Section 3: Deductions & Credits: 13: Individual Tax Credits

Question 1

Refundable Tax Credits
A refundable tax credit can reduce a taxpayer’s liability to zero and also generate a refund to the
taxpayer for the amount by which the credit exceeds the amount of tax he would otherwise owe.
Refundable tax credits include the following:

Answer 1

• Additional Child Tax Credit (ACTC)
• The Earned Income Tax Credit (EITC)
• Premium Tax Credit (related to the Affordable Care Act, covered later in chapter 14)
• American Opportunity Tax Credit (partially refundable)
• Credit for excess Social Security and RRTA tax withheld

Question 2

Child and Dependent Care Credit (CDCTC)

Answer 2

• NOT refundable
• Must be S, HOH, or MFJ
• Only okay for expenses that are work-related/dependent (cant claim expenses for date night babysitter)
• $3K for one dependent, $6K for 2+
• Dependent counts as
• A dependent child under the age of 13 (at the time the care was provided),
• A spouse who is physically or mentally disabled,
• Any other disabled dependent who is incapable of self-care,
• A disabled person that the taxpayer could claim as a dependent except the disabled person had
  gross income of $4,700 or more in 2023

Question 3

Child Tax Credit and the Additional Child Tax Credit (ACTC)

Answer 3

• The nonrefundable Child Tax Credit is $2,000 per qualifying child
• The refundable Additional Child Tax Credit is a maximum of $1,600 per qualifying child.
• The AGI phaseout for the Child Tax Credit is $200,000 ($400,000 for joint filers). If income
  exceeds the limit, the credit will decrease by $50 for every $1,000 that the AGI exceeds the limit.
• The child must have a valid Social Security number to qualify. ITINs and ATINs are not
  sufficient.

Question 4

Question ID: 94849835 (Topic: Child and Dependent Care Credit)
Daphne paid a $250 deposit with a preschool to reserve a place for her three-year-old child. Later, she changed jobs and was unable to send her child to that particular preschool, so she forfeited the deposit. She found another preschool and had $4,000 of qualifying daycare costs during the year. Which of the following is correct?

A. The forfeited deposit is not deductible.
B. The forfeited deposit is a deduction on Schedule A.
C. The forfeited deposit is deductible.
D. Daphne can deduct the deposit because she took her child to another preschool.

Answer 4

Correct Answer Explanation for A:

A forfeited deposit is not actually for the care of a qualifying person, so it cannot be deducted as a childcare expense and does not qualify for the Child and Dependent Care Credit. The Child and Dependent Care Credit is a credit for childcare expenses that allow taxpayers to work or to seek work. Examples of childcare expenses that do NOT qualify for this credit include:

Tuition costs for children in kindergarten and above.
Summer school or tutoring programs.
The cost of sending a child to an overnight camp (but day camps generally do qualify).
The cost of transportation not provided by a care provider.
A forfeited deposit to a daycare center (since it is not for care and therefore not a work-related expense).

Question 5

Question ID: 94849862 (Topic: Child and Dependent Care Credit)
Betty works full-time as an insurance agent. She is unmarried and has three minor children and an adult daughter, Serena, who is age 27 and completely disabled. Patty has the following childcare expenses during the year:

Daycare for her son Artair, 9 years old: $2,200.
Summer camp for her son Ethan, 15 years old: $600.
Daycare for her daughter Serena, 27 years old (disabled): $3,250.
Daycare for her son Jude, 13 years old: $1,200.
Based on this information, what is the total of her qualifying childcare expenses for determining the Child and Dependent Care Credit (before applying any limitations of the credit)?

A. $5,450
B. $6,650
C. $7,050
D. $4,200

Answer 5

Correct Answer Explanation for A:

Only the amounts paid for Artair and Serena ($2,200 + $3,250 = $5,450) are qualifying expenses for the Child and Dependent Care Credit. The amounts paid for Jude and Ethan do not qualify because both of those children are over the age of 13 (and not disabled). For this credit, a qualifying person is a dependent child age 12 or younger (UNDER the age of 13) when the care was provided, unless the qualifying person is disabled. Since Serena is disabled, the age limits do not apply to her. For the purposes of this credit, taxpayers can combine costs for multiple dependents.

