R1 M7 - Tax Computation & Credit

Question 1

Answer 1

Question 2

What is tax credit?

Answer 2

Tax Credit reduce personal tax liability , dollar for dollar.

Question 3

What are two types of tax credit?

Answer 3

1) Nonrefundable personal tax credit

2) Refundable credits –> Reduces tax can create a refund

Question 4

Please give me a list of nonrefundable Personal Tax credit?

Answer 4

• Child and dependent care credit
• Elderly and Permanent disable credit
• Education Credits
  1) Lifetime Learning credits
  2) American Opportunity credit (60% nonrefundable)
• Retirement saving contribution credit
• Foreign tax credit
• Adoption Credit
• General Business credit

Question 5

Please give me a list of refundable credits

Answer 5

• Child tax credits ( refund is limited)
• Federal income tax withholding (Form W2)
• American opportunity credit (40% refundable)
• Excess social security

Question 6

Child & Dependent care credit –> 20 % to 35% of work-related expense
- Maximum allowable expense are:
1) $3,000 for 1 qualifying person
2) $6,000 for 2 or more qualifying persons

Answer 6

Who qualifies for Child & Dependent Care credit
1) Child under 13 years of age
2) Disabled person of any age who is dependent
3) Spouse is disabled

Question 7

Child & Dependent care credit:

Is applicable if the parents are working for married filing jointly to benefit from it (self-employed, salary, wages etc.)

Answer 7

What is Child & Dependent Care Credit expense?

• Nursing school
• Baby Sitting
• Day Care

It does not include elementary school.

Question 8

Answer 8

Question 9

Education Tax incentives

American opportunity Tax credit (AOTC)
- Qualified expense: Tuition, fees, course material (including books)
- Applicable for its first 4 years of post-secondary college education.

What is the maximum (AOTC) Credit?

Answer 9

Maximum (AOTC) Credit is $2,500 per student
1) 100% of the first $2,000 of qualified expense plus
2) 25% of the next $2,000 expense for the year

–> Yourself, Spouse and dependent.

Question 10

Lifetime Learning credit (LLC) is for just a student
- Available for unlimited number of years
- 20% of qualified expense up to $10,000

Answer 10

Qualified Expense
- Tuition and course fee
- Graduate level course
- Certain professional degree course
- Course to acquire or improve skills

Question 11

Coverdell Education Saving Account
- It has no limit on the number of beneficiaries

—> Saving account set for children qualified education expense
—> Maximum contribution per beneficiary is $2,000 per year
—> Beneficiary maybe a child under 18

It can be used in elementary, Middle School or College.

Answer 11

Sidenote: Don’t focus on the phase out.

Question 12

Nonrefundable Tax Credit:

Elderly and permanently disabled
-65 years and older or
- Under 65 and permanently disabled

Retirement Saving contributions credit
- Maximum contribution eligible for credit is $2,000

Foreign tax Credit
- Takes it as an itemized deduction or it can be used as a credit (nonrefundable)
- Carryover of excess (disallowed credit)
- Carried back 1 year
- Carried forward 10 years

General Business credit.

Answer 12

Refundable tax credit:

Child tax credit
- Under the age of 17
- Citizen, resident

Question 13

Earned Income is wages, salaries, tips, self-employment earning
- Does not include pension and annuity income

Question 14

The amount of taxes owed (excess of tax liability over withholding) is expected to be $1,000 or more. Then the IRS will examine the taxpayer’s withholding is less than the lesser of:
- 90% of the current year’s tax; or
- 100% of last year’s tax

Question 15

Failure to pay estimated tax (penalty)

Question 16

Net investment Tax –> 3.8%
- Interest, Dividend, Capital gains
- Rental and Royalty income
- Passive investor

Question 17

Which of the following disqualifies an individual from the earned income credit?

A.	The taxpayer has earned income of $5,000.

B.	The taxpayer has a filing status of married filing separately.

C.	The taxpayer's five-year-old child lived in the taxpayer's home for only eight months.

D.	The taxpayer's qualifying child is a 17-year-old grandchild.

Answer 17

Earned income tax credit is a refundable tax credit. A claimant can have one qualifying child or two or more qualifying children for this credit. There is a maximum credit available for this purpose. Further:

The taxpayer must meet certain earned low-income thresholds.
The taxpayer must not have more than the specified amount of disqualified income.
The taxpayer must be at least age 19 if there are no qualifying children.
If married, the taxpayer must generally file a joint return with his/her spouse (i.e., the married filing separate status disqualifies a taxpayer from claiming the earned income credit).
A qualifying child can be up to and including age 18 (or age 23 if a full-time student) at the end of the tax year, provided the child shared a residence with the taxpayer for 6 months or more.
The taxpayer must be related to the qualifying child (or children) through blood, marriage, or law.
The child must be either in the same generation or a later generation of the taxpayer.
A foster child qualifies if officially placed with the taxpayer by an agency.