Ch.6 Credits and Special Taxes

Taxpayers are allowed two tax breaks for adoption expenses. They are allowed: Qualified Expenses Paid personally Paid by employer

Credit , Exclusion

The child credit is $1,000 per qualifying child unless it is phased out due to higher levels of parental income.

True

The child tax credit is not available for children ages 17 and older.

True

Glen and Mary have two children, Chad, age 12, and Linda, age 8. For 2014, Chad has $4,000 in net unearned income and Linda has net unearned income of $1,000. If the total parental tax for 2014 is $1,500, how would the tax be allocated between Chad and Linda?

$1,200 to Chad and $300 to Linda Feedback: $4,000 / $5,000 × $1,500 = $1,200 and $1,000 / $5,000 × $1,500 = $300

Clark, a widower, maintains a household for himself and his two dependent preschool children. For the year ended December 31, 2014, Clark earned a salary of $32,000. He paid $3,500 to a housekeeper to care for his children in his home, and also paid $1,500 to a kiddie play camp for child care. He had no other income or expenses during 2014. How much can Clark claim as a child care credit in 2014?

$1,300 Feedback: 26% × ($3,500 + $1,500)

Denice is divorced and files a single tax return claiming her two children, ages 7 and 9, as dependents. Her AGI for 2014 is $81,500. Denice's Child Credit for 2014 is:

$1,650 Feedback: (2 × $1,000) - [($81,500 - $75,000) / $1,000 rounded up to the nearest whole number × $50]

Jessica and Robert have two young children. They have $7,000 of qualified child care expenses and an AGI of $20,000 in 2014. What is their allowable child care credit?

$1,920 Feedback: 32% × $6,000, the maximum qualified child care.

In 2014, the child tax credit available to married taxpayers filing jointly is phased out, beginning at:

$110,000

Keith has a 2014 tax liability of $2,250 before taking into account his American Opportunity credit. He paid $2,600 in qualifying expenses, was a full-time student, was not claimed as a dependent on his parents' return, and his American Opportunity credit was not subject to phase out. What is the amount of his American Opportunity credit allowed?

$2,150 Feedback: 100% × $2,000 + 25% × $600

For the 2014 tax year, Sally, who is divorced, reported the following items of income: Interest income $ 600 Wages $4,000 Earnings from self-employment $3,000 She maintains a household for herself and her 1-year-old son who qualifies as her dependent. What is the earned income credit available to her for 2014, using the tables?

$2,389

Steve goes to Tri-State University and pays $40,000 in tuition. Steve works a part-time job to pay for his schooling and has an AGI of $17,000. How much is his American Opportunity Credit?

$2,500

Lee and Pat are married taxpayers living in Louisiana. Lee earns wages of $40,000 and has $5,000 of dividend income from separate property. Lee and Pat have interest income from community property of $10,000. If Lee and Pat file separate income tax returns, what amount of income must be included on Lee's separate tax return?

$27,500 Feedback: ($40,000 + $5,000 + $10,000) / 2

In 2014, Alex has income from wages of $16,000, adjusted gross income of $18,000, and tax liability of $300 before the earned income credit. What is the amount of Alex's earned income credit for 2014, assuming his 5-year-old dependent son lived with him for the full year?

$3,274

Curly and Rita are married, file a joint return, and have two dependent children, ages 11 and 13. Their AGI is $117,000. By how much is their child credit reduced in 2014?

$350 Feedback: ($117,000 - $110,000) / $1,000 rounded up to the nearest whole number × $50

Hal is enrolled for one class at a local community college; tuition cost him $190. Hal's AGI is $20,000. Hal can take a lifetime learning credit of:

$38 Feedback: 20% × $190

William and Irma have two children, Tom, age 13, and Sara, age 8. For 2014, Tom and Sara have a total parental tax of $5,600. Tom's net unearned income is $5,000, while Sara's net unearned income is $15,000. How much of the parental tax would be allocated to Sara on her 2014 tax return?

$4,200 Feedback: $15,000 / $20,000 × $5,600

Molly and Steve are married and live in Texas. Molly earns a salary of $50,000 and Steve owns a rental property that gives him $35,000 of income. If they filed separate tax returns, what amount of income would Steve report?

$42,500 Feedback: ($50,000 + $35,000) / 2

​Caprice is a single 42-year-old with income of $12,000 in 2014. She lacked minimum essential coverage for 7 months in 2014. What is her individual shared responsibility?

