CHAPTER 6

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.

T

For all taxpayers, except those married filing separately, the individual alternative minimum tax rate for 2014 is 26 percent on the first $194,800 of income and 28 percent on income above $194,800.

T

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.

T

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

T

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

T

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

T

The earned income credit: a. Must be calculated on earned income as well as adjusted gross income in some cases. b. Can not exceed the amount of the tax liability. c. Is available only if the taxpayer has qualifying children. d. Is available to married taxpayers who file separate returns.

A

Which of the common deductions below are allowed for regular tax purposes but not for AMT purposes? a. 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 b. Cash charitable contributions c. Moving expenses d. IRAs

A

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? a. The husband and wife must live apart for the entire year. b. The husband and wife must live apart for more than half the year. c. The husband and wife must be in the process of filing for a divorce. d. Only one of the spouses can be working and earning an income. e. None of the above.

A

Which of the following itemized deductions may not be deducted in computing the individual alternative minimum tax? a. Qualified home mortgage interest b. State income taxes c. Medical expenses (limited to 10 percent of AGI) d. Charitable deductions e. All of the above

B

For 2014, which of the following is a tax adjustment or tax preference item for the individual AMT computation? a. Deduction of charitable contribution of tangible personal property b. IRA contribution deduction c. Miscellaneous itemized deductions d. Moving expense deduction e. None of the above

C

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? a. $1,029 b. $1,369 c. $2,389 d. $2,593 e. None of the above

C

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? a. $0 b. $1,000 c. $3,274 d. $3,305 e. None of the above

C

Taxpayers are allowed two tax breaks for adoption expenses. They are allowed: Qualified Expenses Paid personally Paid by employer a. ​ Credit Credit ​ ​ b. ​ Exclusion Exclusion ​ ​ c. ​ Credit Exclusion ​ ​ d. ​ Exclusion Credit ​ ​

C

The child and dependent care provisions: a. Apply only to children under age 15. b. Are available only to single parents. c. Are available for spouses incapable of self-care. d. Are allowed only for taxpayers earning less than $43,000.

C

Which of the following is true of the alternative minimum tax? a. The alternative minimum tax is designed to ensure that high income taxpayers do not pay excessive amounts of income tax. b. For 2014, the alternative minimum tax rates are 20 percent and 30 percent, depending on the taxpayer's income. c. The amount of a taxpayer's state income tax may not be deducted for the purpose of computing the alternative minimum tax. d. All tax-exempt interest is a tax preference item for the alternative minimum tax. e. None of the above are true.

C

Which of the following types of income is not subject to the "kiddie tax?" a. Interest income b. Dividend income c. Salary income d. Capital gains on stock sales e. All of the above are subject to the "kiddie tax"

C

Which of the following tax credits is not available for the 2014 tax year? a. Foreign tax credits b. Earned income credit c. Adoption credit d. Child and dependent care credit e. All of the above are available credits

E

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

False 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 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 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 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.

. Most states are community property states.

False Only nine states are community property states.

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

False 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 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 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 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 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.

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

T

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

T

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

T

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.

T

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

T

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? a. $50,000 b. $30,000 c. $27,500 d. $25,000 e. None of the above

c ($40,000 + $5,000 + $10,000) / 2

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? a. $35,000 b. $85,000 c. $42,500 d. $60,000 e. None of the above

c ($50,000 + $35,000) / 2

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: a. $0 b. $350 c. $1,000 d. $1,650 e. $2,000

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

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? a. $270 b. $459 c. $650 d. $729 e. None of the above

d 27% × ($1,700 + $1,000) = $729 Additional tables, rates or other schedules may be required to assist the student in completing this test question.

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? a. Karen must file a separate tax return and report all of her interest income at her separate rate of tax. b. Karen must file a separate tax return and report all of her interest income at her parents' rate of tax. c. 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. d. Karen can file a separate return or her parents can elect to include her in their tax return, paying tax on the full $2,500 of her interest income at their rate of tax.

C

. New York is a community property state.

F

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

F

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.

T

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? a. $2,400 b. $8,350 c. $12,000 d. $30,000 e. None of the above

b $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

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: a. $0 b. $38 c. $100 d. $190 e. $250

b 20% × $190

A tax credit is allowed for qualified adoption expenses paid by taxpayers: a. And an additional credit is allowed for qualified adoption expenses paid for by taxpayers' employers. b. And an income exclusion is allowed for qualified adoption expenses paid for by taxpayers' employers. c. And is available each year qualifying expenses are incurred. d. And is not subject to a phase-out based on adjusted gross income.

B

Choose the correct statement: ​ a. A taxayer may receive a 30-percent credit for installing energy-efficient window shades. b. A taxpayer may receive a 30-percent credit for installing a windmill, which generates electricity, at his vacation home. c. A taxpayer may receive a 30-percent credit for installing a solar water-heating panel for his swimming pool. d. A taxpayer may receive a 30-percent credit for the purchase of a plug-in electric vehicle.

