Income Taxation I - Exam III - Chapter 12 Questions
Oak Corporation holds the following general business credit carryovers. 2016: $5,000 2017: $15,000 2018: $6,000 2019: $19,000 Total Carryovers: $45,000 If Oak's general business credit generated by 2020 activities equals $36,000 and the total credit allowed during the current year is $60,000 (based on tax liability), what amounts of the current general business credit and carryovers are utilized against the 2020 income tax liability? What is the amount of unused credit carried forward to 2021?
2020 general business credit: $36,000 - (Total credit allowed (based on tax liability): $60,000 - Less: Utilization of carryovers on FIFO basis 2016: (5,000) - 2017 (15,000) - 2018 (6,000) - 2019 (19,000) Remaining credit allowed: $15,000) - Applied against 2020 general business credit: (15,000) = 2020 unused amount carried forward to 2021: $21,000 Therefore, the sources of the $60,000 general business credit allowed in 2020 are the carryovers of $45,000 from the four previous years and $15,000 of the $36,000 general business credit generated in 2020. Because unused credits may be carried over for up to 20 years, the carryovers from each of the four previous years may be utilized.
Adelyn generated a tentative general business credit of $42,000 for the current year. Her net regular tax liability before the general business credit is $107,000, and her tentative minimum tax is $88,000. Compute Adelyn's allowable general business credit for the year.
Adelyn's allowable general business credit for the year is limited to $19,000, determined as follows: Net income tax $107,000* - Less: The greater of: •$88,000 (tentative minimum tax) or •$20,500 [25% × ($107,000 − $25,000)] : (88,000) = Amount of general business credit allowed: $19,000 *Net income tax = $107,000 (regular tax liability) + $0 [alternative minimum tax ($88,000 tentative minimum tax − $107,000 regular tax liability)] − $0 (nonrefundable credits).
The AMT is a surtax, calculated as a percentage of alternative minimum taxable income (AMTI). AMTI generally starts with the taxpayer's taxable income, prior to any standard deduction taken. To this amount, the taxpayer (1) adds designated preference items (e.g., tax-exempt interest income on private activity bonds), (2) makes other specified adjustments (e.g., to reflect a slower cost recovery method), (3) adjusts certain AMT itemized deductions for individuals (e.g., interest incurred on housing), and (4) subtracts an exemption amount. The taxpayer must pay the greater of the resulting AMT or the regular income tax (reduced by all allowable tax credits). AMT preferences and adjustments are assigned to partners, LLC members, and S corporation shareholders. The AMT does not apply to C corporations for tax years beginning after 2017.
Alternative Minimum Tax
This credit applies for qualifying expenses for the first four years of postsecondary education. Qualified expenses include tuition and related expenses and books and other course materials. Room and board are ineligible for the credit. The maximum credit available per student is $2,500 (100 percent of the first $2,000 of qualified expenses and 25 percent of the next $2,000 of qualified expenses). Eligible students include the taxpayer, taxpayer's spouse, and taxpayer's dependents. To qualify for the credit, a student must take at least one-half of the full-time course load for at least one academic term at a qualifying educational institution. The credit is phased out for higher-income taxpayers. § 25A.
American Opportunity Credit
In 2020, Bianca earned a salary of $164,000 from her employer. How much in FICA and Medicare taxes will be withheld from Bianca's salary?
Bianca's FICA tax is $8,537.40 (6.2% × $137,700), and her Medicare tax is $2,378.00 (1.45% × $164,000). The employer must match both of these withheld taxes, which total $10,915.40.
A tax credit based solely on the number of qualifying children under age 17. The maximum credit available is $2,000 per qualifying child. (In addition, a $500 nonrefundable credit is available for qualifying dependents other than qualifying children.) A qualifying child must be claimed as a dependent on a parent's tax return and have a Social Security number to qualify for the credit. Taxpayers who qualify for the child tax credit may also qualify for a supplemental credit. The supplemental credit is treated as a component of the earned income credit and is therefore refundable. The credit is phased out for higher-income taxpayers. § 24. See also dependent tax credit.
