Chapter 6 study questions

To qualify for the EITC, taxpayers with one or more qualifying children must have AGI less than one of the following: with one qualifying child.

$40,320 ($46,010 if married filing jointly)

To qualify for the EITC, taxpayers with one or more qualifying children must have AGI less than one of the following: with two qualifying children.

$45,802 ($51,492 if married filing jointly)

To qualify for the EITC, taxpayers with one or more qualifying children must have AGI less than one of the following: with three or more qualifying children

$49,194 ($54,884 if married filing jointly)

The earned income credit can be worth as much as ______ for 2018, depending upon the taxpayer's filing status, income, and number of qualifying children claimed.

$6,431

To qualify for the EITC, taxpayers with one or more qualifying children must: Have AGI less than one of the following: $40,320 ($46,010 if married filing jointly) with one qualifying child. $45,802 ($51,492 if married filing jointly) with two qualifying children. $49,194 ($54,884 if married filing jointly) with three or more qualifying children

- Have a qualifying child who meets the relationship, age, residency, and joint return tests. - Have a qualifying child who is not claimed by another person for EITC. - Not be a qualifying child of another person.

To qualify for the credit, taxpayers without qualifying children must:

-Be at least 25 years old, but younger than age 65, at the end of 2018 (if MFJ, either spouse can meet this requirement). -Not be able to be claimed as a dependent on another taxpayer's return. -Not be a qualifying child of another person. -Live in the United States more than half the year. -Have AGI of less than $15,270 ($20,950 if married filing jointly).

To qualify for the credit, all taxpayers must:

-Have a valid social security number (SSN). -Not use the filing status MFS. -Be a U.S. citizen or resident alien all year. -Not file a Form 2555, Foreign Earned Income. -Have investment income of $3,500 or less. -Have earned income. -Have AGI under the relevant limit.

In order to prevent persons with substantial assets from receiving the EITC, the credit is denied to any taxpayer with investment income exceeding $3,500 for 2018. For this purpose, investment income includes the following:

-Taxable and exempt interest. -Taxable dividends. -Net capital gain income (excluding §1231 gains), if greater than zero. -Net nonbusiness rental and royalties, if greater than zero. -Net passive income that is greater than zero and is not self-employment income.

To qualify for the EIC credit the taxpayer's qualifying child must be one of the following:

-Under the age of 19 at the end of 2018 and younger than the taxpayer (or the taxpayer's spouse, if filing jointly). -A full-time student under the age of 24 at the end of 2018 and younger than the taxpayer (or spouse, if filing jointly). -Permanently and totally disabled at any time during 2018, regardless of age.

The Additional Child Tax Credit is computed using Schedule

8812

Which of the following statements about the Child Tax Credit and Additional Child Tax Credit is true? The Child Tax Credit is a refundable credit. Incorrect. The Child Tax Credit is a nonrefundable credit that can reduce the taxpayer's tax liability down to $0. A. The Additional Child Tax Credit is a refundable credit. B. The Additional Child Tax Credit is a nonrefundable credit. C. The Child Tax Credit and/or Additional Child Tax Credit is worth up to $1,000 per child for 2018.

A

Which of the following statements is incorrect regarding EITC? A. A taxpayer may qualify for EITC with or without a qualifying child. B. A taxpayer must be a U.S. citizen or resident alien for more than half of the year. C. The maximum amount of EITC for 2018 is $6,431. D. The taxpayer must not have investment income greater than $3,500.

B

Step 4 - Filers Without a Qualifying Child Line 3.

Determines eligibility according to residency in the United States. Taxpayers whose main home was not in the U.S. for more than half of 2018 do not qualify for EITC. Members of the military may qualify under certain circumstances.

Step 4 - Filers Without a Qualifying Child Line 6.

Determines eligibility according to the taxpayer's dependency status. Taxpayers who can be claimed as a dependent on another taxpayer's tax return cannot claim EITC.

EIC Step 1 - All Filers Line 3.

Determines eligibility based on filing status. Taxpayers whose filing status is married filing separately are not eligible for EITC.

EIC Step 1 - All Filers Line 4.

Determines eligibility based on foreign earned income. Taxpayers filing Form 2555 are not eligible for EITC.

EIC Step 1 - All Filers Line 1.

Determines eligibility based on income and number of qualifying children.

EIC Step 1 - All Filers Line 2.

Determines eligibility based on the taxpayer (and spouse, if filing a joint return) having a valid SSN that allows them to work.

Step 3 - Qualifying Child Line 2.

Determines if the taxpayer is filing a joint return or not.

Step 2 - Investment Income Line 4.

Determines if the taxpayer must use Worksheet 1 in Publication 596.

Step 4 - Filers Without a Qualifying Child Line 4.

Determines if the taxpayer without qualifying children is filing a joint return or not.

Step 3 - Qualifying Child Line 1.