Question 6

Question ID: 94849855 (Topic: Child and Dependent Care Credit)
Penelope, age 42, and James, age 58, are married and will file jointly. They have no dependents. Penelope’s husband, James, is permanently disabled and receives SSI (Supplemental Security Income). Penelope earns $48,000 per year as a speech therapist. James has an in-home caregiver a few days a week to help him while Penelope is at work. The caregiver for James was hired through an agency, and the total cost was $4,900 in 2023. Can they claim a credit for the cost of the caregiver for James?

A. No, the cost of the caregiver is a personal expense.
B. Yes, they can claim the Child Tax Credit on their joint return.
C. Yes, they can claim the Child and Dependent Care Credit on their joint return.
D. Yes, they can claim the Disabled Access Credit on their joint return.

Answer 6

Correct Answer Explanation for C:

Penelope and James can claim the Child and Dependent Care Credit on their joint return for the cost of James’ caregiver. The Child and Dependent Care Credit is a tax credit that is typically associated with the cost of daycare for minor children, but this credit also applies to the care expenses of other disabled dependents (such as dependent parents) as well as disabled spouses. The credit may be claimed by taxpayers who pay someone to take care of their qualifying person. In this scenario, James (the husband) is permanently disabled, and Penelope is working, so they can claim a credit for his care on their jointly-filed tax return.

Question 7

Question ID: 94850000 (Topic: Child Tax Credit and Credit for Other Dependents)
Paige and Santo are married and file jointly. They have four dependents, listed below:

Rosalie, who is Paige’s mother and age 62.
Oneta, who is Paige’s aunt. She is age 56 and disabled
Romeo, who is Santo’s brother, age 25 and a student
Ronnie, Paige’s nephew, who is 17. Ronnie has an ITIN, not an SSN
All the dependents live with Paige and Santos. None of the dependents have any taxable income, although Oneta and Rosalie both receive SSI. All the dependents have valid Social Security numbers, except for Ronnie, who has an ITIN. Based on this information, what is the maximum Other Dependent Credit (ODC) Santo and Paige can claim on their joint tax return?

A. $500
B. $2,000
C. $1,500
D. $1,000

Answer 7

Correct Answer Explanation for B:

The maximum ODC credit is $500 for each dependent, so Paige and Santos would qualify for $2,000 ($500 for each dependent). None of their dependents would qualify for the Child Tax Credit (they are all above the age limit for the CTC, except for Ronnie, but Ronnie doesn’t have a valid SSN, he only has an ITIN). The ODC can be claimed for:

Dependents of any age, including those who are age 18 or older.
Dependents who have Social Security numbers or individual taxpayer identification numbers (ITINs).
Dependent parents or other qualifying relatives supported by the taxpayer.
Dependents living with the taxpayer who aren’t related to the taxpayer.
The ODC credit begins to phase out for married couples filing a joint tax return at $400,000 ($200,000 for all other filing statuses). See an overview of the Credit for Other Dependents, or ODC.

Question 7

Question ID: 98939101 (Topic: Child Tax Credit and Credit for Other Dependents)
What is the age requirement for a child to be eligible for the Child Tax Credit (CTC) or Additional Child Tax Credit (ACTC)?

A. There is no age limit for the child if the child is disabled.
B. The child must be under the age of 17 at the end of the tax year.
C. The child must be under the age of 18 or under the age of 24 and a full-time student at the start of the tax year.
D. The child must be under the age of 19 at any point during the tax year.

Answer 7

Correct Answer Explanation for B:

In order to qualify for the Child Tax Credit or Additional Child Tax Credit, at the end of the tax year, the child must be under the applicable age limit (which is 17 in 2023). There are no exceptions.

Question 7

Question ID: 94849966 (Topic: Adoption Credits)
Bettie and Tony legally adopted a foster child with special needs on February 1, 2023. The child is a U.S. citizen. Their total out-of-pocket adoption expenses totaled $4,300, none of which were reimbursed. What is the maximum amount of her adoption credit?