Child Tax Credit
Cooper National is incorporated in Alabama. It generated a $5,000,000 profit on its overseas operations this year. Cooper paid the following to various other countries. *$1,000,000 in income taxes. *$1,500,000 in value added taxes. What are Cooper's alternatives as to the treatment of these tax payments on its U.S. Federal income tax returns?
Cooper's alternatives as to its foreign tax payments are as follows: •Deduct $2,500,000 in foreign taxes in computing taxable income, or •Deduct the $1,500,000 value-added tax (VAT) and use the $1,000,000 income tax payment in computing a foreign tax credit (FTC). The $1,000,000 income tax can be split in any manner between the credit and deduction. Usually, the credit is more advantageous for the taxpayer. An FTC is not allowed for non-income taxes such as the VAT.
A tax credit ranging from 20 percent to 35 percent of employment-related expenses (child and dependent care expenses) for amounts of up to $6,000 is available to individuals who are employed (or deemed to be employed) and maintain a household for a dependent child under age 13, disabled spouse, or disabled dependent. § 21.
Credit for Child and Dependent care expenses
A nonrefundable credit is available based on eligible contributions of up to $2,000 to certain qualified retirement plans, such as traditional and Roth IRAs and § 401(k) plans. The benefit provided by this credit is in addition to any deduction or exclusion that otherwise is available resulting from the qualifying contribution. The amount of the credit depends on the taxpayer's AGI and filing status. § 25B.
Credit for certain retirement plan contributions
A nonrefundable credit is available to employers who provide child care facilities to their employees during normal working hours. The credit, limited to $150,000, is comprised of two components. The portion of the credit for qualified child care expenses is equal to 25 percent of these expenses, while the portion of the credit for qualified child care resource and referral services is equal to 10 percent of these expenses. Any qualifying expenses otherwise deductible by the taxpayer must be reduced by the amount of the credit. In addition, the taxpayer's basis for any property used for qualifying purposes is reduced by the amount of the credit. § 45F.
Credit for employer-provided child care
A nonrefundable credit is available to employers who pay wages to employees while they are on family and medical leave. The credit is equal to 12.5 percent of wages paid to qualifying employees (limited to 12 weeks per employee per year). Employers must pay a minimum of 50 percent of the wages normally paid; if wages paid during the leave exceed 50 percent of normal wages, the credit is increased by 0.25 percent for each percentage point above 50 percent to a maximum of 25 percent of wages paid. The credit does not apply to wages paid in taxable years beginning after 2020. § 45S.
Credit for employer-provided family and medical leave
A nonrefundable credit available to small businesses based on administrative costs associated with establishing and maintaining certain qualified plans. While such qualifying costs generally are deductible as ordinary and necessary business expenses, the availability of the credit is intended to lower the costs of starting a qualified retirement program and therefore encourage qualifying businesses to establish retirement plans for their employees. The credit is available for eligible employers at the rate of 50 percent of qualified startup costs. The maximum credit is $500 (based on a maximum $1,000 of qualifying expenses). § 45E.
Credit for small employer pension plan startup costs
Paola and Isadora Shaw are married, file a joint tax return, and have one dependent child, Dante. The Shaws report modified AGI of $148,000. The couple paid $12,000 of tuition and $10,000 for room and board for Dante, a full-time first-year student at Serene College. Determine the amount of the Shaws' American Opportunity credit for the year.
Dante's tuition is a qualified expense for the American Opportunity credit. For 2020, Paola and Isidora may claim a $2,500 American Opportunity credit for Dante's expenses [(100% × $2,000) + (25% × $2,000)].
For 2018 through 2025, the TCJA of 2017 replaced the dependency exemption with a $500 nonrefundable credit. This credit can be claimed for dependents who are not a qualifying child or under the age of 17. The dependent must be a citizen or resident of the United States.
