R1 M7 - Tax Computations & Credits

Question 1

Answer 1

Question 2

Lifetime credit has unlimited number of years –> 20% up to $10,000 max.

American opportunity is for four years–>maximum $2,500

Question 3

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 3

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.

Choice “B” is correct. Based on the above, the filing status of married filing separately disqualifies a taxpayer from claiming the earned income credit.

Question 4

Give me a list of credits that can result in a refund even if the individual had no income tax liability?

Answer 4

• Federal Income tax withheld (Form W-2)
• American opportunity credit (40% refundable)
• Child tax credit (refund is limited)
• Earned Income credit
• Excess Social Security tax paid

Question 5

Which of the following statements is false?

A.	If tax payments are withheld from payroll checks, regardless of the dollar amounts withheld at any particular time throughout the year, the payments are deemed to have been paid evenly throughout the year.

B.	If an individual files a tax return with a zero-tax liability in the prior year, the individual must pay in at least 90 percent of the current year's tax to avoid underpayment penalties, as the ability to use the 100 percent of prior year tax is lost.

C.	The Internal Revenue Service may waive the penalty for underpayment of taxes if the failure to pay was due to casualty, disaster, illness, or death of the taxpayer.

D.	If an individual fails to pay estimated taxes for a year, there is no underpayment penalty due under any circumstances if the balance of tax due at filing is less than $1,000.

Answer 5

Choice “B” is correct. The statement is false. If an individual files a tax return with a zero tax liability in the prior year, the individual is allowed to use the 100 percent of prior year’s tax rule (as the “lesser” of 90 percent of the current year’s tax or 100 percent of the prior year’s tax) to avoid underpayment penalties.

Choices “D”, “A”, and “C” are incorrect because they are true statements.