Chapter 6: Credits and Special Taxes
Marge and Lester file a joint tax return for 2015, with adjusted gross income of $33,000. Marge and Lester earned income of $20,000 and $12,000 respectively, during 2015. In order for Marge to be gainfully employed, they pay the following child care expenses for their 4 year-old son, Kevin: San Diego Child Care Center $1,750 Ann, the baby sitter $1,250 Assuming they do not claim any other credits against their tax, what is the amount of the child and dependent care credit they should report on their tax return for 2015?
$780
Scott and Dolores are married and file a joint tax return. They have AGI of $33,000, made up of Scott's wages, $20,000; Dolores' wages, $12,000; and $1,000 of interest income. Their son, Chris, is 4 years old and attends the ABC Day Care Center at a cost of $5,000. What is Scott and Dolores' child care credit?
$780 The applicable percentage for an AGI of $33,000 is 26 percent. This is applied to the maximum expense for one child, $3,000. $3,000 x 26% = $780.
Phillip and Naydeen Rivers are married with two dependent children. The family has household income of $38,160 in 2015. 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?
$8,098 $38,160 / $23,850 = 160% of Federal poverty level making the applicable percentage 4.46%. $38,160 x 4.46% = $1,702. $9,800 - $1,702 = $8,098
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 calculated as the lesser of $30,000 x 40% = $12,000 or $30,000 / ($120,000 + $30,000) x $41,750 = $8,350
Courtney and Ralph are married, file a joint return, and have two dependent children, ages 10 and 12. Their combined income is $114,000. By how much is their child credit reduced in 2015?
$200
The earned income credit:
Must be calculated on earned income as well as adjusted gross income in some cases.
Which of the following is not true of the child and dependent care credit?
Outside daycare expenses qualify as expenses for the credit, but in-house babysitters do not.
Carla and Bob finalized an adoption in 2015. Their adoption fees totaled $9,500. They have AGI of $207,000 for 2015. What is their adoption credit?
($241,010 - $207,000) / $40,000 × $9,500 = $8,077
Which of the following tax credits is not available for the 2015 tax year?
All of these choices are available credits.
Choose the answer which best completes the following statement. A parent may elect to include a child's unearned income in his own return if:
All three of the choices requirements are met.
Which of the following is not an adjustment or tax preference item for 2015 for purposes of the individual alternative minimum tax (AMT)?
Cash charitable contributions
Which of the following is not a common adjustment or preference item for alternative minimum tax (AMT)?
Charitable contributions.
The individual shared responsibility:
Is a tax payable by non-exempt taxpayers without minimum essential coverage.
Which of the following is not eligible for an energy credit?
Solar heating for a hot tub
Jessica and Donald have two young children. The children go to daycare during the winter and during the summer they are looked after by Jessica's 20-year-old cousin. The total cost of the child care is $7,000. Jessica and David both work and they earn $25,000 and $20,000 respectively. They have no other income. What may they claim as a child care credit?
The maximum of the expenses they can take into consideration for the credit is $6,000 for two children. The applicable percentage for an AGI of $45,000 is 20 percent. $6,000 x 20% = $1,200.
Sarah is 26 years old and graduated in May with an MBA from Big State University. In this tough job climate it took her a while to obtain employment, and she started work in November 2015. She earned $8,333 and had interest income of $5,000 from a savings account. She has no qualifying child. What is Sarah's earned income credit for 2015?
$0 Sarah is not eligible to claim the earned income credit because her interest income is greater than the $3,400 limitation. Congress believed that if you had tax payers with savings investments great enough to produce interest of $3,400, you were not the kind of taxpayers they were trying to target with the earned income credit.
Frank and Maureen have three children, Kevin 7, Eileen 10, and Michael 17. For 2015, their AGI is $130,000. What is their child tax credit?
$1,000 Michael is not a qualifying child since he is 17 years old. The maximum credit therefore is $2,000. However, Frank and Maureen have AGI over $110,000 so they must reduce the credit by: ($130,000 - $110,000/$1,000 x $50 = $1,000). The credit allowed is $1,000.
Fred and Wilma are married and file a joint return. They take their 4-year-old twins to the ABC Day Care Center while they both work. Fred earns $50,000 and Wilma earns $45,000 and the day care center costs $12,000 for the year. What is Fred and Wilma's child and dependent care credit?