Dependent Tax Credit
A tax credit designed to encourage small businesses to make their facilities more accessible to disabled individuals. The credit is equal to 50 percent of the eligible expenditures that exceed $250 but do not exceed $10,250. Thus, the maximum amount for the credit is $5,000. The adjusted basis for depreciation is reduced by the amount of the credit. To qualify, the facility must have been placed in service before November 6, 1990. § 44.
Disabled Access Credit
A tax credit designed to provide assistance to certain low-income individuals who generally have a qualifying child. This is a refundable credit. To receive the most beneficial treatment, the taxpayer must have qualifying children. However, it is possible to qualify for the credit without having a child. See the text chapter on credits for the computation procedure required in order to determine the amount of the credit allowed.
Earned Income Credit
Emily spent $135,000 to rehabilitate a certified historic building (adjusted basis of $90,000) that originally had been placed in service in 1935. Compute Emily's credit for rehabilitation expenditures.
Emily is entitled to the credit because the building has been substantially rehabilitated (expenditures exceed the adjusted basis). Because the building is a historic structure, Emily is allowed a credit of $27,000 (20% × $135,000).
Taxes that an employer must pay on account of its employees. Employment taxes include FICA (Federal Insurance Contributions Act) and FUTA (Federal Unemployment Tax Act) taxes. Employment taxes are paid to the IRS in addition to income tax withholdings at specified intervals. Such taxes can be levied on the employees, the employer, or both.
Employment Taxes
Various tax credits are available to those who invest in certain energy property. The purpose of the credit is to create incentives for conservation and to develop alternative energy sources.
Energy Tax Credits
The amount of tax (including alternative minimum tax and self-employment tax) a taxpayer expects to owe for the year after subtracting tax credits and income tax withheld. The estimated tax must be paid in installments at designated intervals (e.g., for a calendar year individual taxpayer, by April 15, June 15, September 15, and January 15 of the following year).
Estimated Tax
A U.S. citizen or resident who incurs or pays income taxes to a foreign country on income subject to U.S. tax may be able to claim some of these taxes as a credit against the U.S. income tax. §§ 27 and 901-905.
Foreign tax credit (FTC)
The summation of various nonrefundable business credits, including the tax credit for rehabilitation expenditures, business energy credit, work opportunity credit, research activities credit, low-income housing credit, and disabled access credit. The amount of general business credit that can be used to reduce the tax liability is limited to the taxpayer's net income tax reduced by the greater of (1) the tentative minimum tax or (2) 25 percent of the net regular tax liability that exceeds $25,000. Unused general business credits can be carried back one year and forward 20 years. § 38.
General Business Credit
A tax credit for qualifying expenses for taxpayers pursuing education beyond the first two years of postsecondary education. Individuals who are completing their last two years of undergraduate studies, pursuing graduate or professional degrees, or otherwise seeking new job skills or maintaining existing job skills are all eligible for the credit. Eligible individuals include the taxpayer, taxpayer's spouse, and taxpayer's dependents. The maximum credit is 20 percent of the first $10,000 of qualifying expenses and is computed per taxpayer. The credit is phased out for higher-income taxpayers. § 25A.
Lifetime Learning Credit
During 2020, Lincoln Company hires seven individuals who are certified to be members of a qualifying targeted group. Each employee works in excess of 600 hours and is paid wages of $7,500 during the year. Determine the amount of Lincoln's work opportunity credit.
Lincoln Company's work opportunity credit is $16,800 [($6,000 × 40%) × 7 employees]. If the tax credit is taken, Lincoln must reduce its deduction for wages paid by $16,800. No credit is available for wages paid to these employees after their first year of employment.
Beneficial treatment to owners of low-income housing is provided in the form of a tax credit. The calculated credit is claimed in the year the building is placed in service and in the following nine years. § 42.
