REG 35 - Tax Credits

Question 1

Which of the following statements is false with regard to the child and dependent care credit?
A. The caregiver cannot be a dependent relative or child of the taxpayer.
B. The credit percentage begins at 35% and phases out once AGI exceeds a certain threshold. As income increases the credit percentage is eventually reduced to zero.
C. The maximum amount of expense eligible for the credit is $3,000 ($6,000 if more than one individual qualifies for care).
D. A qualifying child or dependent under the age of 13 who lives with the taxpayer more than one-half of the tax year is a qualifying individual for purposes of claiming the credit.

Answer 1

B. The credit percentage begins at 35% if AGI is less than $15,000, and is reduced by 1% for each $2,000 increment (or part) in AGI above $15,000. The minimum dependent care credit is 20%. Therefore, this statement is false.

Question 2

Which of the following credits can result in a refund, even if the individual had no income tax liability?
A. Credit for prior year minimum tax.
B. Elderly and permanently and totally disabled credit.
C. Earned income credit.
D. Child and dependent care credit.

Answer 2

C. Certain tax credits can result in a refund, even if the individual had no income tax liability. Tax credits resulting in a refund are credits for earned income, tax withheld, excess social security tax withheld, and excise tax for certain nontaxable uses of fuels and light weight diesel vehicles.

Question 3

T/F: A taxpayer cannot be eligible for an earned income credit unless a dependent child resides in the taxpayer’s home.

Answer 3

False.
The credit is generated by earning income. The credit percentage increases if the taxpayer maintains a home with qualifying children, but not having a dependent child does not disqualify them from getting the earned income credit.

Question 4

T/F: The full child credit is available for married taxpayers with AGI of $110,000 or less, with a dependent child under the age of 17.

Answer 4

True

Question 5

T/F: In order for child care expenses to qualify for the dependent care credit, the taxpayer must be employed and earn at least as much as the amount of the expenses.

Answer 5

True

Question 6

The following information pertains to Wald Corp.’s operations:

Worldwide taxable income $300,000
U.S. source taxable income 180,000
U.S. income tax before foreign tax credit 96,000
Foreign source taxable income 120,000
Foreign income taxes paid on foreign source taxable income 39,000

What amount of foreign tax credit may Wald claim?
 A.   $28,800 
 B.   $36,600 
 C.   $38,400 
 D.   $39,000

Answer 6

C. The foreign tax credit is the lower of:
1) foreign tax paid ($39,000), or
2) U.S. tax x foreign taxable income / worldwide taxable income
$96,000 x $120,000 / $300,000 = $38,400

Question 7

Which of the following statements concerning tax credits is true?
A. The foreign tax credit is available for business entities, such as corporations, but not for individuals.
B. Unused general business credits are carried back two years and forward 20 years.
C. For the rehabilitation credit, expenditures to rehabilitate property placed in service before 1936 are eligible for a 20% credit.
D. The work opportunity tax credit is calculated on the amount of wages paid per eligible employee during the first year of employment. The maximum credit is $2,400 per eligible employee.

Answer 7

D. The work opportunity tax credit is 40% of the first $6,000 of wages per employee, so the maximum credit is $2,400.

Question 8

T/F: Excess foreign tax credits are eligible for a one-year carryback and ten-year carryforward.

Answer 8

True

Question 9

T/F: A general business credit cannot offset the taxpayer’s entire tax liability if the liability exceeds $25,000.

Answer 9

True

Question 10

T/F: In lieu of a foreign tax credit, a taxpayer can elect to exclude all income from foreign sources.

Answer 10

False.
In lieu of a foreign tax credit, a taxpayer can elect to mitigate foreign taxes by:
1. They can claim the foreign tax as an itemized deduction.
2. They can elect to exclude income earned (in excess of housing costs) while a bona fide resident in a foreign country. The exclusion is a maximum of $100,800 (2015) if the taxpayer is physically present in the foreign country for at least 330 days in any 12 consecutive months.

Question 11

T/F: The rehabilitation credit is granted for the expenses associated with rehabilitating disabled workers.

Answer 11

False.
A credit available under the general business credit.
A. The rehabilitation credit percentage depends upon the type of expenditure.
1. Expenditures to rehabilitate property placed in service before 1936 are eligible for a 10% credit.
2. Expenditures to rehabilitate certified historic structure are eligible for a 20% credit.

B. Qualifying expenditures are often used to adjust basis, and may be subject to recapture.

1. The adjusted basis of the property is reduced by the amount of credit.
2. Rehabilitation credit is recaptured if the building is held less than five years (the recapture rate is 20% per year).