -Adoption expense

• Covers Adoption Expenses (bc can’t deduct Adoption exp.)
• Not Medical Expenses
• max amount is allowed for Special needs child w/o regard to actual adoption expense

Phase out exists

Excess credit

• carried back 0 years
• carried forward 5 years

Generally Nonrefundable

Question 17

Foreign Tax Credit

Answer 17

Credit limited to LESSER of:

a. Foreign taxes paid
b. U.S. Tax x Foreign Taxable Income / World Wide Taxable Income

Excess Credit

a. Carried back 1 year
b. Carried forward 10 years
c. Only available if don’t claim Itemized Deduction (SCHEDULE. A) “no double dipping”

Question 18

Savers Credit

Answer 18

TP must file a tax return

Age 18

Not claimed as another’s dependent

Not a full time student

Max Credit – Single $1,000; MFJ $2,000

Encourages low income workers to make voluntary contributions to IRA and 401(k) plans