M3 Tax Computation and Credits

Question 1

MCQ-15367
Which of the following personal tax credits can offset tax liability but cannot result in a refund to the taxpayer if the amount of the credit exceeds the taxpayerʹs tax liability?

Answer 1

Lifetime learning credit

The lifetime learning credit is an education credit that can offset an individual taxpayerʹs tax liability but does not result in a refund if the credit amount is more than the taxpayerʹs tax liability.

Question 2

MCQ-04887
Which of the following is not a refundable tax credit?

Answer 2

Retirement savings contribution credit.

The retirement savings contribution credit is a non-refundable credit. The EIC and child tax credit could result in a refunded amount beyond the actual tax liability, depending upon
the taxpayer’s income levels. In addition, if excess Social Security is paid, the taxpayer can receive a refund of those amounts regardless of the income tax liability being reduced to zero.

Question 3

MCQ-15615
Which of the following statements about the child and dependent care credit is correct?

Answer 3

The credit is available for the cost of the care of a disabled spouse.

The expenses for care of a spouse who is disabled and unable to take care of himself or herself are eligible for the credit, up to a maximum expenditure of $3,000.

Question 4

MCQ-15616
Frank and Mary Wood have 2 children, Becky, age 10, and Matt, age 14. The Woods incur expenses of $5,000 for after-school care for each child. Their only income is from wages. Frank’s wages are $60,000, and Mary’s wages are $2,500. What amount of Child and Dependent Care Credit may the Woods claim on their joint tax return?

Answer 4

$500

First, determine the eligible expenses. Only expenses for Becky will qualify because Matt is not under 13 years of age. Of the $10,000 spent, only $5,000 will qualify. The maximum eligible expenses for one dependent is $3,000. The eligible expenses are also limited to the lowest earned income of either spouse. That would be Mary’s $2,500. Because of Frank and Mary’s combined income level, the credit rate of 20 percent applies. The credit is 20 percent of $2,500, or $500.

Question 5

MCQ-11783
Mr. and Mrs. Sloan incurred the following expenses during the year when they adopted a child:
Child’s medical expenses $5,000
Legal fees 8,000
Agency fee 3,000

Without regard to the limitation of the credit, what amount of the above expenses are qualifying expenses for the adoption credit?

Answer 5

$11,000

The legal fees and agency fee would be qualifying expenses for the tax credit (medical expenses do not qualify).

Question 6

MCQ-15368
Max, a 19-year-old single taxpayer, works part time and goes to school part time. Maxʹs adjusted gross income (AGI) for the current year is $30,000. He made a $3,000 contribution to a Roth individual retirement account (IRA). Which of the following is a true statement about Maxʹs retirement savings contribution credit for the current year?

Answer 6

The credit is only available for $2,000 of Maxʹs contributions to a Roth IRA.

Only $2,000 of Maxʹs $3,000 Roth IRA contribution is eligible for the credit. The retirement savings contribution credit is a nonrefundable credit for contributions of up to $2,000 to either a traditional or Roth IRA by an eligible taxpayer.

Question 7

MCQ-04885
For the current year, Seth and Sheila intend to file a joint return. Seth expects to earn $35,000 in wages from his teaching job. He is covered by the university’s pension plan. Sheila is a volunteer at their son, Stephen’s, school. In addition to Seth’s income, they received $500 in interest income and
$50 in prize winnings from a local radio contest. Each would like to make a deductible contribution to a traditional individual retirement account for the current year. They also believe they will be eligible to claim a tax credit for these contributions. Which of the following is correct?
- Deductible Contribution
- Claim Credit

Answer 7

Yes; Yes

Although Seth is covered by a plan, the second factor (the income limitation) is not exceeded, thus, both Seth’s and Sheila’s contributions should be deductible. In addition, both
should qualify for a portion of the credit

Question 8

MCQ-05529
How may taxes paid by an individual to a foreign country be treated?

Answer 8

As a credit against federal income taxes due

A taxpayer may claim a credit against federal income taxes due for foreign income taxes paid to a foreign country or a U.S. possession. There is a limitation on the amount of the credit an individual can obtain. In lieu of this credit, an individual might find it better to deduct the taxes as an itemized deduction instead. Note that the only correct response to this question is choice “B”; however, also note that the other option for treating the taxes paid to the foreign country is not included as an answer option.

Question 9

MCQ-15617
The Tiller family has a modified adjusted gross income of $50,000. The Tillers have two children, ages 12 and 13, who qualify as dependents. All of the Tillers’ income is from wages and their tax liability is $1,000 before the child tax credit. What is the amount of the child tax credit on the Tillers’ married filing jointly income tax return for the current year?