A. $15,950
B. $4,300
C. $16,550
D. $2,000

Answer 7

Correct Answer Explanation for A:

For adoptions finalized in 2023, there is a federal adoption tax credit of up to $15,950 per child. Bettie and Tony adopted a child with special needs, which means that they can claim the full adoption credit, even though their actual expenses are much less. The adoption credit is not refundable, however. So if they cannot use up the entire credit in the current year, any excess of tax liability may be carried forward for up to five years.

Question 7

Question ID: 94850013 (Topic: Adoption Credits)
How many years can unused adoption credits be carried over?

A. 1 year
B. 10 years
C. 0 years (no carryover)
D. 5 years

Answer 7

Correct Answer Explanation for D:

The adoption credit is not refundable, but any amount the taxpayer cannot claim on the current year’s return can be carried over for up to five years.

Question 8

Question ID: 94849955 (Topic: Adoption Credits)
To claim the adoption credit, the taxpayer must file which form along with their tax return?

A. Form 8308
B. Form 8275
C. Form 8839
D. Form 8826

Answer 8

Correct Answer Explanation for C:

To claim the adoption credit, the taxpayer must file Form 8839, Qualified Adoption Expenses, along with their tax return.

Question 9

Question ID: 94849954 (Topic: Adoption Credits)
For the purposes of the adoption credit, which of the following would NOT qualify as a “special needs” child?

A. A foster child who is a naturalized U.S. citizen, and is now available for adoption in the U.S. foster care system as a “special needs” child.
B. A child that is a citizen of the United States, and the state has determined that the child will not be adoptable without assistance provided to the adoptive family.
C. A foreign child who is a citizen of China and has a severe disability. The child is available for adoption by a U.S. couple.
D. All of the above would be considered “special needs” children for the purpose of the adoption credit.

Answer 9

Correct Answer Explanation for C:

A foreign child with a disability would not qualify for the special-needs adoption credit. If a taxpayer adopts a U.S. child that a state has determined to have special needs, the taxpayer is eligible for the maximum amount of credit in the year the adoption is final. However, this does not apply to foreign adoptions.

Question 10

Question ID: 94849825 (Topic: Education Credits)
Eudora is age 27 and a full-time student in her sophomore year of college. During the year, Eudora paid $3,000 for tuition, $200 for required books, and $5,000 for room and board at her university. She is a degree candidate. To assist with these costs, she was awarded a $2,000 scholarship and a $4,000 student loan. She used the scholarship to offset her tuition costs. She is not required to pay the student loan until she graduates. What are her qualified education expenses for the year?

A. $8,200
B. $1,200
C. $3,200
D. $8,000

Answer 10

Correct Answer Explanation for B:

For purposes of the education credit, Eudora must first subtract the tax-free scholarship from her tuition and books. The $5,000 paid for room and board is not a qualifying expense. Unlike the scholarship, the student loan is not considered tax-free educational assistance, so it does not reduce the qualified expenses. Eudora is treated as having paid $1,200 of qualified expenses ([$3,000 tuition + $200 books] – $2,000 scholarship).

Question 11

Question ID: 94850005 (Topic: Education Credits)
Jerome is 32 and a full-time doctoral student. He spent $16,000 on college tuition this year. Because he is a graduate student, he is only eligible for the Lifetime Learning Credit. He is single and does not have any dependents. What is the maximum amount that he can claim as an education credit on his tax return?

A. $5,000
B. $2,500
C. $3,200
D. $2,000

Answer 11

Correct Answer Explanation for D:

Jerome can claim a maximum credit of $2,000 on his return. The amount of the credit is equal to 20% of the first $10,000 of qualified tuition and related expenses paid by the taxpayer. The lifetime learning credit is for qualified tuition and related expenses paid for eligible students enrolled in an eligible educational institution. This credit can help pay for undergraduate, graduate and professional degree courses — including courses to acquire or improve job skills. There is no limit on the number of years you can claim the credit. The credit is worth up to $2,000 per tax return.

