Unit 13 - Individual Tax Credits

Question 1

Tax credits

Answer 1

Reduce a taxpayers liability on a dollar for dollar basis

Usually more valuable than a tax deduction

A tax deduction reduces the amount of taxable income

But tax credit reduces the liability

Various types – refundable or nonrefundable

Question 2

Nonrefundable tax credits

Answer 2

Reduce taxpayers liability for the year to zero – but not beyond that

Any remaining credit is not refunded to the taxpayer

Most common non-refundable tax credits available :

Child and independent care credit
Adoption credit
American opportunity tax credit
Lifetime learning credit
Retirement savings contributions credit
The credit for other dependents ODC
CHILD TAX CREDIT CTC
FOREIGN TAX CREDIT

Question 3

Refundable tax credits

Answer 3

Reduce taxpayers liability to zero and also generate a refund to the taxpayer for the amount of which the credit exceeds the amount of tax he would otherwise

Refundable tax credits include the following

Additional child tax credit ACTC
The earned income tax credit EITC
Premium tax credit
American opportunity tax credit – partial
Credit for excess Social Security and RRTA tax withheld

Question 4

Due diligence requirements

Answer 4

Tax prep must complete form 8867, paid prepare due diligence checklist for:

Head of household filing status
Earned income tax credit
Child tax credit
American opportunity tax credit
Additional child tax credit

Taxpayers, spouse, and qualifying child are required to have a valid, taxpayer identification number assigned on or before the due date or extended, due date of the return for the following :

AOTC
ACTC
CTC
ODC
EITC

Question 5

Child and dependent care credit – CDCTC

Answer 5

A nonrefundable credit

Allows a taxpayer a credit for a percentage of childcare expenses for children, under age, 13 and or for disabled dependence of any age

If receiving any reimbursement under an FSA – taxpayer must deduct the reimbursed amount from qualified expenses

Maximum amount of care expenses used to calculate the credit is

$3000 for one qualifying dependent
$6000 for two or more qualifying independence

The amount of the credit ranges between 20% to 35% of qualifying expenses, depending on the taxpayers AGI

Question 6

CDCTC – qualifying expenses

Answer 6

Preschool education
After school care
Disabled care
Transportation cost
Fees and deposits
Household services

Question 7

CDCTC – eligibility test

Answer 7

Taxpayer must pass five eligibility test to qualify for the child and dependent care credit

Qualifying person test
Earned income test
Work related expense test
Joint return test
Provider identification test

Can still qualify for the CDCTC filing MFS if meet certain requirements

Question 8

CDCTC – test number one qualifying person test

Answer 8

A qualifying person is

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

Disabled person that the taxpayer could claim as a dependent, except the disabled person had gross income of $4700 or more

Question 9

CDCTC – test number two earned income test

Answer 9

Taxpayer must have earned income during the year – if filing jointly both spouses must work

The following are considered as having earned income for any month they are :

A full-time student or
Disabled

Deemed earned income for one qualifying dependent equals $250 per month or $500 per month if the taxpayer has two or more dependence

The amount of qualifying (Daycare) expenses used to figure. The credit cannot be more than the taxpayers earned income for the year, if unmarried

Or the smaller of the spouses earned income for the year married

If one spouse has a net loss on schedule C – they would not qualify

Question 10

CDCTC – test number three work related expense test

Answer 10

Expenses must be work related to qualify for this credit

Taxpayer must be working or actively searching for work

Cannot include (Daycare) expenses for date night

Question 11

CDCTC – non-qualifying expenses

Answer 11

Tuition for children in kindergarten and above

Summer school or tutoring programs

Cost of sending a child to an overnight camp

Cost of transportation not provided by a daycare provider

A forfeited deposit to a daycare center

Question 12

CDCTC – divorced parents

Answer 12

Only the custodial parent of the child is allowed to claim the child. Independent CareCredit.

Question 13

CDCTC does not apply to childcare payments made to…

Answer 13

A family member who is the taxpayers owned dependent under 19 years old, or any other dependent listed on their tax return

Question 14

CDCTC – test #4 joint return test

Answer 14

Claiming the child, independent care credit – married couples generally must file jointly

If a taxpayers filing status is MFS, and all of the following apply, the taxpayer is still permitted to claim the (Daycare) credit

1. Taxpayer lived apart from their spouse during the last six months.
2. Taxpayers home was the qualifying person home for more than half of the year.
3. Taxpayer paid more than half the cost of keeping up for the year.