Answer 9

$4,000

The Tillers may claim a child tax credit of $2,000 for each of the children since the children are both under age 17. The credit is partially refundable and is not limited to the amount of their tax liability. The Tillers’ AGI is below the AGI phaseout thresholds so they are entitled to the full child tax credit of $4,000.

Question 10

MCQ-15618
Madison and Nick Koz have two children, ages 8 and 10. Both children meet the definition of qualifying child. The Koz family has adjusted gross income of $300,000. What is the amount of the child tax credit on the couple’s current year income tax return?

Answer 10

$4,000

The full child tax credit is available for MFJ taxpayers with AGI up to $400,000. The eligible children must be under the age of 17. The two Koz children qualify for the child tax credit of $2,000 each ($4,000 total).

Question 11

MCQ-13097
Which of the following credits can result in a refund even if the individual had no income tax liability?

Answer 11

Earned income credit

The earned income credit is refundable. The lifetime learning credit, elderly and/or permanently disabled credit, and retirement savings contribution are not refundable credits.

Question 12

MCQ-02084
Krete, an unmarried taxpayer with income exclusively from wages, filed her initial income tax return for Year 8. By December 31, Year 8, Krete’s employer had withheld $16,000 in federal income taxes and Krete had made no estimated tax payments. On April 15, Year 9, Krete timely filed an extension
request to file her individual tax return and paid $300 of additional taxes. Krete’s Year 8 income tax liability was $16,500 when she timely filed her return on April 30, Year 9, and paid the remaining income tax liability balance.
What amount would be subject to the penalty for the underpayment of estimated taxes?

Answer 12

$0

Provided the taxes due after withholdings were not over $1,000, there is no penalty for underpayment of estimated taxes. Note that there would be a failure to pay penalty on the
$200 that was not paid until April 30, but this is a separate penalty.

Question 13

MCQ-02098
Chris Baker’s adjusted gross income on her current year tax return was $160,000. The amount covered a 12-month period. For the next tax year, Baker may avoid the penalty for the underpayment of estimated tax if the timely estimated tax payments equal the required annual amount of:

I. 90% of the tax on the return for the current year paid in four equal installments.
II. 110% of prior year’s tax liability paid in four equal installments.

Answer 13

Both I and II

I. Payment of 90% of the tax on the return for the current year avoids the penalty for underpayment of estimated tax.
II. Generally, payment of 110% of the prior year’s tax liability avoids the penalty for underpayment of estimated tax when the taxpayer’s AGI from the prior year exceeds $150,000. If the taxpayer’s AGI is $150,000 or less, payment of 100% of the prior year’s tax liability avoids the penalty for underpayment of estimated tax.

Note: Payment of the lesser of the two above will provide “safe harbor” to the taxpayer.

Question 14

MCQ-06479
Dawn White’s adjusted gross income on her Year 1 tax return was $100,000. The amount covered a 12-month period. For the Year 2 tax year, the minimum payments required from White to avoid the penalty for the underpayment of estimated tax is:

Answer 14

90% of the current tax on the return for the current year paid in four equal installments or 100% of the prior year’s tax liability paid in four equal installments.

The requirement is 90% of the current tax on the return for the current year paid in four equal installments or 100% of the prior year’s tax liability paid in four equal installments.

Question 15

MCQ-02179
An employee who has had Social Security tax withheld in an amount greater than the maximum for a particular year may claim:

Answer 15

The excess as a credit against income tax, if that excess resulted from correct withholding by two or more employers.

An employee who has had Social Security tax withheld in an amount greater than the maximum for a particular year may claim the excess as a credit ag

Question 16

MCQ-08904
An individual taxpayer’s tax return included the following:

Regular tax before tax credits $ 5,000
Current year estimated tax payments 6,000
Amount paid with current year extension 1,000
Federal income tax withheld 1,000

What amount, if any, is the taxpayer’s overpayment?

Answer 16

$3,000

The total tax payments applied against the $5,000 current year regular tax liability is $8,000, which includes $6,000 current year estimated tax payments, $1,000 current year withholding, and $1,000 paid with current year extension. Overpayment = $5,000 current year tax liability − $8,000 tax payments = $3,000.

Question 17

MCQ-06884
Sam’s Year 2 taxable income was $175,000 with a corresponding tax liability of $30,000. His Year 2 adjusted gross income was $200,000. For Year 3, Sam expects taxable income of $250,000 and a tax liability of $50,000. In order to avoid a penalty for underpayment of estimated tax, what is the minimum amount of Year 3 estimated tax payments that Sam can make?

