R2-2 Flashcards
Which of the following credits can result in a refund even if the individual had no income tax liability?
a.
Child and dependent care credit.
b.
Earned income credit.
c.
Elderly and permanently and totally disabled credit.
d.
Credit for prior year minimum tax.
Choice “b” is correct. The earned income credit is refundable. Eligible taxpayers can get advance payments from their employers because the credit is assured.
Mr. and Mrs. Sloan incurred the following expenses during the year when they adopted a child:
Child’s medical expenses
$ 5,000
Legal expenses
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?
a.
$11,000
b.
$16,000
c.
$5,000
d.
$10,160
Choice “a” is correct. The adoption fees would be qualifying expenses for the tax credit (medical expenses do not qualify).
Choice “b” is incorrect. $5,000 of the $16,000 of total expenses are not eligible.
Choice “d” is incorrect. The expenses ($8,000 + $3,000) are eligible.
Choice “c” is incorrect. Medical expenses are not eligible for the credit.
How may taxes paid by an individual to a foreign country be treated?
a.
As an itemized deduction subject to the 2% floor.
b.
As a nondeductible expense.
c.
As a credit against federal income taxes due.
d.
As an adjustment to gross income.
Choice “c” is correct. 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 (NOT subject to the 2% floor) instead. Note that the only correct response to this question is choice “c”; however, also note that the other option for treating the taxes paid to the foreign country is not included as an answer option.
Choice “a” is incorrect. Although taxes paid by an individual to a foreign country are allowable itemized deductions, they are NOT subject to the 2% floor.
Choice “d” is incorrect. An adjustment is not allowed for taxes paid by an individual to a foreign country. 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. In lieu of this credit, an individual might find it better to deduct the taxes as an itemized deduction (NOT subject to the 2% floor) instead.
Choice “b” is incorrect. 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. In lieu of this credit, an individual might find it better to deduct the taxes as an itemized deduction (NOT subject to the 2% floor) instead.
Which of the following statements about the child and dependent care credit is correct?
a.
The child must be under the age of 18 years.
b.
The credit is nonrefundable.
c.
The maximum credit is $600.
d.
The child must be a direct descendant of the taxpayer.
Choice “b” is correct. The child and dependent care credit is nonrefundable. The only refundable credits are the child tax credit (which is a different credit with a similar name), the earned income credit, withholding taxes, portions of the Hope Scholarship credit, and excess Social Security taxes paid. The child and dependent care credit is a “personal” tax credit.
Choice “a” is incorrect. The child must be under age 13, not age 18, to be a qualifying child and for there to be a credit.
Choice “d” is incorrect. The child need not be a direct descendant of the taxpayer for there to be a credit. To be a qualifying child, the child must merely be a dependent of the taxpayer.
Choice “c” is incorrect. The maximum child and dependent care credit is 35% of eligible expenses, with a phase out for AGI over $15,000. There is no pure $600 limit.
Frank and Mary Wood have 2 children, Becky, age 10, and Matt, age 14. The Woods incur expenses of $4,000 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?
a.
$500
b.
$1,200
c.
$1,600
d.
$800
Choice “a” is correct. First of all we need to determine the eligible expenses. Only expenses for Becky will qualify because Matt is not under 13 years of age. So of the $8,000 spent, only $4,000 will qualify. The maximum eligible for 1 dependent, though, is $3,000. Then it is further limited because it is limited to the lowest earned income of either spouse. That would be Mary’s $2,500. Due to their combined income level, they are in the 20% credit range. The credit is 20% of $2,500, or $500.
Choices “c”, “d”, and “b” are incorrect, per the above explanation.
Which of the following credits can result in a refund even if the individual had noincome tax liability?
a.
Earned Income Credit.
b.
Child and Dependent Care Credit.
c.
Adoption Credit.
d.
Credit for the Elderly or Permanently Disabled.
Choice “a” is correct. The Earned Income Credit is refundable. The other credits listed are not refundable.
Note: The Child Tax Credit (not listed) can be refundable in certain circumstances. Do not confuse this with the Child and Dependent Care credit, which is not refundable.
Choices “b”, “c”, and “d” are incorrect, per the above explanation
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 qualifying child is a 17-year-old grandchild.
d.
The taxpayer’s five-year-old child lived in the taxpayer’s home for only eight months.
Rules: Earned income tax credit is a refundable tax credit. It is designed to encourage low-income workers (i.e., those with earned income) to offset the burden of U.S. tax. 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 over age 25 and less than 65 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 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 rules, the filing status of married filing separately disqualifies a taxpayer from claiming the earned income credit.
Choice “c” is incorrect. If the taxpayer’s qualifying child is a 17-year-old grandchild, the requirement of age and relation is satisfied, and the taxpayer may qualify to claim the EIC.
Choice “a” is incorrect. The taxpayer earning an income of $5,000 meets the earned low-income requirements; thus, it does not disqualify him or her from claiming the EIC.
Choice “d” is incorrect. The taxpayer’s five year old child lived in the taxpayer’s home for eight months. The above rules indicate that the otherwise qualifying child must live with the taxpayer for six or more months; thus, this fact does not disqualify the taxpayer from claiming the EIC.
Which of the following is not a refundable tax credit?
a.
Earned income credit.
b.
Retirement savings contribution credit.
c.
Excess social security paid.
d.
Child tax credit.
Choice “b” is correct. 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.
An employee who has had social security tax withheld in an amount greater than the maximum for a particular year, may claim:
a.
Such excess as either a credit or an itemized deduction, at the election of the employee, if that excess resulted from correct withholding by two or more employers.
b.
Reimbursement of such excess from his employers, if that excess resulted from correct withholding by two or more employers.
c.
The excess as a credit against income tax, if that excess resulted from correct withholding by two or more employers.
d.
The excess as a credit against income tax, if that excess was withheld by one employer.
Choice “c” is correct. 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 against income tax, if that excess resulted from correct withholding by two or more employers.
Choice “a” is incorrect. The excess resulting from the correct withholding by two or more employers may only be claimed as a credit against income tax.
Choice “b” is incorrect. The employee may not seek reimbursement of the excess if the excess resulted from correct withholding by two or more employers.
Choice “d” is incorrect. The employee may not claim the excess as a credit against income tax, if that excess was withheld by one employer. The employer must adjust the excess for the employee.
