Tax Ch 9 Flashcards
Miranda is a single mom with 2 children, Alex and Bailey. Alex is 14 years old and Bailey is 3 years old. Miranda has AGI of $50,000. She paid the following expenses for child care in 2023:
* $300 to Alex to care for Bailey so Miranda could go out to dinner with friends.
* $1,000 for an after-school program for Alex.
* $3,500 to Miranda’s mother for the care of Bailey during the day.
What is Miranda’s available child and dependent care credit in 2023?
a. $0. b. $200. c. $600. d. $700
correct answer is c.
The payment to Alex does not qualify because he is a dependent child of Miranda under the age of 19 and because the expense was not employment related.
The payment for Alex’s after-school program does not
qualify because Alex is not under the age of 13 (note that means there is only one qualifying dependent).
The payment to Miranda’s mother does count towards eligible expenses. However, the eligible expenses are limited to $3,000 since there is only one qualifying dependent. Since Miranda has AGI over $43,000 she is able to take a credit of 20% x $3,000 = $600
Owen, who is single, contributed $6,500 to his Roth IRA for 2023. He had MAGI of $17,000 for 2023 and used the single filing status. Owen has never taken a distribution from a retirement plan. What is his maximum retirement savings credit for 2023?
a. $0. b. $200. c. $1,000. d. $2,000
The correct answer is c.
Owen’s maximum credit for 2023 is $1,000 ($2,000 x 50%)
Jackson’s second wife, Avery, died several years ago. Jackson and Avery had two children together, Lexi and Levi (twins, age 6) and they had adopted a child Preston (age 10). Jackson also had a child, April, age 18, with his first wife. Jackson’s fiancé (who also lives with Jackson) gave birth to Jackson’s biological child, Teddy, in November of the current year. All five children live with Jackson and he claims all of them as dependents. Jackson’s AGI for 2023 is $60,000 and he files head of household.
What is Jackson’s available child tax credit in 2023?
a. $2,000. b. $4,000. c. $8,000. d. $10,000.
correct answer is c.
He is entitled to $2,000 credit for each of four of the five children. April does not count because she is age 18.
Teddy counts, since she was born before the end of the year and lives with him.
Preston is considered to be Jackson’s own child even though he is adopted.
Jackson would be able to claim a $500 other dependent tax credit for April
Adele earns a salary of $190,000 from Hospitals, Inc. as a hospital administrator during 2023. Hospitals, Inc. withholds OASDI taxes in the amount of $9,932.
She also earns $20,000 of wages from CPR Experts where she teaches CPR.
CPR Experts withholds OASDI taxes in the amount of $1,240. What is Adele’s available credit for excess Social Security taxes withheld, assuming Adele’s tax due before application of the credit is $800?
a. $0. b. $440. c. $800. d. $1,240
The correct answer is d. $ 1,240
Adele will be allowed to take a $1,240 refundable credit against income taxes for the excess Social Security taxes withheld from her compensation during the year. She is only required to pay Social
Security tax on the first $160,200 (2023) which was withheld from Hospitals, Inc. The amount withheld from CPR Experts is the excess amount
Which of the following statements concerning business credits is correct?
a. The investment credit consists of the sum of two different credits, (1) the rehabilitation credit, and (2) the qualifying gasification project credit.
b. The amount of the rehabilitation credit is 20 percent of the qualified rehabilitation expenditures for certified historic structures.
c. The work opportunity credit is a credit for employees of certain high risk jobs to provide them with an additional benefit because of the risks involved in their job (for example, police officers).
d. The employer-provided child care credit allows a credit for employer provided payments to 3rd party caregivers.
The correct answer is b.
The investment credit consists of the sum of five different credits, (1) the rehabilitation credit, (2) the energy credit, (3) the qualifying advanced coal project credit, (4) the qualifying gasification project
credit, and (5) the qualifying advanced energy project credit.
b. The amount of the rehabilitation credit is 20 percent of the qualified rehabilitation expenditures for certified historic structures.
The work opportunity credit is intended to promote the hiring of targeted groups of people who have special needs or high unemployment rates.
The employer-provided child care credit is intended to encourage employers to help provide and promote appropriate child care for their employees and is for facilities owned by the employer.
Which of the following statements concerning the general business credit is correct?
Any unused credit can be carried back 20 years or forward 20 years.
The general business credit is a combination of more than 30 different nonrefundable tax credits.
The credits are used in a LIFO Sequence – carrybacks, current year, then carryforward credits.