$1,200 The maximum expense Fred and Wilma may take into consideration is $6,000 for the two children. Their AGI is $95,000 for which the applicable percent is 20 percent. The credit is $6,000 x 20% = $1,200.
Richard is a widower with four dependent children. The twins are 18 years old and the two younger ones are 12 and 10. Richard's AGI is $90,000 for 2015. What is his child tax credit?
$1,250 At 18 years old, the twins are no longer eligible for the child tax credit. Since Richard's AGI is over the start of the phase-out range he must reduce his credit by: $90,000 - $75,000/$1,000 x $50 = $750. The credit Richard claims is $2,000 - $750 = $1,250.
Ted and Alice are married and have two children under the age of 16. For 2015, their AGI is $120,000. What may they claim as a child tax credit?
$1,500 Ted and Alice are in the phase-out range since their AGI is over $110,000. The reduction is calculated as ($120,000 - $110,000)/$1,000 x $50 = $500. The amount allowable is [$2,000 ($1,000 per child) - $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 2015 is $81,500. Denice's child tax credit for 2015 is:
$1,650 (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 $22,000 in 2015. What is their allowable child and dependent care credit?
$1,860 31% × $6,000, the maximum qualified child care.
Jonathan has income from Country F of $30,000 which is taxed at a 40 percent rate. He also has income from Country G of $20,000, taxed at a 10 percent rate. Jonathan's U.S. taxable income (not including foreign income) is $100,000 and his tax liability before credits is $30,000. What is Jonathan's foreign tax credit?
$10,000 Jonathan's foreign tax paid is $12,000 + $2,000 = $14,000. The overall limitation is calculated: $30,000 + $20,000 × $30,000 = $10,000. $30,000 + $20,000 + $100,000 Jonathan's foreign tax credit is the lesser of the two or $10,000
Manuel is a U.S. taxpayer working abroad and has the following foreign income and tax: income from Country A, $40,000 taxed at 20 percent; and income from Country B, $30,000 taxed at 30 percent. Manuel also has U.S. taxable income (not including the foreign income) of $70,000 and his U.S. tax liability is $20,000. What is Manuel's foreign tax credit?
$10,000 The foreign tax credit is the lower of the actual foreign taxes paid or the ratio of foreign income to total income times the tax on U.S. taxable income. Manuel's foreign taxes paid total $17,000. The limitation is calculated as: ($30,000 + $40,000)/($40,000 +$30,000 + $70,000) x $20,000 = $10,000.
David and Susan have AGI of $210,000 in 2015. In that year, they finalize the adoption of a U.S. child without special needs. Their qualified expenses were $10,000 paid in 2014 and $8,000 paid in 2015. What is the adoption credit they may claim in 2015?
$10,388 David and Susan's qualified expenses are $18,000 limited to the maximum of $13,400. In addition, their AGI is within the phase-out range so the credit is limited as follows: ($241,010 - $210,000)/$40,000 x $13,400 = $10,388.
In 2015, the child tax credit available to married taxpayers filing jointly is phased out, beginning at:
$110,000
Stan and Myra are married and file a joint return. They have no children. Their regular taxable income is $100,000 and their regular tax is $16,589. The deductions on their Schedule A are as follows: home mortgage interest $9,000; interest on a home equity loan used to purchase a car $2,000; state income tax $10,000; real estate tax $3,500; and charitable contributions $8,050. What is Stan and Myra's alternative minimum taxable income (AMTI) before the AMT exemption?
$123,500 Net alternative minimum tax is calculated as follows: Taxable income $100,000 Add back personal exemptions 8,000 Add back home equity loan interest 2,000 Add back state income tax 10,000 Add back real estate tax 3,500 AMTI $123,500
Janie, a 36 year old single taxpayer, has AGI of $31,000 in 2015. Janie failed to obtain minimum essential coverage for any part of 2015. What is Janie's individual shared responsibility?
$414 Greater of: $31,000 - $10,300 = $20,700 x 1% = $414 or $325
Gary decides 2015 is his year to "go green". He purchases a Nissan Leaf for $30,000 and spends another $30,000 on a solar system designed to generate electricity and to heat water for his vacation home. He does not own a swimming pool or a hot tub. What is the total amount of the credit(s) he may claim on his 2015 return?