Question 12

Question ID: 94816008 (Topic: Education Credits)
Stavros is a Turkish citizen with a green card. Stavros lives and works in the United States all year. His sister, Grenada, is 18 years of age and also a Turkish citizen. Grenada lives in Turkey and goes to school full-time as a college freshman. Stavros supports his sister financially and pays for her college tuition. Stavros provided more than 50 percent of Grenada’s total support. Can Stavros claim his sister as a dependent and claim the American Opportunity Tax Credit (AOTC) for the tuition that he paid on her behalf?

A. Stavros can claim his sister as a dependent but cannot claim the AOTC. He can claim the Lifetime Learning Credit instead.
B. Stavros can claim his sister as a dependent and claim the AOTC.
C. Stavros can claim his sister as a dependent but cannot claim the AOTC.
D. Stavros cannot claim his sister as a dependent.

Answer 12

Correct Answer Explanation for D:

Stavros cannot claim his sister as a dependent because she does not pass the “Citizen or Resident Test”. A taxpayer generally can’t claim a person as a dependent unless that person is a U.S. citizen, U.S. resident alien, U.S. national, or a resident of Canada or Mexico. Since Grenada does not pass the Citizen or Resident Test, he cannot claim her as a dependent.

Question 13

Question ID: 94849813 (Topic: Education Credits)
What is the maximum amount of the American Opportunity Tax Credit, and what is the refundable portion of the credit?

A. $2,500 per student. The entire amount is refundable.
B. The credit is worth up to $4,000 per eligible student. Up to 50% of the credit ($2,000) is refundable.
C. The credit is a maximum of $2,000 per return.
D. The credit is worth $2,500 per eligible student. Up to 40% of the credit (up to $1,000) is refundable.

.

Answer 13

Correct Answer Explanation for D:

The AOTC is a tax credit of up to $2,500 of the cost of tuition, fees and course materials paid during the taxable year. Also, up to 40% of the credit (up to $1,000) is refundable. This means you can get a refund even if you owe no tax. Taxpayers will receive a tax credit based on 100 percent of the first $2,000, plus 25 percent of the next $2,000, paid during the taxable year for tuition, fees and course materials. See Publication 970, Tax Benefits for Education, for information about the AOTC

Question 14

Question ID: 94849937 (Topic: Education Credits)
Jonathan and Jennifer are married and have three kids in college. Their joint AGI is $105,000. These are their three dependents and their respective college tuition expenses:

$5,000 for Cosima, age 21, a college sophomore working on her first bachelor’s degree.
$5,100 for Marico, age 19, a college freshman working on his first bachelor’s degree.
$9,000 for Kasha, age 23, a graduate student working on her first master’s degree.
Based on the above scenario, what is the maximum amount in American Opportunity Tax Credits (AOTC) Jonathan and Jennifer can claim on their joint tax return?

A. $2,500
B. $7,500
C. $5,000
D. $0 (Their AGI is too high to claim the AOTC)

Answer 14

Correct Answer Explanation for C:

Their joint AGI is within the threshold to take the full AOTC for the children who qualify. In 2023, a taxpayer’s modified adjusted gross income (MAGI) must be $80,000 or less, or $160,000 or less, for a married couple filing jointly to receive the full AOTC.

However, the most Jonathan and Jennifer can claim is $5,000 in AOTC credits ($2,500 for Cosima and $2,500 for Marico). The expenses for Kasha do not qualify for the American Opportunity Credit, because to be eligible for the American Opportunity Credit, a student must not have completed the first four years of post-secondary education as of the beginning of the taxable year. Since Kasha is working on her Master’s degree, those expenses would not be eligible for the AOTC, but they would be eligible for the Lifetime Learning Credit, if she otherwise qualifies. See Publication 970, Tax Benefits for Education, for information about the AOTC.

Question 15

Question ID: 94849913 (Topic: Earned Income Tax Credit)
Which of the following taxpayers may qualify for the Earned Income Tax Credit (EITC)?

A. Oleg, who is unmarried and earns $13,000 in self-employment income. He has an individual taxpayer identification number (ITIN).
B. Alex, who files head of household with one dependent child and has wages of $39,000. He files Form 2555.
C. Layla, who is 63, files Single, and has $14,000 in wage income and $2,000 in Social Security.
D. Fred, who is single and has wages of $5,000 and investment income of $12,000.

