Tax 1-7 Analyze a situation to calculate available tax credits or total tax due.

Question 1

In 2016, a taxpayer buys $8,000 of solar energy equipment and installs it in his main home. How much of a tax credit can he claim?

(LO 1-7, pg 53)

Answer 1

He may claim a $2,400 tax credit for 2016 ($8,000 × .30 = $ 2,400).

Residential energy-efficient property credit. In general, an individual is allowed an annual credit for buying residential energy-efficient property before 2017, equal to the sum of 30% of the amounts paid for qualified:

photovoltaic property (i.e., property that uses solar power to generate electricity in a home);

solar water heating property;

fuel cell property up to a maximum credit of $500 for each 0.5 kilowatt of capacity;

small wind energy property; and geothermal heat pump property.

Question 2

John and Karen Postman have spent $7,000 on day care for their two children (ages 9 and 10) in the current tax year. These expenses were incurred to allow both John and Karen to work outside the home. Their adjusted gross income is estimated at $71,000. Calculate the child care credit to which they are entitled.

(LO 1-7)

Answer 2

They are entitled to a child care credit of $1,200 ($ 6,000 × 20% = $1,200). The maximum amount of qualifying expenditures on which the credit may be based is $3,000 per child, or $6,000 for two or more children. By the time the taxpayer’s AGI has exceeded $43,000, the percentage is reduced to its lowest point of 20%.

Question 3

9. John and Karen Postman will spend a total of $5,000 on day care for their two children (ages 9 and 10) in the current tax year. These expenses were incurred to allow both John and Karen to work outside the home. Their adjusted gross income is estimated at $138,000. What is the amount of child care credit, if any, to which they are entitled?

$0

$600

$1,000

$1,750

(LO 1-7)

Answer 3

$1,000

The maximum amount of qualifying expenditures on which the credit may be based is $3,000 per child, or $6,000 for two or more children. In this situation, they spent $5,000. This is multiplied by 20% for taxpayers with an AGI greater than $43,000. Thus, $5,000 × 20% = $1,000.

Question 4

14. Which one of the following statements regarding the child tax credit is not correct?

The maximum credit is $600 per qualifying child for 2016.

A qualifying child is generally defined as an individual under the age of 17 (as of the close of the calendar year) for whom the taxpayer may claim a dependency exemption.

A qualifying child includes a child or a descendant of a child, a stepchild, or an eligible foster child.

(LO 1-7)

Answer 4

The maximum credit is $600 per qualifying child for 2016.

The maximum credit is $1,000, not $600, per qualifying child. A qualifying child is generally defined as an individual under the age of 17 (as of the close of the calendar year) for whom the taxpayer may claim a dependency exemption. A qualifying child includes a child or a descendant of a child, a stepchild, or an eligible foster child.

Question 5

15. Which of the following statements is correct regarding the credit for adoption expenses?

A tax credit of $13,460 of qualified adoption expenses (for 2016) for each eligible adoptee is available.

An eligible adoptee is an adoptee who is not yet age 18 at the time of adoption or who is physically or mentally incapable of caring for himself or herself. For 2016, the credit is nonrefundable.

All of the above.

(LO 1-7)

Answer 5

All of the above.

A tax credit of $13,460 of qualified adoption expenses for each eligible adoptee is available. An eligible adoptee is an adoptee who is not yet age 18 at the time of adoption or who is physically or mentally incapable of caring for himself or herself. For 2016, the credit is nonrefundable.

Question 6

27. Assume that married taxpayers filing jointly have a taxable income of $152,900. Using the tax rate schedule found in your materials, what is the amount of federal income tax? Round your answer to the nearest dollar.

$29,798

$35,849

$42,812

(LO 1-7)

Answer 6

$29,798

Taxable Income … $152,900
Less (from tax rate schedule) … ($151,900)

Amount over $151,900 … 1000
Times (marginal rate,
from tax rate schedule) … 28%

Tax on amount over $151,900 … $280
Plus (from tax rate schedule) … $29,518

Total Tax … $29,798

Question 7

28. Assume that married taxpayers filing jointly have a taxable income of $152,900. What is the taxpayers’ average tax rate? You will need to use the tax rate schedule found in your materials.

15%

19.5%

28%

(LO 1-1, 1-7)

Answer 7

19.5%

The average income tax bracket is the amount of income tax ($29,798), divided by the taxable income of $152,900. This gives us 19.5%.

Taxable Income … $152,900
Less (from tax rate schedule) … ($151,900)

Amount over $151,900 … 1000
Times (marginal rate,
from tax rate schedule) … 28%

Tax on amount over $151,900 … $280
Plus (from tax rate schedule) … $29,518

Total Tax … $29,798

Question 8

A _____ is a dollar-for-dollar offset against the tax liability and typically is determined by use of a formula— often a percentage of a base amount.

(LO 1-7, pg 48)

Answer 8

tax credit

Question 9

A _____ credit is one that can generate a tax refund even when no tax liability exists.