$16,500 Gary may claim a plug-in electric car credit of $7,500 for the purchase of the Nissan Leaf. He may also claim a 30 percent credit for the installation of qualified solar property at his vacation home (30% x $30,000 = $9,000). The total electric car plus REEP credit would be $16,500.
Robert takes one class a semester at EPU (Expensive Private University) where he pays $10,000 for tuition and fees in 2015. Robert has AGI of $50,000. How much is his lifetime learning credit?
$2,000 Robert's lifetime learning credit is $2,000 (20% x $10,000). If Robert were enrolled at least half-time, he would be better off claiming the American Opportunity tax credit of $2,500.
Leonard is a junior at ESU and his parents have a 2015 tax liability of $6,000 before taking into account the American Opportunity tax credit. Leonard's parents paid $2,500 in qualifying expenses. Leonard was a full-time student, and was claimed as a dependent by his parents. What is the amount of the American Opportunity tax credit allowed on the parents' 2015 tax return? Assume there is no income limitation.
$2,125 The amount of the credit is 100 percent of the first $2,000 of expenses and 25 percent of the next $500 of expenses.
Keith has a 2015 tax liability of $2,250 before taking into account his American Opportunity tax 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 tax credit was not subject to phase-out. What is the amount of his American Opportunity tax credit allowed?
$2,150 100% × $2,000 + 25% × $600
In 2015, Alexis has income from wages of $17,000, adjusted gross income of $19,000, and tax liability of $200 before the earned income credit. She has one qualifying child. What is the amount of Alexis' earned income credit for 2015?
$3,114
Marilyn has income from Country C of $30,000, taxed at 10 percent, and income from Country D of $10,000, also taxed at 10 percent. Her U.S. taxable income (not including the foreign income) is $60,000 and her tax liability before credits is $15,000. What is Marilyn's foreign tax credit?
$4,000 Marilyn's foreign tax paid is $3,000 + $1,000 = $4,000. The U.S. tax limitation is: $30,000 + $10,000 × $15,000 = $6,000. $30,000 + $10,000 + $60,000 Marilyn's credit is the lower of the two, or $4,000.
Mike and Sandy are married and file a joint return. Their AGI is $170,000. They pay $20,000 for tuition, fees, and books for their dependent daughter, Jennifer, who is enrolled full-time at Southern Illinois State University. What is Mike and Sandy's American Opportunity tax credit?
$4,000 Mike and Sandy would be eligible for the maximum credit of $2,500 except that their AGI falls within the phase-out range for the American Opportunity tax credit. The credit is phased out ratably between $160,000 and $180,000 for married filing joint taxpayers. The reduction is calculated: ($180,000 - $170,000)/$20,000 x $2,500 = $1,250.
Rick has net taxable income of $20,000 from Country Z which imposes a 40 percent income tax. Rick also has net taxable income from U.S. sources of $80,000, and U.S. tax liability, before the foreign tax credit, of $22,000. What is the amount of Rick's foreign tax credit?
$4,400
Carol enrolls in a grammar and writing course at her local community college to learn where to put the commas when doing her book editing job. Her tuition and fees are $200. What is Carol's lifetime learning credit? Her income is below the phase-out range.
$40 The lifetime learning credit is 20 percent of the eligible expenses (20% x $200) = $40.
Arnold and Annette are married and live in California. Arnold's salary is $50,000 and Annette earns $40,000. They have interest from a joint savings account of $400 and Annette has dividends of $5,000 from an investment account she inherited from her father during the marriage and which she has maintained as separate property. They decide to file separate returns. How much income does Annette report on her separate return?
$50,200 Annette must report: 50% of her earnings $20,000 50% of Arnold's salary 25,000 50% of the joint interest 200 100% of her separate dividends 5,000 Total $50,200
Richard, a single taxpayer, is in the 25 percent bracket for regular tax. His alternative minimum taxable income, after the exemption, is $217,000. What is Richard's tentative minimum tax?
$57,052 The tentative minimum tax is: (26% x $185,400) + (28% x [$217,000 - $185,400]) = $57,052. An alternative calculation is (28% x $217,000) - $3,708 = $57,052.
Mike and Geri have two children, Mark (6) and Jackie (9). For 2015, Mark has $3,000 of net unearned income and Jackie has $5,000 of net unearned income. If the total parental tax for 2015 is $1,900, how would it be allocated between Mark and Jackie?