Answer 15

Correct Answer Explanation for C:

Layla, who is 63, files single, and has $14,000 in wage income and $2,000 in Social Security would likely be eligible for the EITC. None of the others would qualify for the credit. Fred has too much investment income to qualify. Alex cannot claim the credit because he files Form 2555, which is related to foreign income. Oleg cannot claim the EITC because he has an individual taxpayer identification number (ITIN), and a valid Social Security Number is required.

EITC credit amounts for tax year 2023
Dependents Claimed

Single, HOH, or QSS

MFJ

Zero

$17,640

$24,210

One

$46,560

$53,120

Two

$52,918

$59,478

Three

$56,838

$63,398

The maximum amount of credit in 2023:

No qualifying children: $600
1 qualifying child: $3,995
2 qualifying children: $6,604
3 or more qualifying children: $7,430
Basic Qualifying Rules for 2023
To qualify for the EITC, the taxpayer must:

Have worked and earned income
Have investment income below $11,000 in the tax year 2023
Have a valid Social Security number by the due date of the return (including extensions)
Be a U.S. citizen or a U.S. resident alien all year
Not file Form 2555 (related to foreign earned income)
If the taxpayer does not have a dependent, (“childless EITC”) they must be age 25 but under 65 at the end of the year

Question 16

Question ID: 94849917 (Topic: Earned Income Tax Credit)
In 2023, what is the maximum amount of investment income that a taxpayer can have before they are disqualified from claiming the Earned Income Tax Credit?

A. $10,300
B. $12,950
C. $400
D. $11,000

Answer 16

Correct Answer Explanation for D:

In 2023, the limit on investment income is increased to $11,000. This limit is now indexed for inflation.

Basic Qualifying Rules for 2023
To qualify for the EITC, the taxpayer must:

Have worked and earned income
Have investment income below $11,000 in the tax year 2023
Have a valid Social Security number by the due date of the return (including extensions)
Be a U.S. citizen or a U.S. resident alien all year
Not file Form 2555 (related to foreign earned income)
To learn more about the EITC, see the IRS page for Who Qualifies for the Earned Income Tax Credit (EITC).

Question 17

Question ID: 94815998 (Topic: Earned Income Tax Credit)
Martha is 18 years old, unmarried, and lives with her mother, Rosa. Martha is not a student and works full-time. Her earnings for the year are $16,000 in wages, which she earned working as a cashier for a retail store. Martha has a young child (age 1) who lives with her. Martha’s mother also worked and earned $22,000. Rosa paid the majority of the costs of keeping up the home. Can Martha claim her own son as a dependent and also claim the Earned Income Credit?

A. Martha cannot claim her own child, but she can still claim the EITC because she is under the threshold to qualify for the “childless EITC”.
B. Rosa has the primary right to claim the child because he is her grandson, she is the head of household, and she also earned more than Martha.
C. Martha can claim her child, EITC, and also claim Head of Household status.
D. Yes, as the child’s parent, Martha has the primary right to claim her own son. She can also claim the earned income credit. But she cannot claim head of household.

Answer 17

Correct Answer Explanation for D:

As the child’s parent, Martha has the primary right to claim her own son. She can also claim the earned income credit. But she cannot claim head of household, because she did not pay the costs of keeping up the home. She may file as “Single” and claim her own child.

Question 18

Question ID: 94849829 (Topic: Earned Income Tax Credit)
Elsie claimed the Earned Income Tax Credit in a prior year. Her return was audited, and the IRS disallowed the EITC due to fraud because she had claimed the credit for a child using a stolen Social Security Number. How many years is Elsie barred from taking the credit?

A. Ten years.
B. Two years.
C. Forever. A taxpayer who is found guilty of fraud related to the EITC can never claim the credit again.
D. One year.