Low-income housing credit
Carlson's general business credit (before limitations) for the current year is $84,000. His net income tax is $190,000, tentative minimum tax is $175,000, and net regular tax liability is $185,000. He reports no other Federal income tax credits for the year. Compute Carlson's general business credit allowed for the year, and any amounts that can be carried back and forward.
Net income tax: $190,000 - Less: The greater of: •Tentative minimum tax $175,000 or •25% of net regular tax liability that exceeds $25,000 [25% × ($185,000 − $25,000)]: $40,000 Greater: (175,000) = Amount of general business credit allowed for tax year: $15,000 Because the general business credit allowed for tax year is $15,000, Carlson has $69,000 ($84,000 − $15,000) of unused general business credits that may be carried back or forward.
A credit that is not paid if it exceeds the taxpayer's tax liability. Some nonrefundable credits qualify for carryback and carryover treatment.
Nonrefundable Credits
A credit that is paid to the taxpayer even if the amount of the credit (or credits) exceeds the taxpayer's tax liability.
Refundable Credits
A credit that is based on expenditures incurred to rehabilitate industrial and commercial buildings and certified historic structures. The credit is intended to discourage businesses from moving from older, economically distressed areas to newer locations and to encourage the preservation of historic structures. § 47.
Rehabilitation Expenditures Credit
A tax credit whose purpose is to encourage research and development. It consists of three components: the incremental research activities credit, the basic research credit, and the energy credit. The incremental research activities credit is equal to 20 percent of the excess qualified research expenditures over the base amount. The basic research credit is equal to 20 percent of the excess of basic research payments over the base amount. § 41.
Research Activities Credit
Santiago and Amy are married and file a joint tax return. They have three children, ages 12, 14, and 18. All parties are U.S. citizens. Their AGI is $140,000. Determine any available child tax credit and dependent tax credit.
Santiago and Amy can claim a child tax credit of $2,000 for both of the children ages 12 and 14; $4,000 ($2,000 × 2 children). In addition, they may claim a $500 dependent tax credit for their 18-year-old child (this child is not under age 17 and, therefore, is not eligible for the child tax credit). Since Santiago and Amy's AGI is not in excess of the $400,000 phaseout threshold, the entire $4,500 credit ($4,000 + $500) is allowed.
A tax of 12.4 percent is levied on individuals with net earnings from self-employment (up to $137,700 in 2020) to provide Social Security benefits (i.e., the old age, survivors, and disability insurance portion) for such individuals. In addition, a tax of 2.9 percent is levied on individuals with net earnings from self-employment (with no statutory ceiling) to provide Medicare benefits (i.e., the hospital insurance portion) for such individuals. If a self-employed individual also receives wages from an employer that are subject to FICA, the self-employment tax will be reduced. A partial deduction is allowed in calculating the self-employment tax. Individuals with net earnings of $400 or more from self-employment are subject to this tax. §§ 1401 and 1402.
Self-employment Tax
Ivanna, who has three children under age 13, worked full-time while her husband, Sergio, was attending college for nine months during the year. Ivanna earned $28,000 and incurred $9,100 of child care expenses. Determine the amount of Ivanna and Sergio's child and dependent care credit.
Sergio is deemed to be fully employed and to have earned $500 for each of the nine months (or a total of $4,500). Because Ivanna and Sergio have AGI of $28,000, they are allowed a credit rate of 28%. Ivanna and Sergio are limited to $4,500 in qualified child care expenses ($6,000 maximum expenses, limited to Sergio's deemed earned income of $4,500). Therefore, they are entitled to a tax credit of $1,260 (28% × $4,500) for the year.
Amounts that directly reduce a taxpayer's tax liability. The tax benefit received from a tax credit is not dependent on the taxpayer's marginal tax rate, whereas the benefit of a tax deduction or exclusion is dependent on the taxpayer's tax bracket.
Tax Credits
Jimenez Enterprises is incorporated in Arkansas. It generated a $5,000,000 profit on its overseas operations this year. Jimenez paid $1,000,000 in income taxes to various countries on these profits. Jimenez's marginal Federal income tax rate is 21%. Compute the Jimenez foreign tax credit and carryovers for the year.