$55.44 Feedback: The greater of: $12,000-$10,150 = $1,850 x 1% = $18.50 or $1.54/month or $95 or $7.92/month. $7.92 x 7 months = $55.44

Fletch and Cammie Gates are married with three dependent children and household income of $55,140 in 2014. The Gates purchased health care insurance on their state's exchange for total premiums of $6,000. A designated silver plan for their family in their state costs $9,700. Calculate the Gates' premium tax credit.​

$6,000. $55,140/$27,570 = 200% os the federal poverty level thus the applicable percentage is 6.3%. $55,140 x 6.3 % = $3,474. $9,700 - $3,474 = $ 6,226. The premium tax credit is the lesser of $6,226 or $6,000.

Jim has foreign income. He earns $26,000 from Country A which taxes the income at a 20 percent rate. He also has income from Country B of $18,000. Country B taxes the $18,000 at a 10 percent rate. His U.S. taxable income is $90,000, which includes the foreign income. His U.S. income tax on all sources of income before credits is $19,000. What is his foreign tax credit?

$7,000 Feedback: $7,000 calculated as the lesser of ($26,000 × 20%) + ($18,000 × 10%) = $7,000 or ($26,000 + $18,000) / $90,000 × $19,000 = $9,289

Carla and Bob finalized an adoption in 2014. Their adoption fees totaled $9,500. They have AGI of $207,000 for 2014. What is their adoption credit?

$7,334 Feedback: ($237,880 - $207,000) / $40,000 × $9,500 = $7,334

Robert and Mary file a joint tax return for 2014, with adjusted gross income of $30,000. Robert and Mary earned income of $20,000 and $12,000 respectively, during 2014. In order for Mary to be gainfully employed, they pay the following child care expenses for their 4-year-old son, John: Union Day Care Center $1,700 Wilma, baby sitter (Robert's mother) $1,000 What is the amount of the child and dependent care credit they should report on their tax return for 2014?

$729 Feedback: 27% × ($1,700 + $1,000) = $729

Taxpayer Q has net taxable income of $30,000 from Country Y which imposes a 40 percent income tax. In addition to the income from Country Y, taxpayer Q has net taxable income from U.S. sources of $120,000, and U.S. tax liability, before the foreign tax credit, of $41,750. What is the amount of Q's foreign tax credit?

$8,350 Feedback: $8,350 calculated as the lesser of $30,000 x 40% = $12,000 or $30,000 / ($120,000 + $30,000) x $41,750 = $8,350

​Phillip and Naydeen Rivers are married with two dependent children. The family has household income of $35,325 in 2014. They paid $11,000 for health care for the year. A designated silver plan would have cost $9,800. What is the Rivers' premium tax credit?

$8,387 Feedback: $35,325/$23,550 = 150% of Federal poverty level making the applicable percentage 4%. $35,325 x 4% = $1,413. $9,800 - $1,413 = $8,387

Bob and Carol file their tax returns using the married filing jointly status. Their AGI is $132,500. They have two children, ages 11 and 7. How much child tax credit can Bob and Carol claim for their two children?

$850 Feedback: (2 × $1,000) - [($132,500 - $110,000) / $1,000 rounded up to the nearest whole number × $50]

In 2014, which of the following children would have income taxed at their parents' rates?

A 12-year-old child with net unearned income of $2,000

Which one of the following taxpayers qualify for the earned income credit?

A 31-year-old construction worker with $22,000 of AGI and two children.

Choose the correct statement:

A taxpayer may receive a 30-percent credit for installing a windmill, which generates electricity, at his vacation home.

Which of the following tax credits is not available for the 2014 tax year?

All of the above are available credits

A parent may elect to include a child's income in the parent's return if:

All of the above must be met for a parent to elect to include a child's income in the parent's return.

A tax credit is allowed for qualified adoption expenses paid by taxpayers:

And an income exclusion is allowed for qualified adoption expenses paid for by taxpayers' employers.

The child and dependent care provisions:

Are available for spouses incapable of self-care.

Which of the following is not a true statement regarding community property law?

Colorado, Ohio, and Florida are community property states.

Which of the following is not an adjustment or tax preference item for 2014 for purposes of the individual alternative minimum tax (AMT)?

Cash charitable contributions

Taxpayers are required to wait until they file their tax return to receive the premium tax credit. ​

False

To be eligible for the earned income credit for 2014, a taxpayer must have a "qualifying child."

False Feedback: As long as adjusted gross income (AGI) is below a certain level, and the taxpayer is over 25 and under 65 years old and not claimed as a dependent on another return, a taxpayer may be eligible for the earned income credit even if the taxpayer does not have a qualifying child.