Answer 18

Correct Answer Explanation for A:

Elsie will be barred from taking the credit for 10 years. If the IRS examines a taxpayer’s return and disallows all or part of the EITC due to fraud or reckless conduct, the taxpayer:

Must pay back the amount in error with interest;
May need to file Form 8862, Information to Claim Earned Income Credit after Disallowance;
Cannot claim the EITC for the next two years if the IRS determines the error is because of reckless or intentional disregard of the rules; or
Cannot claim the EITC for the next ten years if the IRS determines the error is because of fraud.

Question 19

Question ID: 94849839 (Topic: Earned Income Tax Credit)
Which of the following is considered “earned income” for the purpose of calculating the Earned Income Tax Credit?

A. Qualified dividends
B. Social Security Benefits
C. Taxable alimony
D. Nontaxable combat pay

Answer 19

Correct Answer Explanation for D:

Nontaxable combat pay is considered “earned income” for EITC purposes because a taxpayer can elect to include nontaxable combat pay in gross income in order to qualify for certain credits, including the Earned Income Tax Credit. None of the other choices qualify as “earned income” for EITC purposes.

Question 20

Question ID: 94849841 (Topic: Earned Income Tax Credit)
Miranda claimed the Earned Income Tax Credit in a prior year. Her return was later audited, and the EITC was disallowed because the IRS determined the error was because of reckless or intentional disregard of the rules (but not fraud). How long must Miranda wait before she can claim the credit again (assuming she is eligible)?

A. Five years.
B. One year.
C. Ten years.
D. Two years.

Answer 20

Correct Answer Explanation for D:

Miranda must wait at least two years to claim the EITC again, even if she is eligible. If the IRS examines a taxpayer’s return and disallows all or part of the EITC, the taxpayer:

Must pay back the amount in error with interest;
May need to file Form 8862, Information to Claim Earned Income Credit after Disallowance;
Cannot claim the EITC for the next two years if the IRS determines the error is because of reckless or intentional disregard of the rules; or
Cannot claim the EITC for the next ten years if the IRS determines the error is because of fraud.

Question 21

Question ID: 94849843 (Topic: Earned Income Tax Credit)
For purposes of claiming the Earned Income Tax Credit, which of the following types of income are not considered earned income?

A. Unemployment compensation.
B. Qualified Medicaid/Medicare waiver payments
C. Household employee income reported on Form W-2.
D. Rental income that is subject to self-employment tax and earned by a real estate professional.

Answer 21

Correct Answer Explanation for A:

Unemployment compensation is not considered earned income for purposes of the EITC. All of the other forms of income can be treated as qualifying income for purposes of the credit. To learn more about the EITC, see the IRS page for Who Qualifies for the Earned Income Tax Credit (EITC).

Question 22

Question ID: 94849948 (Topic: Earned Income Tax Credit)
Alexis is 56 and wants to claim her son, Theodore, for EITC. Theodore is 29 years old, unmarried, and is permanently disabled from a serious car accident that he sustained on March 1, 2023. Before March, he was not disabled, but his doctor said that Theodore is permanently disabled now due to the accident. Theodore lived with his mother, Alexis, in the U.S. for over 6 months in the last part of the year, and Alexis provided more than half of her son’s support, as well as paying the majority of his medical bills. No one else lived in the home. Both have valid Social Security numbers. Theodore worked at the beginning of the year, and earned $13,890 in wages before he sustained his accident on March 1. Does Alexis qualify to claim her son Theodore as a qualifying child, and why or why not?

A. No, Alexis cannot claim Theodore as her qualifying child because his income is over the gross income limit for qualifying relatives.
B. Yes, Alexis can claim Theodore as her qualifying child because his doctor determined he cannot work because of his disability, and his disability is permanent.
C. No, Alexis cannot claim Theodore as her qualifying child because he is over 24 years of age and not a full-time student.
D. No, Alexis cannot claim Theodore as her qualifying child because his income is over the exemption amount for the year. However, she can claim her son as a qualifying relative the following year if he has zero income.