Determines whether the taxpayer qualifies as a taxpayer with or without a qualifying child.

Step 2 - Investment Income Line 2.

Determines whether the taxpayer's investment income exceeds the maximum of $3,500 for 2018.

Earned income exceeding $2,500. Three or more qualifying children.

Earned income exceeding $2,500. Three or more qualifying children.

Step 4 - Filers Without a Qualifying Child Line 5.

For taxpayers who answered "NO" to line 4 above, this line qualifies taxpayers according to their eligibility to be claimed as a qualifying child on another tax return. Taxpayers who are the qualifying child of another taxpayer who is required to file a tax return cannot claim EITC.

Step 3 - Qualifying Child Line 3.

For taxpayers who answered "No" to line 2, this line qualifies taxpayers according to their ability to be claimed as a qualifying child on another tax return. Taxpayers who are the qualifying child of another taxpayer who is required to file a tax return cannot claim EITC.

Determine whether or not the taxpayer qualifies for EITC. If they do not qualify, explain the reason for their disqualification. If they do qualify, determine the amount of the credit Juan (52) is filing as a single taxpayer with no dependents. Juan's earned income and AGI in 2018 was $15,281, all from wages. He had no other income. Juan is a U.S. citizen.

No. Juan's income was greater than $15,269.

Determine whether or not the taxpayer qualifies for EITC. If they do not qualify, explain the reason for their disqualification. If they do qualify, determine the amount of the credit Lorelei (29) and Sean (28) are married taxpayers, filing a joint return. Lorelei's income from wages was $18,871. Sean's income from wages was $10,465. They had $88 of interest income from their checking account. They had no other income in 2018. Lorelei and Sean are expecting their first child in June of 2019. Both are U.S. citizens.

No. Lorelei and Sean have a combined income greater than $20,949.

Determine whether or not the taxpayer qualifies for EITC. If they do not qualify, explain the reason for their disqualification. If they do qualify, determine the amount of the credit Rosalee (19) is filing as a single taxpayer with no dependents. Rosalee's earned income and AGI in 2018 was $8,974, all from wages. She had no other income. She is a U.S. citizen.

No. Rosalee is not between the ages of 25 and 65.

EIC Step 1 - All Filers Line 5.

Qualifies taxpayers according to residency status. Nonresident aliens must be married to a U.S. citizen or resident alien, file a joint return, and choose to be treated as a resident alien.

Step 2 - Investment Income Line 3.

Relates to the sale of business property.

Worksheet A—2018 EIC—Line 17a Part 3.

The taxpayer's EITC is the lesser of the amounts calculated in Parts 1 and 2, above.

Requirement 1 and ACTC

complete Form 8867

Requirement 2 and ACTC

complete and keep all worksheets

Which of the following statements is incorrect regarding a paid tax return preparer's due diligence for ACTC? a. Must complete Form 8867. b. Copies of worksheets and documents used to determine eligibility and compute the credit(s) must be kept in the client file. c. May be penalized $520 for each failure, per credit, per return if due diligence is not exercised. d. Must meet three of the four due diligence requirements to allow the taxpayer to claim the Child Tax Credit.

d

Requirement 3 and ACTC

knowledge requirement

Requirement 4 and ACTC

record retention

EITC is a _______ credit refundable or nonrefundable

refundable

Step 5 - Earned Income Line 2.

Accounts for any income from self-employment activities including those by clergy or church employees.

Step 6 - How to Figure the Credit Line 1.

Asks if the taxpayer wants the IRS to figure the credit for them. Answering no directs you to complete Worksheet A

Step 2 - Investment Income Line 1.

Computes the taxpayer's total investment income.

Step 4 - Filers Without a Qualifying Child Line 2.

Determines eligibility according to age. Taxpayers without a qualifying child must be at least age 25 but under age 65 at the end of 2018.

Step 4 - Filers Without a Qualifying Child Line 1.

Determines eligibility according to income and filing status for taxpayers who do not have a qualifying child. AGI must be less than $15,270 ($20,950 if married filing jointly).

Answer the questions below using your knowledge of due diligence as it applies to the ACTC and EITC. A 19-year-old young man, Tim Suderman, is your client. He tells you he has a son, age 1, who lives with him, and he is the sole support of his son. Then, he shows you his Form W-2, which has $4,950 in wages shown in box 1. He is not in school, and he says he wants to file as head of household and claim his Earned Income Tax Credit. What concerns does this raise for you, and what are some questions you might want to ask him and document in your due diligence notes?

It is clear Tim is not a qualifying child (he is 19 and not in school). He is not a qualifying relative since his income is over $4,150. However, there should be concerns about support. Hopefully, when you determined his filing status, you completed the support worksheet. Some examples of appropriate questions might include: Why is the child not living with his mother? Who looks after your child when you work? Do you live with anyone else other than your son? Did you receive any assistance in caring for this child—mother, friends, family? Who is paying the household expenses?