The Jimenez foreign tax credit (FTC) for the year is computed as follows. FTC = Lesser of: •Foreign tax imposed $1,000,000, or •FTC overall limitation = U.S. Federal income tax paid on the overseas profits = 21% × $5,000,000 = $1,050,000. Thus, a current $1,000,000 FTC is allowed. All of the foreign tax payments have been recovered by Jimenez, so no FTC carryover is created.
Jimenez Enterprises is incorporated in Arkansas. It generated a $5,000,000 profit on its overseas operations this year. Jimenez paid $1,000,000 in income taxes to various countries on these profits. Jimenez's marginal Federal income tax rate is 21%. Compute the Jimenez foreign tax credit and carryovers for the year. Same as Problem 28, except that Jimenez paid $2,000,000 in income taxes to other countries.
The Jimenez foreign tax credit (FTC) for the year is computed as follows: FTC = Lesser of: •Foreign tax imposed $2,000,000, or •FTC overall limitation = U.S. Federal income tax paid on the overseas profits = 21% × $5,000,000 = $1,050,000. Thus, a current $1,050,000 FTC is allowed. The unused $950,000 foreign tax credit is carried back 1 year and then forward 10 years by Jimenez.
Rafael and Lucy Gonzalez, married taxpayers, each contribute $2,900 to their respective § 401(k) plans offered through their employers. The AGI reported on the couple's joint return is $39,000. Determine their credit for retirement plan contributions (the Saver's Credit).
The maximum amount of contributions that may be taken into account in calculating the credit is limited to $2,000 for Rafael and $2,000 for Lucy. As a result, they may claim a credit for their retirement plan contributions of $800 [($2,000 × 2) × 20%].
Employers are allowed a tax credit equal to 40 percent of the first $6,000 of wages (per eligible employee) for the first year of employment. Eligible employees include certain hard-to-employ individuals (e.g., qualified ex-felons, high-risk youth, food stamp recipients, and veterans). The employer's deduction for wages is reduced by the amount of the credit taken. For qualified summer youth employees, the 40 percent rate is applied to the first $3,000 of qualified wages. The credit does not apply to any amount paid to an individual who begins work for the employer after 2020. §§ 51 and 52.
Work Opportunity Tax Credit
Green Corporation hires six individuals on January 4, 2020, all of whom qualify for the work opportunity credit. Three of these individuals receive wages of $8,500 during 2020, and each individual works more than 400 hours during the year. The other three individuals each work 300 hours and receive wages of $5,000 during the year. a. Calculate the amount of Green's work opportunity credit. b. If Green pays total wages of $140,000 to its employees during the year, how much of this amount can Green deduct, assuming that the work opportunity credit is taken?
a. 3 qualified employees × $6,000 limit on wages for each employee × 40%: $7,200 + 3 qualified employees × $5,000 wages for each employee × 25%: $3,750 = Total work opportunity tax credit: $10,950 b. The wage deduction for 2020 is $129,050 [$140,000 (total wages) − $10,950 (credit)].
Paul and Karen Kent are married, and both are employed (Paul earned $44,000 and Karen earned $9,000 in 2020). Paul and Karen have two dependent children, Samuel and Joy, both under the age of 13. Paul and Karen pay $3,800 ($1,900 for each child) to Sunnyside Day Care Center (422 Sycamore Road, Ft. Worth, TX 76028; Employer Identification Number 11-2345678), to care for their children while they are working. a. Assuming that Paul and Karen file a joint return, what, if any, is their tax credit for child and dependent care expenses?
a. For two or more children, the maximum expense allowed for purposes of the credit for child and dependent care expenses is $6,000. Actual child care expenses ($3,800) are less than this ceiling and lower than Karen's earned income of $9,000 (the spouse with the lesser earned income). Because their combined AGI is more than $43,000, the applicable rate for the credit is 20%. Thus, the credit allowed is $760 (20% × $3,800).