Question 15

CDCTC Test #5 provider identification test

Answer 15

To qualify for this credit – taxpayer must include the name, address, and identification number of the caregiver or organization who provided care

If (Daycare) provider refuses – taxpayer can report whatever information they have and attach a statement explaining the situation

For daycare providers are exempt from an identification number, and these requirements

Most tax software will automatically enter LAFCP – living abroad, foreign care provider in the space for the care providers, taxpayer identification number

Question 16

Child tax credit – CTC

How much is it?
How to calculate?
Where reported?

Answer 16

A nonrefundable credit of $2000 per qualifying child

With an AGI phase out at $200,000, or $400,000 for joint files

Income exceeding the limit, the credit will decrease by $50 for every $1000 that the AGI exceeds the limit (additional $40,000)

Child must have a valid SSN to qualify

ITIN and ATIN are not sufficient

Schedule 8812 is used for figuring and reporting the child tax credit

Question 17

Qualifying child for the child tax credit

Answer 17

To be eligible to claim the CTC, taxpayer must have at least one qualifying child, and the child must meet the following test:

Age test – younger than 17 on 12/31

Relationship test – must be child, stepchild, foster child, sibling, step sibling, half sibling, or a descendent of any of them or adopted child

Support test – child must not provide more than half their own support

Dependency test – taxpayer must claim the child as a dependent

Joint return test – child cannot file a joint return unless to claim a refund

Citizenship test – must be a US citizen or US resident alien with a valid SSN

Residency test – lived with taxpayer more than half the year – exceptions for temporary absences, or children who are born/die within the year

Question 18

Additional child tax credit

How much is it?
How to calculate it?
Where is it reported?

Answer 18

A refundable credit

Taxpayer must be able to claim the CTC in order to claim the additional child tax credit credit

This is the refundable component of the CTC

Taxpayer can claim up to $1600 for each qualifying child

Based on the lesser of :

15% percent of the taxpayers taxable earned income that is over $2500

Or

The amount of unused child tax credit

Schedule 8812 is used for figuring and reporting the ACTC

Question 19

Credit for other dependence – ODC
What is it?
How much?
Who qualified?

Answer 19

Nonrefundable credit

Applies to dependence who do not qualify for the CTC

Such as children who are over the age threshold or other dependence, such as elderly parents

Credit is $500 per qualifying dependent

Cannot claim the ODC for themselves or a spouse – only available for dependence listed on the return

Dependent must be a US citizen, US national, or US resident and have a valid identification number by the due date of the return

AGI phase out begins at $200,000 for unmarried, and $400,000 for joint files

Credit reduced by $50 for each $1000 above the threshold

Question 20

Adoption credit

What is it?
How much?
Who can you adopt?
Eligibility?
Where reported?

Answer 20

A nonrefundable credit

Up to $15,950 per child can be taken for qualified expenses paid to adopt a child

MFS taxpayers cannot claim the adoption credit

Eligible child must be under the age of 18 or physically or mentally disabled

Income phase out range for all filing statuses is the same

MAGI phase out starts at $239,230 and ends at $279,230

Any unused credit may be carried forward for up to five years

Credit is claimed on form 8839 – qualified adoption expenses

The adoption of a domestic child – qualified expenses paid before the year in which the adoption becomes final may be claimed in the year after the expenses were paid . Applies even if the adoption is unsuccessful.

Question 21

Adopting a special-needs child

Answer 21

The maximum credit amount is allowed, even if the taxpayer does not have any adoption expenses

Special needs child must be a US citizen or US resident when the adoption begins

And one of the following must apply

1. The state has determined the child cannot be returned to the parents home.
2. The state has determined the child will not be adopted unless assistance is provided to the adoptive parents.

Child does not have to be disabled in order to qualify as “ special needs”

Question 22

Employer provided adoption benefits

Answer 22

They are excluded from income

The exclusion and the credit cannot be claimed for the same expenses

No double dipping allowed

Question 23

Adoption expenses
What’s included?
What’s not included?

Answer 23

Qualifying adoption expenses must be directly related to the adoption of the child

Including …

Attorney fees, adoption, fees, and court cost

Travel expenses related to the adoption, including meals and lodging

Cost of an unsuccessful adoption of a US citizen or US national

Adoption expenses to adopt a foreign child

Expenses do not include …

Any illegal adoption expenses
Surrogate parenting arrangement
Adoption of a spouse’s child

Question 24

Foreign adoptions

Answer 24

If the eligible child is from a foreign country, the taxpayer cannot take the credit unless the adoption becomes final

A foreign child is defined as a child who was not a citizen or resident of the US at the time the adoption effort began

Foreign adoptions do not qualify as the special needs adoption. Only qualifying expenses.

