Study Unit 8

Question 1

Give examples of (1) non refundable tax credits and (2) refundable tax credits.

Answer 1

Non Refundable Tax Credits Refundable Tax Credits

• Foreign Tax Credit - Credit for Taxes Withheld
• Lifetime Learning Credit - Earned Income Credit
• Retirement Savings Cont. Credit - Child and Dependent Care Credit
• Credit for the Elderly or Disabled - Child Tax Credit and Credit for other Dependents
• General Business Credit - American Opportunity Credit
• Adoption Credit - Premium Tax Credit

Question 2

How is the Foreign Tax Credit (FTC) determined?

Answer 2

The FTC is the lesser of

* Foreign taxes paid/accrued during the tax year or
* The portion of U.S. tax liability attributed to all foreign-earned income, calculated as

FTC (U.S. Portion) = U.S. Income Tax (before FTC) x (Foreign-earned taxable income/worldwide taxable income

Question 3

What are the requirement for the Child and Dependent Care Credit?

Answer 3

• Child and dependent care expenses are incurred to enable a taxpayer to maintain gainful employment or active employment seeking.
• The taxpayer provides more than half the cost of maintaining a household for
  • A dependent under age 13 or
  • An incapacitated spouse or dependent.

NOTE: Child and dependent care expenses are limited to $8,000 (or $16,000 for two or more dependents).

Question 4

How much can an eligible taxpayer claim for the child tax credit and credit for Other Dependents?

Answer 4

• Child Tax Credit = $3,600 per qualifying child (same criteria as dependent children) under 18
• Credit for Other Dependents = $500 per qualifying relative (same criteria as dependent relatives)

Question 5

Describe the General Business Credit.

Answer 5

The General Business Credit is a set of credits commonly available to businesses. It includes credits for investment, research, work opportunity, low-income housing, and alternative motor vehicles, among others.

Question 6

Describe the Adoption Credit.

Answer 6

The Adoption Credit is allowed for reasonable and necessary adoption expenses incurred including adoption fees, court costs, attorney fees, and other directly related expenses.

The maximum credit is $14,440 per qualified child (subject to phaseout), including children with special needs (not subject to phaseout).

Question 7

Compare the American Opportunity Credit and the Lifetime Learning Credit.

Answer 7

American Opportunity Lifetime Learning Credit

Allowed for Per Student Per tax return filed

Qualified Qualified expenses for Qualified tuition expenses
Expense the first 4 years of (no time restriction)
post secondary education

Amount of 100% of the first $2000 20% of qualified tuition expenses paid
Credit of expenses and 25% of by the taxpayer, limited to $2,000 per year
the second $2,000 of and 20% of the first $10,000 if expenses
expenses (maximum (maximum credit is $2,000)
credit per year is $2,500)

Question 8

How is casualty loss calculated for (1) personal-use property and (2) business property or investment property?

Answer 8

Type of property Damage Amount of Casualty Loss

Personal-use Partially Lesser of adjusted basis or decline in FMV
Completely Lesser of adjusted basis or decline in FMV

Business or Partially Lesser of adjusted basis or decline in FMV
Investment
Completely Adjusted basis

Question 9

How is the deductible casualty loss calculated?

Answer 9

Deductible casualty loss - Casualty loss - insurance reimbursement - $100 - 10% x AGI

Question 10

What are the two methods of claiming deductions for inventory casualty loss?

Answer 10

Method How Reimbursement

1			Increasing cost of			Included in gross income
			good sold	

2			Eliminating the affected	Not included in gross income
			inventory from
			beginning inventory
			or purchases

Question 11

Compare net operating losses (NOLs) arising (1) in 2021 and later, (2) after 2017, but before 2021, and (3) before 2018.

Answer 11

Carry Carry Offsetting Taxable
Back Forward Income

NOLs before 2018 2 years 20 years 100%

NOLs from 2018, 5years Indefin- 100% until 2021
2019, and 2020 itely (80% after 2021)

NOLs beginning
In 2021 N/A Indefin- 80%
itely

Question 12

State the three rules limited the deductible losses of individual taxpayers.

Answer 12

Loss of individuals taxpayers, in the order of application, is limited by three rules: APE

Loss-limiting Rules Description

At-risk rule Loss deduction is limited to the amount a person has at risk in the activity.

Passive activity rule Passive activity loss deduction is then limited to passive activity income

Excess business loss Excess loss is then limited to $262,000 ($524,000 MFJ)

Question 13

Describe the small landlord exception to the general passive activity rule.

Answer 13

All rental activity is passive and subject to the passive activity rule except when a person

* Actively participated in the rental activity
* Owns 10% or more of the activity (by value) for the entire year
* Has MAGI < $150,000

If the exception applies, the person can deduct a maximum of $25,000 of rental activity loss in a year in excess of passive activity income. They $25,000 limit is phased out by 50% for every dollar of modified adjusted gross income (MAGI) over $100,000.