(LO 1-7, pg 48)

Answer 9

refundable

If a refundable credit exceeds the tax liability of the taxpayer claiming the credit, the excess is refunded to the taxpayer.

Question 10

The maximum Child tax credit of $_____ is provided for each qualifying child.

(LO 1-7, pg 50)

Answer 10

$1,000

A qualifying child generally is defined as an individual under the age of 17 (determined at the close of the calendar year) for whom the taxpayer may claim a dependency exemption. A qualifying child includes a child or a descendant of a child (grandchild), a stepchild, or an eligible foster child.

Question 11

Taxpayers will be required to _____ under any one of the following circumstances

they had net earnings of $400 or more from self-employment income,

they had wages of approximately $110 or more from a church that is exempt from paying the employer portion of Social Security taxes, or

they are subject to one of the special taxes (e.g., self-employment tax or alternative minimum tax).

(LO 1-7, pg 50)

Answer 11

file a tax return

Question 12

Credits

A _____ credit is one that can generate a tax refund even when no tax liability exists

(LO 1-7, pg 48)

Answer 12

refundable

If a refundable credit exceeds the tax liability of the taxpayer claiming the credit, the excess is refunded to the taxpayer. Refundable credits include prior income tax payments, including estimated taxes paid, amounts withheld from wages or pension payments, payments made with a request for an extension of the time to file a return, and an over-payment from the previous year and excess Social Security (FICA) taxes withheld by two or more employers. In addition, a portion of the American Opportunity tax credit is refundable. The Earned Income tax credit, available only to low-income working taxpayers, is another major refundable credit.

Question 13

Child tax credit.

A maximum tax credit of _____ is provided for each qualifying child. A qualifying child generally is defined as an individual under the age of 17 (determined at the close of the calendar year) for whom the taxpayer may claim a dependency exemption. A qualifying child includes a child or a descendant of a child (grandchild), a stepchild, or an eligible foster child.

(LO 1-7, pg 50)

Answer 13

$1,000

The credit is phased out by $50 for each $1,000 or part thereof, for taxpayers with modified AGI that exceeds $110,000 (for married taxpayers filing jointly), $75,000 (for single taxpayers), and $55,000 (for married taxpayers filing separately). These thresholds are not indexed for inflation. The child tax credit is generally a nonrefundable credit.

Question 14

Child and dependent care credit. Taxpayers who incur household and dependent care expenses with respect to a qualifying individual may be allowed a tax credit if paying these expenses enabled the taxpayer to be _____ employed.

(LO 1-7, pg 51)

Answer 14

gainfully employed

A taxpayer with a qualifying individual is described as follows:

the taxpayer has a dependent under age 13 for whom the taxpayer may claim an exemption deduction;

the taxpayer has a dependent, or a person the taxpayer could have claimed as a dependent except that the person has gross income greater than the personal exemption amount, who is physically or mentally unable to care for himself or herself; or

the taxpayer has a spouse who is physically or mentally unable to care for himself or herself.

Question 15

Federal Income Tax Calc

For example, assume that a married taxpayer filing jointly has taxable income of $164,200 for 2016. There are no qualifying dividends or net long-term capital gains. Using the 503 Tax Schedule, the tax would be computed as follows:

1-7

Answer 15

Taxable income $164,200.00 is in the $151,900 - $231,450 line

Tax is $29,517.50 plus 28% of amount over $151,900
or $3,444.00

Therefore:
$29,517.50 + $3,444.00 = $32,961.50

Question 16

Practice Test 1

6. Jerry and Margaret Price, both 58 years old, are married and file a joint income tax return. They provide the total support for two dependent grandchildren (full-time students, ages 18 and 19), who have lived with them since their parents (Jerry and Margaret’s daughter and son-in-law) were killed in an automobile accident. In the current year, Jerry earned $78,200, and Margaret earned $42,500. The Prices will contribute a total of $13,000 to their IRAs and anticipate total itemized deductions of $15,000. Neither Jerry nor Margaret is covered by a company pension plan.

Based on the information given, what will be the Prices’ total tax due for 2016?

(LO 1-7)

Answer 16

$10,668

  120,700 (Salaries)
- 13,000 (IRA deductions)
= 107,700 (AGI)
- 15,000 (Itemized Deductions)
- 16200 (Personal Exemptions)
= 76,500 (Taxable Income)
- 75,300 (From Tax Rate Schedule) 
= 1,200 (Amount over 75,300 from tax rate schedule)
* 25% (Marginal tax bracket)
= 300 (Tax on amount over 75,300)
\+ 10368 (From tax rate schedule)
= 10668 (Total tax)

The salaries of $120,700 are reduced by the IRA deduction of $13,000, the itemized deductions of $15,000, and the four exemptions at $4,050 each. The tax liability should be calculated on a taxable income of $76,500. Note: The IRAs are fully deductible because neither spouse is covered by a company pension plan. They may each contribute $5,500 plus the $1,000 catch-up. There is no child tax credit because neither child is under age 17 at the close of the tax year.