Answer the questions below using your knowledge of due diligence as it applies to the ACTC and EITC. Your 18-year-old client, Kelli Brown, has one child, a baby born December 13, 2018. She tells you she is in her last year of high school. Kelli brought in the birth certificate and social security card for her baby, and she also brought in a Form W-2, showing wages of $1,937. What concerns does this bring to mind, and what questions should you ask Kelli and be sure to document in the due diligence notes?

This is an example of the knowledge requirement of EITC due diligence. Knowing that Kelli is only 18 years old gives rise to the possibility that she herself is a qualifying child of someone. The low income is probably not enough to provide support for herself and the baby. Some appropriate questions to ask are: Do you live with your parents or other relatives? Who looks after your child when you are in school or working? Who is paying the household expenses? Did you receive any other income or support, such as food, gifts, food stamps, help with rent, and so forth?

Step 5 - Earned Income Line 1.

This line first determines if the taxpayer is clergy or a church employee. The worksheet that follows calculates income from taxable scholarships or fellowships, income from work performed while in prison, and income from pensions or annuities from nonqualified deferred compensation plans. The sum total of the above is then subtracted from earned income that was reported on Form 1040, line 1. Finally, nontaxable combat pay is taken into consideration, as in some cases it may increase EITC, and the taxpayer may elect to treat it as taxable.

Step 5 - Earned Income Line 3.

This line takes into consideration the amount from step 5, line 1, above to make final determination of EITC eligibility.

Worksheet A—2018 EIC—Line 17a Part 2.

This section determines EITC based on the taxpayer's AGI (see the worksheet for exceptions).

Worksheet A—2018 EIC—Line 17a Part 1.

This section determines the EITC based on earned income as calculated in step 5. Then, AGI is taken into consideration to see if it differs from earned income. Taxpayers whose earned income differs from their AGI must go on to Part 2.

Determine whether or not the taxpayer qualifies for EITC. If they do not qualify, explain the reason for their disqualification. If they do qualify, determine the amount of the credit Marty (24) is a single taxpayer, filing head of household, with one dependent, Mindy (2). Mindy is Marty's daughter, and she lived with him for all of 2018. No one else lived with Marty. Marty's earned income and AGI was $23,457, all from wages. He had no other income. Both Marty and Mindy are U.S. citizens. Marty is not a full-time student.

Yes. He would receive $2,692 in EITC.

Determine whether or not the taxpayer qualifies for EITC. If they do not qualify, explain the reason for their disqualification. If they do qualify, determine the amount of the credit Ronald (28) is filing as a single taxpayer with no dependents. Ronald's earned income and AGI in 2018 was $10,281, all from wages. He had no other income. He is a U.S. citizen.

Yes. He would receive $382 in EITC.

Determine whether or not the taxpayer qualifies for EITC. If they do not qualify, explain the reason for their disqualification. If they do qualify, determine the amount of the credit Anita (42) is a married taxpayer. Her husband, Mark (43), has not lived with her since 2015 and Anita is considered unmarried for tax purposes, filing head of household. Anita's earned income and AGI was $28,478, all from wages. She had no other income. Anita has one dependent daughter, Samantha (14). Anita and Samantha lived together in 2018, and no one else lived with them. Both are U.S. citizens.

Yes. Their combined earned income of $41,750 and AGI of $41,894 would allow them to receive $2,025 in EITC.

Determine whether or not the taxpayer qualifies for EITC. If they do not qualify, explain the reason for their disqualification. If they do qualify, determine the amount of the credit Yes. Their combined earned income of $41,750 and AGI of $41,894 would allow them to receive $2,025 in EITC.Ernest (45) and Teresa (41) are married taxpayers, filing a joint return. Ernest's income from wages was $23,457. Teresa's income from wages was $18,293. They had $144 of interest income from a money market account. Their AGI was $41,894. They had no other income in 2018. Ernest and Teresa have two dependent sons, Michael (17) and Connor (15). They all lived together in 2018, and no one else lived with them. Ernest, Teresa, Michael, and Connor are all U.S. citizens.

Yes. Their combined earned income of $41,750 and AGI of $41,894 would allow them to receive $2,025 in EITC.

Determine whether or not the taxpayer qualifies for EITC. If they do not qualify, explain the reason for their disqualification. If they do qualify, determine the amount of the credit Junichi (34) and Mariko (32) are married taxpayers, filing a joint return. Junichi's gross income from wages was $34,281. Mariko had no income in 2018. They had no other income in 2018. Junichi and Mariko have one dependent daughter, Sakiko (4). They all lived together in 2018, and no one else lived with them. Junichi, Mariko, and Sakiko are all U.S. citizens.

Yes. They would receive $1,875 in EITC.