Jenna Rosen, a longtime client of yours, is an architect and the president of the local Rotary chapter. To keep up to date with the latest developments in her profession, she attends continuing education seminars offered by the architecture school at State University. This year, Jenna spends $2,000 on course tuition to attend these seminars. She spends another $400 on architecture books during the year. Jenna's dependent daughter Caitlin is a senior majoring in engineering at the University of the Midwest. During the calendar year, Caitlin incurs the following expenses: $8,200 for tuition ($4,100 per semester) and $750 for books and course materials. Caitlin lives at home while attending school full-time. Jenna is married, files a joint return, and reports a combined AGI with her husband Morrie of $120,000. a. Calculate Jenna's education tax credits for these items.
a. Jenna is eligible to take the American Opportunity credit for her daughter's tuition costs and books. In addition, she can claim the lifetime learning credit for the tuition expenses for her continuing professional education seminars. The architecture books purchased by Jenna are ineligible for the lifetime learning credit. Because Jenna's AGI ($120,000) is less than $160,000, she qualifies for a $2,500 American Opportunity credit (the maximum allowed; Caitlinʼs tuition costs and books exceed this amount). The lifetime learning credit is available per taxpayer on the first $10,000 of qualifying tuition expenses. Accordingly, her tuition ($2,000) would qualify for the credit during 2020. Therefore, Jenna's maximum lifetime learning credit would be $400 (20% × $2,000) for 2020. However, the $400 maximum credit would have to be reduced by $40 because her $120,000 AGI exceeds the threshold level of $118,000 for married taxpayers. [($120,000 − $118,000)/$20,000] × $400 = $40 reduction Maximum credit $400 - Less: Phaseout (40) = Lifetime learning credit $360 Jenna's total education credits amount to $2,860 (American Opportunity credit of $2,500 plus lifetime learning credit of $360). The portion of the costs associated with the continuing education seminars that are not used in the lifetime learning credit calculation are not deductible (they are miscellaneous itemized deductions, which have been suspended from 2018 through 2025).
Kathleen and Glenn decide that this is the year to begin getting serious about saving for their retirement by participating in their employers' § 401(k) plans. As a result, they each have $3,000 of their salary set aside in their qualified plans. a. Calculate the credit for certain retirement plan contributions available to Kathleen and Glenn if the AGI on their joint return is $35,000. b. Kathleen and Glenn persuade their dependent 15-year-old son, Joel, to put $500 of his part-time earnings into a Roth IRA during the year. What is the credit for certain retirement plan contributions available to Joel? His AGI is $7,000.
a. Kathleen and Glenn's contributions to their respective § 401(k) plans are qualified contributions; however, the maximum amount that may be considered in calculating the credit is $2,000 for each taxpayer. In addition, because their AGI is $35,000, the rate of the credit is 50%. Therefore, the credit available to Kathleen and Glenn is $2,000 [($2,000 × 2) × 50%]. b. Joel may not claim the credit for certain retirement plan contributions because he is less than 18 years of age and is claimed as a dependent on his parents' return.
Determine the additional Medicare taxes for these individuals. a. Mario, who is single, earns wages of $440,000. b. George and Shirley are married and file a joint return. During the year, George earns wages of $138,000, and Shirley earns wages of $210,000. c. Simon has net investment income of $38,000 and MAGI of $223,000 and files as a single taxpayer.
a. Mario pays $2,900 of Medicare taxes on the first $200,000 of his wages ($200,000 × 1.45%) and $5,640 of Medicare taxes on his wages in excess of $200,000 [($440,000 − $200,000) × 2.35%]. In total, his Medicare tax is $8,540; his additional Medicare tax is $2,160 [($440,000 - $200,000) × 0.9%]. b. George and Shirley report total wages of $348,000. George and Shirley pay total Medicare taxes of $5,928: ($250,000 × 1.45%) = $3,625 plus ($348,000 − $250,000) = $98,000 × 2.35% = $2,303. Their additional Medicare tax is $882 ($98,000 × 0.9%). c. Simon pays a Medicare tax on the lesser of (1) $38,000 (his net investment income) or (2) $23,000 (the amount by which his MAGI exceeds the $200,000 threshold). As a result, Simon's additional Medicare tax on unearned income will be $874 ($23,000 × 3.8%).