The general business credit can offset all of the income tax remaining after the application of the other nonrefundable credits.
The general business credit is a combination of more than 30 different nonrefundable tax credits.
Rationale
Any unused credit can be carried back to the prior year or forward 20 years. The credits are used in a FIFO Sequence – carryforwards, current year, then carryback credits. The general business credit may not be allowed to offset all of the income tax remaining after the application of the other nonrefundable credits.
Ellis pays foreign income taxes of $1,200 (at the same rate as U.S. income taxes) on foreign earned income for the current year. Her U.S. income tax for the year is $22,000. Her total itemized deductions other than the allowable deduction for foreign income taxes are $500 less than her standard deduction. If Ellis is in the 24% marginal tax bracket, which of the following should she do?
Ellis should take a credit for the foreign tax paid.
Ellis should take an itemized deduction for the foreign tax paid.
Ellis should take a deduction for a portion of the foreign tax paid and a credit for the rest.
Ellis cannot take a deduction or a credit for the foreign tax paid.
Ellis should take a credit for the foreign tax paid.
Rationale
Ellis should take a credit for the tax paid. If she takes an itemized deduction for foreign income taxes, only $700 of the $1,200 of foreign taxes paid will produce a tax benefit (the excess over the standard deduction greater than her itemized deductions).
The tax benefit will be equal to $700 multiplied by her marginal tax rate of 24% = $168. Any tax benefit for the remaining $500 of foreign taxes will be lost.
Alternatively, if Ellis takes a foreign tax credit, she will reduce her U.S. income tax by the full $1,200 of foreign taxes paid.
Finally, if Ellis can’t use the entire foreign tax credit in the current year, she may be able to carry it back to the preceding year and forward to future tax years, as needed. The taxpayer must select either the foreign tax deduction or the foreign tax credit, she cannot take both in the same year.
UPDATED FOR 2024:
Taye and Naomi decided last year to adopt a child. They believe that they can financially and emotionally support a child that has special needs. Therefore, this year they adopted Audra, a four-year-old child with special needs. They paid $8,000 in qualifying adoption expenses for the current year. Their MAGI for the year is $160,000 and their tax due before the application of the qualified adoption credit is $10,000.
What amount can Taye and Naomi claim as an adoption credit for 2024?
$8,000.
$10,000.
$16,000.
$16,810
$16,810.
Rationale
Because they have adopted a child with special needs, they can take a credit of the full credit amount, $16,810, even though they did not spend that much in adoption expenses.
Because this is a nonrefundable credit, they can only use $10,000 this year. The additional $6,810 can be carried forward for up to five years.
Cooper, a married filing jointly taxpayer, paid $10,000 of qualified tuition and related expenses for each of his twin daughters, Violet and Charlotte, during 2023. They started their freshman year of college during 2023. Cooper was very excited that both daughters excelled in the college environment; especially since Violet had a drug addiction during her senior year of high school (Cooper had a friend on the college admissions board that thankfully overlooked Violet’s felony drug conviction). Cooper also paid $2,000 of qualified tuition and related expenses for his daughter Sloan’s sophomore year of college, and $3,000 for his own master’s degree program. Cooper claims all three of his daughters as dependents. His modified gross income for the year is $50,000. What is the available American Opportunity Tax Credit for 2023?
$2,000.
$2,500.
$4,500.
$7,500.
4,500.
Rationale
The credit is not available for Violet since she has a felony drug conviction.
The maximum American Opportunity Tax Credit of $2,500 is available to Charlotte.
The credit available for Sloan is $2,000 ($2,000 x 100%).
Sloan would have needed $4,000 of expenses to get the maximum credit.
The total of credits for Charlotte and Sloan is $4,500 for 2024 (and 2023)
Which of the following is a refundable credit?
The Adoption Credit.
Earned Income Credit.
General Business Credit.
Foreign Tax Credit.
Earned Income Credit.
Rationale
The earned income credit is a refundable credit. All other three credits are nonrefundable credits.
In 2024, Izzie paid $5,000 for qualified solar electric property and $4,000 for qualified fuel cell property with one kilowatt of capacity for her vacation home. She also paid $10,000 for qualified solar water heating property for her personal residence.
What is her maximum residential energy efficient property credit for 2024?
$3,900.
$4,500.
$5,500.
$6,500.
4,500.
Rationale
Izzie’s maximum residential energy efficient property credit for 2024 is $4,500
[($5,000 x 30%) + ($10,000 x 0.30)].