Answer 22

Correct Answer Explanation for B:

Since his doctor determined he cannot work because of his disability and his disability is permanent, Alexis can claim Theodore as her qualifying child despite his age. Theodore will have a filing requirement because of the amount of income that he earned (it is above the standard deduction amount in 2023), but that does not preclude his mother from claiming him as a disabled dependent if all the other requirements are met. A qualifying child claimed for the EITC can be any age if they:

Have a permanent and total disability and
Have a valid Social Security number

Question 23

Question ID: 94849827 (Topic: Earned Income Tax Credit)
For purposes of the Earned Income Tax Credit, a “qualifying child” is a child who: (please choose the best answer).

A. Is a full-time student age 26 or younger.
B. Meets the relationship test.
C. Has lived with the taxpayer in the United States, Canada, or Mexico for at least 12 months.
D. Is at least partially disabled.

Answer 23

Correct Answer Explanation for B:

For purposes of the Earned Income Tax Credit, a qualifying child must meet a number of tests that are stricter than those for the dependency exemption. The four tests are:

The age test: (must be 18 or under, a full-time student age 23 or younger, or completely disabled of any age);
The joint return test: (must not file a tax return with a spouse except to claim a refund);
The residency test: (must have lived with the taxpayer in the United States for more than half the year).
The relationship test: requires that the qualifying child be related to the taxpayer in any of the following ways: child, stepchild, foster child, or descendant of any of them (for example, a grandchild), OR sibling, half-sibling, stepbrother, stepsister, or descendant of any of them (for example, a niece or nephew).

Question 24

Question ID: 94851236 (Topic: Earned Income Tax Credit)
Farrah files Head of Household. She has one dependent, an 18-year-old son named Abraham. Farrah claims her son and also the Earned Income Credit on her tax return, resulting in a large refund. What is the earliest date that Farrah’s tax refund can be released, assuming she e-files her return as soon as possible at the beginning of the year?

A. February 1.
B. March 15.
C. March 1.
D. February 15.

Answer 24

Correct Answer Explanation for D:

Due to changes in the law, the IRS can’t issue refunds before mid-February for returns that properly claimed the EIC or the ACTC. This applies to the entire refund, not just the portion associated with these credits. The PATH Act mandates that the IRS not issue a refund on tax returns claiming the Earned Income Tax Credit until Feb. 15. The additional time helps the IRS stop fraudulent refunds from being issued to identity thieves and fraudulent claims with fabricated wages and withholdings. Learn more information on Path Act related provisions on the IRS’ dedicated webpage for The Path Act.

Question 25

Question ID: 94849910 (Topic: Earned Income Tax Credit)
Daniel and Reyna are married and have two dependent children, ages 6 and 8. They file jointly. Daniel had $28,000 in nontaxable combat pay, and Reyna received $4,000 in worker’s compensation benefits and $5,000 in W-2 income. They also had $3,000 in income from a passive residential rental activity. For the purposes of calculating the Earned Income Tax Credit, what is their qualifying “earned income” on their joint return?

A. $37,000
B. $33,000
C. $9,000
D. $5,000

Answer 25

Correct Answer Explanation for B:

Their combined “earned” income for the purposes of the Earned Income Tax Credit is $33,000 ( $28,000 in nontaxable combat pay + $5,000 wages earned by Reyna). Taxpayers have the option (election) to include combat pay in EITC earned income if it will produce a better tax result. The $4,000 in worker’s compensation benefits is not taxable and does not need to be reported on their return. The rental income would be taxable, but it would not qualify as “earned income” for the purposes of the EITC.

Question 26

Question ID: 94815898 (Topic: Earned Income Tax Credit)
Which of the following types of income would be considered “earned income” for the purposes of claiming the Earned Income Tax Credit?

A. Military disability pension income.
B. Social Security Disability income.
C. Disability retirement benefits received before the minimum retirement age.
D. Supplemental Social Security Income.

Answer 26

Correct Answer Explanation for C:

Some disability retirement benefits qualify as earned income for purposes of eligibility for the EITC. The IRS considers disability retirement benefits as “earned income” until you reach the minimum retirement age. However, benefits such as Social Security Disability Insurance, SSI, or military disability pensions are not considered earned income and cannot be used to claim the EITC.

Question 27

Question ID: 94849840 (Topic: Earned Income Tax Credit)
There are currently ______________ separate due diligence requirements for tax preparers related to the Earned Income Tax Credit.