Paul Chaing (4522 Fargo Street, Geneva, IL 60134) acquires a qualifying historic structure for $350,000 (excluding the cost of the land) and plans to substantially rehabilitate the structure. He is planning to spend either $320,000 or $380,000 on rehabilitation expenditures. a. The computation that determines the rehabilitation expenditures tax credit available. b. The effect of the credit on Paul's adjusted basis in the property. c. The cash-flow differences as a result of the tax consequences related to his expenditure choice.
a. Paul Chaing has acquired a qualifying historic structure for $350,000 (excluding the cost of land) with the intention of substantially rehabilitating the building. He has inquired as to the availability of the rehabilitation tax credit and its impact on the structure's cost recovery basis if he incurs either $320,000 or $380,000 of qualifying rehabilitation expenditures. To qualify for the rehabilitation credit, Paul must substantially rehabilitate the structure. The substantial rehabilitation requirement provides that a taxpayer must incur rehabilitation expenditures that exceed the greater of (1) the adjusted basis of the property before the rehabilitation ($350,000) or (2) $5,000. Therefore, if Paul chose to incur only $320,000 on the rehabilitation, the amount would not be enough to qualify as a "substantial rehabilitation" and no credit would be available. The depreciable basis of the property would be the sum of its original cost plus the capital improvements, or $670,000 ($350,000 + $320,000). If Paul incurred $380,000 for the rehabilitation project, a substantial rehabilitation would result. Therefore, the rehabilitation tax credit available to Paul would be $76,000 ($380,000 × 20%). The depreciable basis of the property, which would be reduced by the full amount of the credit, would be $654,000 [$350,000 (original cost) + $380,000 (capital improvements) − $76,000 (amount of credit)]. Although other considerations are likely relevant to Mr. Chaing while he decides which of the two renovation projects to pursue, certainly the impact of the rehabilitation tax credit on the current cash flow should not be overlooked. If he decides to undertake the more expensive project (i.e., the one costing $380,000 rather than the one costing $320,000), the higher cost would be more than offset in the current year by the benefit he would receive from the tax credit. Thus, the short-term cash flow advantage would total $16,000 [$76,000 (available tax credit) − $60,000 (incremental cost associated with the more expensive project)]. Note that this cash flow advantage would be reduced slightly by the smaller depreciation deduction associated with the credit.
Tom, a calendar year taxpayer, informs you that during the year, he incurs expenditures of $40,000 that qualify for the incremental research activities credit. In addition, Tom's research-credit base amount for the year is $32,800. a. Determine Tom's incremental research activities credit for the year. b. Tom is in the 24% tax bracket. Determine which approach to the research expenditures and the research activities credit (other than capitalization and subsequent amortization) would provide the greater tax benefit.
a. Qualified research expenditures for the year: $40,000 - Less: Base amount: (32,800) = Incremental research expenditures: $7,200 * Tax credit rate × 20% Incremental research activities credit: $1,440 b. The tax benefit of Tom's choices is determined as follows: Choice 1: Reduce the deduction by 100% of the credit and claim the full credit. $40,000 (qualified expenditures) − $1,440 (credit): $38,560 * Tax rate × 24% Tax benefit of reduced deduction: $9,254 + Plus: Allowed credit: 1,440 = Total tax benefit of Choice 1: $10,694 Choice 2: Claim the full deduction and reduce the credit by the product of 100% of the credit times 21% (the corporate income tax rate). Deduction (qualified expenditures): $40,000 * Tax rate × 24% Tax benefit of full deduction = $9,600 + Plus: Reduced credit: $1,440 − [(100% × $1,440) × 21%]: 1,138 = Total tax benefit of Choice 2: $10,738 Thus, Choice 2 provides Tom a greater tax benefit of $44 ($10,738 − $10,694).