Expenses paid before or during the adoptive process are only includable for the credit once the adoption actually becomes final

Question 25

Post adoption expenses

Answer 25

Any additional expenses paid after an adoption becomes final…

Are included in the tax credit calculation in the year paid

Regardless of whether the adoption was foreign or domestic

Question 26

Educational credits

What are they?
Can you claim both?
Where reported?

Answer 26

Two education credits are available based on qualified expenses. Taxpayer pays for post secondary education.

1. American opportunity tax credit – also called the AOC or AOTC
2. Lifetime learning credit.

Taxpayer cannot claim both the American opportunity credit and the lifetime learning credit for the same student in one year

But can take both credits for different students claim as dependents

Form 8863, education, credits, is used to figure and claim both education credits

Question 27

Education credits – who qualifies

Answer 27

Taxpayer can receive education credits for themselves, their spouse, and any dependents who attend an eligible educational institution during the previous tax year

Question 28

Education credits – eligible institutions

Answer 28

Include colleges, universities, vocational schools, and community colleges

Payments made in advance for an academic term beginning within the first three months of the next calendar year can also be claimed . (in the same year the cost is paid – before school starts.)

Question 29

Education credits – who doesn’t qualify

Answer 29

1. If you could be claimed as a dependent on another person’s tax return.
2. Married filing separately.
3. Individuals with a non-resident alien spouse are not eligible.
4. Income that exceeds the phase out limits.

Unmarried individuals limits are between $80,000 and $90,000

Married couples filing jointly phase out limits are $160,000 and $180,000

Question 30

Education credits – qualified expenses

Any reductions?

Answer 30

Tuition and related fees

Required textbooks and other course materials required as a condition of enrollment

Any course involving sports, games, or hobbies is not a qualifying expense unless the course is part of the students degree program - or if taken to improve job skills in the case of the lifetime learning credit

Qualified education, expenses must be reduced by the amount of any tax-free education assistance received – such as pell grants, tax-free portions of scholarships, and employer provided educational assistance

The following expenses cannot be used:

1. Room and board.
2. Medical fees.
3. Insurance expenses.
4. Transportation cost.
5. Any other personal, living, or family expenses.

Question 31

How are tuition expenses reported to students

Answer 31

Form 1098 – T, tuition statement

Issued by the school

Shows tuition expense and scholarships

Question 32

American opportunity tax credit – AOTC

Answer 32

Maximum credit of $2500 for each eligible student

The credit covers 100% of the first $2000 and 25% of the second $2000 of eligible expenses per student

Has a refundable portion …

Up to 40% of the credit can be refunded – allowing taxpayers to receive a maximum of $1000 even if they do not owe any tax

Question 33

AOTC requirements

Answer 33

1. Degree requirement – student must be enrolled in a program that leads to a degree, certificate, or other recognized educational credential.
2. Minimum load – student must be enrolled at least halftime for at least one academic period beginning in the tax year
3. no felony drug conviction cannot have any felony convictions for possessing or distributing a controlled substance
4. Four years of post, secondary education – credit can be claimed only for expenses related to a students post, secondary education and only for a maximum of four years.

Question 34

Lifetime learning credit

Answer 34

A nonrefundable tax credit of 20% of qualified tuition, fees, and any amounts paid directly to the educational institution for required books, supplies, and equipment up to $10,000 paid during the tax year

Maximum credit is $2000 per tax return, not per student

A families maximum credit is the same regardless of the number of qualified students

Question 35

Lifetime learning credit requirements

Answer 35

1. No degree or workload requirement
2. All levels of post, secondary education, undergraduate, graduate, or professional degree candidate. Courses can also be just for professional development.
3. An unlimited number of years.
4. Felony drug convictions permissible.

Question 36

Earned income tax credit – EITC

Answer 36

A refundable tax credit for lower income people who work and have earned income and adjusted gross income under certain thresholds

Must have a valid Social Security number by the due date of the return, including extensions

Refunds for taxpayers claim in the EIC will not be issued prior to February 15

Question 37

EITC requirements

Answer 37

1. Have a SSN that is valid for employment.
2. Have earned income from wages, combat pay, or self-employment, etc.
3. Investment income must be $11,000 or less for the year. (this figure inflates every year.) investment income includes interest, payments, dividends, capital gains, and passive rental income.
4. Not be claimed as a dependent by another taxpayer.
5. Be a US citizen or legal resident all year. (non-resident alien married to a US citizen or resident alien filing jointly can still qualify under some narrow circumstances.
6. Cannot file form 2555 – related to the foreign earned income exclusion.