A. Two.
B. Six.
C. Three.
D. Four.

Answer 27

Correct Answer Explanation for D:

The four due diligence requirements for preparers related to the EITC are as follows:

1. Complete and submit the EITC checklist: A preparer must complete Form 8867, Paid Preparer’s Earned Income Credit Checklist, to make sure he considers all EITC eligibility criteria for each return prepared.
2. Compute the credit: A preparer must complete the EITC worksheet in the Form 1040 series instructions or the one in Publication 596, Earned Income Credit. The worksheet shows what is included in the computation (i.e. self-employment income, total earned income, investment income, and adjusted gross income.)
3. Retain records: A preparer must retain the following five records for each EITC claim:

Form 8867.
EITC worksheet(s) or his own worksheet.
Copies of any taxpayer documents he relied on to determine eligibility for or amount of EITC.
A record of how, when, and from whom the information used to prepare the form and worksheet(s) was obtained.
A record of any additional questions the preparer asked and his client’s answers. All records should be kept for at least three years in either paper or electronic format, and they must be produced if the IRS asks for them.
4. Knowledge: A preparer must not know (or have reason to know) that the information used to determine eligibility or to compute the amount of the credit is incorrect. A preparer must ask his client additional questions if the information furnished seems incorrect or incomplete.

Question 28

Question ID: 94849949 (Topic: Earned Income Tax Credit)
With regards to the Earned Income Tax Credit, which of the following statements is true?

A. Combat pay is not qualifying compensation for the EITC.
B. A taxpayer can elect to include their combat pay in their taxable earned income to get (or increase) their EITC.
C. A taxpayer must always include their nontaxable combat pay in earned income if they claim EITC.wrong
D. Combat pay is considered passive income with regards to EITC.

Answer 28

Correct Answer Explanation for B:

A taxpayer may include their combat pay in their taxable earned income to get or increase their Earned Income Tax Credit.

Question 29

Question ID: 94849944 (Topic: Other Credits)
Taxpayers may be eligible for the Retirement Savings Contributions Credit if they make eligible contributions to which types of retirement plans?

A. Only a traditional IRA or an employer-sponsored retirement plan.
B. Only to an employer-sponsored plan.
C. A Roth IRA or a Traditional IRA, including rollover contributions.
D. An employer-sponsored retirement plan, Roth IRA, or an individual retirement arrangement (Traditional IRA), not including rollover contributions.

Answer 29

Correct Answer Explanation for D:

The Saver’s Credit (also called the Retirement Savings Contribution Credit) can be taken for a taxpayer’s contributions to: a traditional or Roth IRA; a 401(k), SIMPLE IRA, SARSEP, 403(b), 501(c)(18) or governmental 457(b) plan; and voluntary after-tax employee contributions to a qualified retirement plan as well as 403(b) plans. However, rollover contributions are NOT eligible for the Saver’s Credit. To see more information about this credit, see IRS Topic No. 610 Retirement Savings Contributions Credit.

Question 30

Question ID: 94850134 (Topic: Other Credits)
Megan is a doctor who worked at two different medical clinics during the year. She overpaid her Social Security taxes because one clinic paid her $120,000 in wages and the second clinic paid her $60,000 ($180,000 in wages total). What is the proper way for her to request a refund of these overpaid amounts?

A. She can claim the excess withholding as an adjustment to income on Form 1040.
B. She can claim the excess withholding as a deduction on Schedule A.
C. She can claim the excess withholding as a credit on Schedule B.
D. She can claim the excess withholding as a credit in the payments section of Form 1040.

Answer 30

Correct Answer Explanation for D:

Megan can claim the excess withholding as a credit in the payments section of Form 1040. Social Security taxes are withheld from the paychecks of all employees up to the allowable maximums. Taxpayers with more than one employer might have had more than the required amount of Social Security tax withheld from their wages for the year. If this occurred, taxpayers can claim the excess withholding as a credit in the payments section of Form 1040. Overpayments of Social Security tax are discussed in IRS Tax Topic 608, Excess Social Security and RRTA Tax Withheld.