All taxpayers are required to have minimum essential health coverage.​

False Feedback: Certain taxpayers can file an exemption.

The total expenses that can be taken as a credit for all tax years for adoption of a child without "special needs" is $6,000.

False Feedback: For 2014, the total expenses that can be taken as a credit for all tax years with respect to an adoption of a child without "special needs" are $13,190.

In determining the amount of the child and dependent care credit, there is a limit of $2,000 on the amount of qualified expenses for one dependent.

False Feedback: In determining the amount of the child and dependent care credit, there is a limit of $3,000 on the amount of qualified expenses for one dependent and $6,000 for two or more dependents.

New York is a community property state.

False Feedback: New York is not a community property state.

Most states are community property states.

False Feedback: Only nine states are community property states.

Salary earned by minors may be taxed at their parents' tax rate.

False Feedback: Only unearned income of minors may be taxed at their parents' tax rate.

Amounts paid to a relative generally do not qualify as child care expenses.

False Feedback: Payments to relatives are eligible for the child and dependent care credit, unless the payments are to a dependent of the taxpayer or to the taxpayer's child who is under the age of 19 at the end of the tax year.

A taxpayer with earned income of $50,000 is not eligible to claim the credit for child and dependent care expenses.

False Feedback: Taxpayers at all levels of income are eligible to claim a credit of at least 20 percent of qualified expenses for child and dependent care expenses.

In calculating the individual AMT, the individual alternative minimum tax liability may not exceed the regular tax liability of the taxpayer.

False Feedback: Taxpayers must pay the alternative minimum tax if their AMT liability is larger than their regular tax liability.

The foreign tax credit applies only to foreign corporations.

False Feedback: The foreign tax credit applies to U.S. taxpayers who earned income from a foreign country and who were subject to income taxes in that foreign country.

In the case of the adoption of a child who is not a U.S. citizen or resident of the U.S., the credit for qualified adoption expenses is available:

In the year the adoption becomes final.

The American Opportunity credit

Is available for qualifying expenses paid on behalf of the taxpayer and his or her spouse, in addition to those paid for dependents.

Assume Karen is 12 years old and her only income is $2,500 of interest income from a bank account with money her parents have given her to save for college. What are the options Karen has for filing her tax return?

Karen can file a separate tax return or her parents can elect to include her in their tax return, paying tax on $500 of her interest income at their rate of tax.

For 2014, which of the following is a tax adjustment or tax preference item for the individual AMT computation?

Miscellaneous itemized deductions

Which of the common deductions below are allowed for both regular tax purposes and for AMT purposes?

Mortgage interest from the acquisition of a residence costing less than $1 million

The earned income credit:

Must be calculated on earned income as well as adjusted gross income in some cases.

Which of the following types of income is not subject to the "kiddie tax?"

Salary income

Which of the following itemized deductions may not be deducted in computing the individual alternative minimum tax?

State income taxes

Which of the following is true of the alternative minimum tax?

The amount of a taxpayer's state income tax may not be deducted for the purpose of computing the alternative minimum tax.

Which one of the following conditions must be satisfied in order for a married taxpayer to be taxed on only his income if he resides in a community property state?

The husband and wife must live apart for the entire year.

Which of the common deductions below are allowed for regular tax purposes but not for AMT purposes?

The interest deduction for up to $100,000 of home equity debt which is not used to purchase or improve part of a principal residence

An individual may claim both a credit and an exclusion from income in connection with the adoption of an eligible child, but may not claim both a credit and an exclusion for the same expense.

True

For 2014, the maximum amount of expenses that qualify for the child and dependent care credit is the same for three dependents as it is for two dependents.

True

For all taxpayers, except those married filing separately, the individual alternative minimum tax rate for 2014 is 26 percent on the first $182,500 of income and 28 percent on income above $182,500.

True

If the net unearned income of a minor child is to be taxed at the parents' tax rate, the parents may elect, under certain conditions, to include the child's gross income on their tax return.

True

In all community property states, income from community property is community income.

True

Married taxpayers must file a joint tax return to claim the child and dependent care credit.

True

Net unearned income of certain minor children is taxed at their parents' tax rates.

True

The alternative minimum tax must be paid only if the tentative minimum tax exceeds a taxpayer's regular tax liability.

True

The use of the earned income credit could result in a taxpayer receiving a refund even though he or she has not paid any income taxes.

True

Unearned income of a 16-year-old child may be taxed at his or her parents' income tax rate.

True