Question 38

Earned income and AGI limits

Answer 38

The amount of the EITC credit varies based on a taxpayers earnings and how many children are claimed as dependence on the return

Both taxpayers earned income and their AGI must be less than certain thresholds

Question 39

EITC – no qualifying children – maximum amount

Answer 39

$600

Question 40

EITC – one qualifying child – maximum amount

Answer 40

$3995

Question 41

EITC – two qualifying children – maximum amount

Answer 41

$6604

Question 42

EITC – three or more qualifying children – maximum amount

Answer 42

$7430

Question 43

What qualifies as income for the EITC

Answer 43

Only earned income, such as wages, tips, combat pay, union, strike, benefits, and net earnings from self-employment qualifies for the EITC

Earned income, for EIC purposes, does not include:

Social Security benefits, SSI, or welfare payments

Alimony or child support

Pensions or annuities

Unemployment benefits

Inmate wages, including work, release programs

Income from investments, passive rental activities, or other passive sources

Income that is excluded from tax is generally not considered earned income for the EIT – with the exception of combat pay and qualified Medicare waiver payments

Taxpayer can choose to include this non-taxable pay in their earned income if it gives them a better tax result

Question 44

Qualifying children for EITC purposes

Answer 44

Must be all the following tests

1. Relationship test
2. Age test.
3. Joint return test.
4. Residency test.

Question 45

EITC qualifying child – relationship test

Answer 45

Child must be related to the taxpayer in one of the following ways:

1. Son, daughter, stepchild, eligible, foster child, adopted child, or descendent of any of them.
2. Brother, sister, brother, sister, stepbrother, stepsister, or descendent of any of them.
3. A foster child can be eligible if placed in the taxpayers home by an authorized placement agency or by the courts.

Qualifying child listed on schedule EIC must have a valid SSN .

If the dependent does not have an SSN – taxpayer eligible to take the smaller credit available as if no children claimed

Question 46

EITC qualifying child – age test

Answer 46

To qualify for the EITC, the child must be

Age 18 or younger

A full-time student, age 23 or younger

Any age, if permanently disabled

Plus, the qualifying child must be younger than the taxpayer claiming them unless the dependent is permanently disabled

Question 47

EIC qualifying child – joint return test

Answer 47

The qualifying child or dependent cannot file a joint return with a spouse except to claim a refund

Question 48

EITC qualifying child – residency test

Answer 48

The child must have lived with the taxpayer in the United States for more than half the year

Only a custodial parent can claim the EITC

US military personnel stationed outside the US are considered to live in the US during that duty.

A child who was born or died during the year, would meet the residency test for the entire year if the child lived with the taxpayer the time the child was alive

Question 49

Childless EITC

Answer 49

A taxpayer with a qualifying child can claim the EITC without any age limitations

But taxpayer without a child can only claim the EIT see if all of the following test are met

1. Must be between the age of 25 and 65 – on a joint return only one spouse must meet the age requirement
2. Must not qualify as a dependent of another person.
3. Must live in the United States for more than half of the year.
4. Cannot file form 2555 – related to the foreign earned income exclusion.

Question 50

EITC fraud and penalties

Answer 50

If the IRS audits taxpayers return and disallows all or part of the EITC – the taxpayer…

1. Must pay back the amount in error with interest.
2. May need to file form 8862, information to claim earned income credit after disallowance.
3. Cannot claim the EIT for the next two years if the IRS determines the air is because of reckless or intentional disregard of the rules.
4. Cannot claim EIT for the next 10 years if the IRS determines is because of fraud.

Question 51

Retirement savings contributions credit

How much?
How to calculate?
Where is it reported?

Answer 51

Also referred to as the savers credit

The credit is 10%, 20%, or 50% of eligible contributions to IRAs or an employer, sponsored retirement plan

Up to a maximum credit of $1000 or $2000 MFJ, depending on a taxpayers AGI

Amount of the credit is the eligible contribution by the applicable credit rate, which is based on filing status and AGI

Foreign income cannot be included in the taxpayers AGI for the purposes of calculating this credit

Taxpayer must generally subtract the amount of distributions received from their retirement plans

• in the two years before the year the credit is claimed
• the year the credit is claimed
• the period after the end of the year, but before the due date, including extensions, for filing the return for the credit year

The credit is claimed on form 8880, credit for qualified retirement, savings contributions

Question 52

Savers credit eligibility

Answer 52

To be eligible for for this credit, the taxpayer must fulfill all of the following requirements:

1. At least age 18 or older.
2. Not be a full-time student.
3. Not claimed as a dependent on another person‘s return.

Question 53

Credit for excess Social Security and RRTA tax withheld

Answer 53

The credit is for workers who overpay their tax for Social Security or railroad retirement taxes

Fully refundable

If a single employer over withheld too much – that is the employers error to adjust the access for the employee

If the employer refuses – file a claim for refund using form 843 – claim for refund and request for abatement