$713 to Mark and $1,187 to Jackie. $3,000/$8,000 x $1,900 = $713 allocated to Mark $5,000/$8,000 x $1,900 = $1,187 allocated to Jackie
Which of the following is not true regarding the child tax credit?
At least one parent must have earned income.
Art and Irma have two children, Tom (age 12) and Lucy (age 10). Tom has net unearned income of $15,000 and Lucy has net unearned income of $5,000. It has been determined that the parental tax is $3,000. What is Lucy's tax liability?
$855 Lucy's share of the parental tax is: ($5,000/($15,000 + $5,000) x $3,000 = $750). To this must be added the regular 10 percent tax on the $1,050 statutory deduction (10% x $1,050 = $105), for a final tax liability of $855.
In 2015, 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 of the following children would have income taxed at their parents' rate?
A child, 13 years old, who has unearned income of $2,200.
Choose the correct statement:
A taxpayer may receive a 30-percent credit for installing a windmill, which generates electricity, at his vacation home.
The child and dependent care provisions:
Are available for spouses incapable of self-care.
Which of the following lists only community property states?
Arizona, Nevada, Texas
Which of these statements concerning the alternative minimum tax (AMT) is correct?
For married taxpayers, the AMT rate is 26 percent of the first $182,500.
The earned income credit:
Is based upon the adjusted gross income, the number of qualifying children, and the filing status of the taxpayer.
Nine states have a community property system of marital law. Which of the following statements is correct?
In some states, separate property can give rise to community income.
In the case of the adoption of a child who is a U.S. citizen or resident of the U.S., the credit for qualified adoption expenses incurred over several years is available:
In the year the adoption becomes final for expenses incurred in that year and the prior year.
A taxpayer may claim a REEP credit for which of the following?
Installation of solar panels for heating water in his vacation home.
Which of the following does not qualify for the Residential Energy-Efficient Property (REEP) credit?
Installation of solar water-heating property to heat a swimming pool.
If Craig and Michelle are married and reside in California, income from which of the following would not be considered community income?
Interest on investment property inherited by Michelle from her grandmother.
Mike and Mindy have two children, Sarah and Jake. Sarah has interest and dividend income of $2,200. Jake has interest and dividend income of $750. For 2015, Mike and Mindy have taxable income of $76,000 which puts them in the 25 percent federal tax bracket. If each child files his/her own tax return, what is Sarah and Jake's tax liability?
Sarah's tax liability is $14350; Jake's tax liability is $0. Sarah's taxable income is $1,200 ($2,200 - $1,000 standard deduction = $1,200). Her tax liability on the first $1,000 is $1005 plus her tax liability on the next $200 is $50 ($200 x 25%). Jake has no tax liability since his taxable income is below $1,000.
In regards to the alternative minimum tax (AMT):
State income tax refunds are not considered income since state income taxes are not allowed as a deduction for AMT.
Which of the following statements is not correct?
Taxpayers can take both the American Opportunity tax credit and the lifetime learning credit for the same student in the same year.
Mr. and Mrs. Brown adopted a child in 2015. During 2015, Mrs. Brown's employer pays $3,000 of her adoption expenses under an adoption assistance program. The Browns also pay $12,300 out of their pocket during 2015. Their AGI is $100,000. Which of the following is accurate?
The $3,000 of adoption expenses will not be included as wages on Mrs. Brown's W-2 and the Browns will also be able to claim a $12,300 adoption credit on their 2015 tax return.
In order to qualify for the child tax credit of $1,000 per child (before any phase-out),
The child must be a "qualifying child".
Which of the following is true of the American Opportunity tax credit?
The credit is available for qualifying education expenses paid on behalf of the taxpayer and his or her spouse as well as expenses paid for dependents.
Mr. French had the following income and taxes: Net foreign incomer $10,000 Foreign taxes $4,000 Net U.S. income (including foreign income) $100,000 U.S. taxes (before foreign tax credit) $30,000 Calculate the amount of the foreign tax credit.
The current year foreign tax credit is $3,000. The foreign tax credit is limited based upon the following formula: Net foreign income x U.S. income taxes U.S. taxable income
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 is the following is not a requirement to claim the premium tax credit?
The premium tax credit is claimed at the time the health coverage is purchased.
Household income for purpose of the individual shared responsibility payment includes all of the following except:
Untaxed Social Security benefits