Alison incurs the following research expenditures. *In-house wages: $60,000 *In-house supplies: $5,000 *Paid to ABC, Inc., for research services: $80,000 a. Determine the amount of Alison's qualified research expenditures for the tax year. b. If the taxpayer's base amount is $50,000, what is Alison's incremental research activities credit?
a. The qualified research expenditures are $117,000 [$60,000 + $5,000 + ($80,000 × 65%)]. b. The incremental research activities credit is $13,400 [($117,000 − $50,000) × 20%].
Which of the following individuals qualify for the earned income credit for 2020? a. Thomas is single, is 21 years old, and has no qualifying children. His income consists of $9,000 in wages. b. Shannon, who is 27 years old, maintains a household for a dependent 11-year-old son and is eligible for head-of-household tax rates. Her income consists of $16,050 of salary and $50 of taxable interest (Shannon's AGI is $16,100). c. Keith and Susan, both age 30, are married and file a joint return. Keith and Susan have no dependents. Their combined income consists of $28,500 of salary and $100 of taxable interest (i.e., their AGI is $28,600). d. Colin is a 26-year-old, self-supporting, single taxpayer. He has no qualifying children and generates earnings of $9,000.
a. Thomas is not eligible for the earned income credit because he does not have a qualifying child and is not between the ages of 25 and 64. b. Shannon is eligible for the earned income credit because she has a qualifying child. Because her earned income and AGI are below the income level where the earned income credit begins to phase out ($19,330 in 2020), Shannon qualifies for the maximum earned income credit. c. Keith and Susan are not eligible for the earned income credit. Their income exceeds the disqualifying threshold for the credit that is available when there is no qualifying child ($21,710 in 2020). d. Even though Colin does not have a qualifying child, he is eligible for the earned income credit: he is between 25 and 64 years of age, cannot be claimed as a dependent on another taxpayer's return, and has earnings below the level at which the credit is completely phased out ($15,820 in 2020).
Jim and Mary Jean are married and have two dependent children under the age of 13. Both parents are gainfully employed and earn salaries in 2020 as follows: $16,000 (Jim) and $5,200 (Mary Jean). To care for their children while they work, Jim and Mary Jean pay Eleanor (Jim's mother) $5,600. Eleanor does not qualify as a dependent of Jim and Mary Jean. Jim and Mary Jean file a joint Federal income tax return. Compute their credit for child and dependent care expenses.
or two or more children, the maximum expense allowed for purposes of the credit for child and dependent care expenses is $6,000. However, because the qualifying expenditures are limited to the earnings of the spouse with the lesser earned income (i.e., $5,200), this amount is used in calculating the credit. Using the combined AGI of $21,200 ($16,000 + $5,200), the applicable rate for the credit is 31%. Thus, the credit is $1,612 (31% × $5,200). The payments to Jim's mother for child care qualify for the credit.
Joshua and Ellen are married and file a joint return. Three individuals qualify as their dependents: their two children, ages 5 years and 6 months, and Ellen's 18-year-old son from a previous marriage. All parties are U.S. citizens. Joshua and Ellen's combined AGI is $68,000. Compute Joshua and Ellen's child tax credit and dependent tax credit.
shua and Ellen may claim the child tax credit for their two children, ages 5 years and 6 months. The full amount of the child tax credit is available for qualifying children born during the tax year. Although Ellen's son from a previous marriage qualifies as a dependent, he is not eligible for the child tax credit because he is not under age 17. However, he is eligible for a dependent tax credit. Because the couple's combined AGI is below $400,000, their child tax credit is $4,000 ($2,000 × 2); their dependent tax credit is $500.