$5,000 spent for the qualified solar electric property qualifies for the credit even though the expenditures were not for her principal residence.
However, the amount paid for the qualified fuel cell property does not qualify since it was not for her principal residence. The amount paid for the qualified solar water heating property is limited to $3,000 ($10,000 x 0.30).
Jackson’s second wife, Avery, died several years ago. Jackson and Avery had two children together, Lexi and Levi (twins, age 6) and they had adopted a child Preston (age 10). Jackson also had a child, April, age 18, with his first wife. Jackson’s fiancé (who also lives with Jackson) gave birth to Jackson’s biological child, Teddy, in November of the current year.
All five children live with Jackson and he claims all of them as dependents. Jackson’s AGI is $60,000 and he files head of household. What is Jackson’s available child tax credit?
$2,000.
$4,000.
$8,000.
$10,000.
$8,000.
Rationale
He is entitled to $2,000 credit for each of four of the five children.
April does not count because she is age 18.
Teddy counts, since she was born before the end of the year and lives with him.
Preston is considered to be Jackson’s own child even though he is adopted.
Jackson would be able to claim a $500 other dependent tax credit for April.
Adele earns a salary of $190,000 from Hospitals, Inc. as a hospital administrator during 2024. Hospitals, Inc. withholds OASDI taxes in the amount of $10,453. She also earns $20,000 of wages from CPR Experts where she teaches CPR. CPR Experts withholds OASDI taxes in the amount of $1,240. What is Adele’s available credit for excess Social Security taxes withheld, assuming Adele’s tax due before application of the credit is $800?
$0.
$440.
$800.
$1,240.
$1,240.
Rationale
Adele will be allowed to take a $1,240 refundable credit against income taxes for the excess Social Security taxes withheld from her compensation during the year.
She is only required to pay Social Security tax on the first $168,600 (2024) which was withheld from Hospitals, Inc.
The amount withheld from CPR Experts is the excess amount.
Which of the following statements concerning the Credit for the Elderly or Disabled is correct?
The credit is available without regard to the individual’s income if the individual is disabled.
A qualified individual must be over age 65 at the end of the tax year or be 65 or younger and meet one of the listed exceptions.
The credit is a fixed amount for all individuals.
The credit is available to U.S. citizens and residents who qualify
The credit is available to U.S. citizens and residents who qualify.
Rationale
The credit for the elderly or disabled is available to a U.S. citizen or resident who is a qualified individual and has income below specified limits.
A qualified individual must be age 65 or older at the end of the tax year or under age 65 and (1) retired on total and permanent disability, (2) the recipient of taxable disability benefits from an employer’s plan for the tax year, and (3) younger than the mandatory retirement age of the employer at the beginning of the tax year.
The amount of the credit is a fixed base amount reduced by both
1) one-half of AGI in excess of $7,500 (single; $10,000 MFJ), and
2) nontaxable Social Security benefits and certain other nontaxable income, multiplied by a rate of 15 percent.
For purposes of this credit, the taxpayer is considered to be age 65 on the day before their actual birthday.
Cooper, a married filing jointly taxpayer, paid $5,000 of qualified tuition and related expenses for each of his twin daughters, Violet and Charlotte, during 2023. They started their freshman year of college during 2023. Cooper was very excited that both daughters excelled in the college environment; especially since Violet had a drug addiction during her senior year of high school (Cooper had a friend on the college admissions board that thankfully overlooked Violet’s felony drug conviction). Cooper also paid $2,000 of qualified tuition and related expenses for his daughter Sloan’s sophomore year of college and $3,000 for his own master’s program. Cooper claims all three of his daughters as dependents. His modified gross income for the year is $50,000.
What is the available Lifetime Learning Credit assuming he elects to use the Lifetime Learning Credit for those expenses that do not qualify for the American Opportunity Tax Credit?
$1,600.
Rationale
Charlotte and Sloan both qualify for the American Opportunity Tax Credit.
The felony drug conviction does not hinder availability of the lifetime learning credit, thus the $5,000 in expenses for Violet qualify.
His own expenses qualify as well.
The taxpayer’s lifetime learning credit for 2024 (and 2023) is $1,600 (($5,000 + $3,000) x 20%).
$5,000 Violet (get American Opp Credit )
$5,000 Charlotte (Can deduct from Lifetime Learning Credit )
$2,000 Sloan (get American Opp Credit )
$3,000 Masters degree ( Can deduct Lifetime Learning credit )