Answer 17

$33,000

To avoid penalties, a taxpayer who owes $1,000 or more in tax payments after withholdings will need to have paid in the lesser of:

90% of the current year’s tax ($50,000 x 90%) = $45,000, or
100% of the previous year’s tax ($30,000 x 100%) = $30,000

However, if the taxpayer had adjusted gross income in excess of $150,000 in the prior year, 110% of the prior year’s tax liability is used to compute the safe harbor for estimated payments. (Previous year’s tax $30,000 x 110% = $33,000).

Question 18

MCQ-14931
Which of the following can be subject to the net investment income tax?

Answer 18

An individual who is a resident of the United States.

An individual who is a U.S. resident may be subject to the 3.8 percent net investment income tax on net investment income above statutory AGI threshold amounts.

Question 19

MCQ-14735
Which of the following statements is true regarding the net investment income (NII) tax?

Answer 19

The tax is 3.8 percent of the lesser of (1) the taxpayer’s net investment income; or (2) the excess of modified AGI over a threshold amount.

The net investment income (NII) tax is 3.8 percent of the lesser of (1) the taxpayer’s net investment income; or (2) the excess of modified AGI over a threshold amount.

Question 20

MCQ-15619
The Welles family has three children. Which of the children listed below would be subject to the “kiddie tax”?

Answer 20

Wilson: 20 years old, full-time college student, fully supported by his parents

The net unearned income of a dependent child under 18 years of age (or a child age 18–24 who does not provide over half of his or her own support and is a full-time student) is taxed at the parents’ marginal rate under the “kiddie tax” rules. Because Wilson is under the age of 24 and is a full-time college student who does not support himself, his net unearned income over the allowable threshold is taxed at his parents’ marginal rate. If Wilson’s unearned income is between
$1,150 and $11,500 and consists solely of interest, dividends, and capital gain distributions, his parents can elect to include the income on the parents’ return, rather than file a separate income tax return for Wilson.

Question 21

MCQ-15620
Chris, age 5, has $3,000 of interest income and no earned income this year. Assuming the current applicable standard deduction for dependents is $1,150, how much of Chris’ income will be taxed at his parents’ marginal rate?

Answer 21

$700

The net unearned income of a dependent child under age 18 is taxed at the parents’ marginal rate under the “kiddie tax” rules. Net unearned income is calculated by taking the
child’s unearned income and reducing it by the dependent child’s allowable standard deduction of $1,150 plus an additional $1,150 (which is taxed at the child’s marginal tax rate). Chris’ net unearned income taxed at his parents’ marginal rate is $700 ($3,000 interest income – $1,150 standard deduction – $1,150 taxed at child’s marginal rate).

Question 22

MCQ-15621
A 22-year-old full-time student earned $11,000 in salary and received $9,000 in interest from corporate bonds. The bonds were a gift from the student’s grandparents. The student’s parents pay more than half of the student’s support, including $25,000 in tuition. Which of the following statements is correct regarding the student’s current year income tax?

Answer 22

A portion of the student’s interest income and no other income will be subject to the “kiddie tax.”

Only a portion of the student’s interest income is subject to the kiddie tax. Net unearned income of a dependent child is taxed at the parent’s marginal rate (“kiddie tax”). Net unearned income is unearned income minus $2,300.

Question 23

MCQ-15622
Andre Davis is 17 years old and lives at home with his parents. He earned $5,000 in the current tax year mowing lawns. Andre also received $3,000 in interest on a corporate bond that his grandmother gave him. At what marginal tax rate is Andre’s $8,000 of income taxed?

Answer 23

$7,300 less the standard deduction is taxed at Andre’s marginal rate. $700 is taxed at his parents’ marginal rate.

The net unearned income of a dependent child under 18 years of age (or a child age 18–24 who does not provide over half of his or her own support and is a full-time student) is taxed at the parents’ marginal rate. The net unearned income is calculated by taking the child’s net unearned income (in this case, interest) and subtracting the allowable standard deduction for dependents of $1,150 plus an additional $1,150 taxed at the child’s marginal rate (2022). Andre’s net unearned income is $700 ($3,000 – $2,300). Therefore, $700 is taxed at his parents’ marginal rate and $7,300 (less Andre’s standard deduction) is taxed at Andre’s marginal tax rate. Note that
because Andre has both earned income and unearned income, his standard deduction is the greater of: (1) $1,150; or (2) earned income + $400 ($5,000 + $400 = $5,400). All of the income is reported on Andre’s income tax return.