B

In 2014, which of the following children would have income taxed at their parents' rates? a. A 13-year-old child with salary income of $12,000 b. A 12-year-old child with net unearned income of $2,000 c. A non-student, 19-year-old child with net unearned income of $12,000 d. A 9-year-old child with salary income of $1,000 e. All of the above

B

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? a. $2,000 b. $2,500 c. $4,000 d. $1,000 e. He does not qualify for the American Opportunity Credit.

B

A parent may elect to include a child's income in the parent's return if: a. The child is under age 18. b. The child's income is only from interest and dividend distributions. c. The child's gross income is more than $1,000 and less than $10,000. d. All of the above must be met for a parent to elect to include a child's income in the parent's return.

D

In 2019, the child tax credit available to married taxpayers filing jointly is phased out, beginning at: a. $55,000 b. $75,000 c. $95,000 d. $400,000

D

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: a. In the first year the expenses are paid. b. Each year expenses are paid. c. In the last year expenses are paid. d. In the year the adoption becomes final.

D

The American Opportunity credit a. Is 50 percent of the first $1,200 of tuition and fees paid and 100 percent of the next $1,200. b. Is available for 2 years of post-secondary education. c. Is fully refundable even if the credit exceeds the tax liability. d. Is available for qualifying expenses paid on behalf of the taxpayer and his or her spouse, in addition to those paid for dependents.

D

Which of the common deductions below are allowed for both regular tax purposes and for AMT purposes? a. The standard deduction b. Personal and dependency exemptions c. State income taxes, property taxes, and all other taxes deducted on Schedule A d. Mortgage interest from the acquisition of a residence costing less than $1 million e. Miscellaneous itemized deductions taken on Schedule A

D

Which of the following is not a true statement regarding community property law? a. For a married couple living in California, income derived from separate property is taxable to the owner of the property. b. For a married couple living in Texas, income derived from separate property produces community income. c. In all community property states, the salary of married spouses is allocated one-half to each spouse. d. Colorado, Ohio, and Florida are community property states. e. Property acquired before marriage in a community property state continues to be separate property.

D

Which of the following is not an adjustment or tax preference item for 2014 for purposes of the individual alternative minimum tax (AMT)? a. State income tax refunds b. Certain passive losses c. Miscellaneous itemized deductions d. Cash charitable contributions e. All of the above are adjustment or tax preference items for AMT.

D

Which one of the following taxpayers qualify for the earned income credit? a. A 70-year-old doctor whose practice had a net loss and who has an AGI of $5,000 in 2014. b. An 18-year-old college student who earns $8,000 at a part-time job. c. A couple who have a combined AGI of $17,000 and three children but file separately. d. A 31-year-old construction worker with $22,000 of AGI and two children. e. None of the above qualifies for the earned income credit.

D

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? a. $0 b. $300 c. $350 d. $700 e. $7,000

c ($117,000 - $110,000) / $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? a. $1,920 b. $2,240 c. $2,000 d. $6,000 e. $7,000

a 32% × $6,000, the maximum qualified child care.

For 2014, Beatrice qualifies for the earned income credit. She has one daughter who is 7 years old. Her earned income and adjusted gross income for 2014 are $6,100. a. Using the EIC tables, calculate the amount of her 2014 earned income credit. b. ​ Calculate the amount of Beatrice's 2013 earned income credit assuming her earned income for 2014 is $8,400 and her adjusted gross income is $10,000.

a. $2,083 b. $2,865

. Norm and Linda are married, file a joint return, and have one 5-year-old child. Their adjusted gross income is $136,000. What is their child credit for the current year? b. If Norm and Linda had a 3-year-old as well as the 5-year-old and an 18-year-old from Linda's first marriage, what would their child credit be for the current year? c. In b. above, how many qualifying children do Norm and Linda have? Explain.

a. $2,000. Ninfa's income is less than the phase-out range for a single taxpayer, so two child credits are allowed at $1,000 each. b. $150, calculated as $126,300 - $110,000 = $16,300; $16,300 / $1,000 = 16.3, rounds to 17; 17 × $50 = $850 of the $1,000 child credit, phased out due to AGI limits. c. $0. Carol's son is too old to qualify for the child credit.

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? a. $6,550 b. $7,025 c. $7,334 d. $9,500

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

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? a. $0 b. $4,200 c. $2,800 d. $5,600 e. None of the above

b $15,000 / $20,000 × $5,600

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? a. $1,500 to Chad and $0 to Linda b. $1,200 to Chad and $300 to Linda c. $1,120 to Chad and $280 to Linda d. $750 to Chad and $750 to Linda e. None of the above

b $4,000 / $5,000 × $1,500 = $1,200 and $1,000 / $5,000 × $1,500 = $300

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? a. $6,500 b. $7,000 c. $9,289 d. $19,000 e. Jim does not qualify for a foreign tax credit.

b $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

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? a. $0 b. $850 c. $875 d. $1,150 e. None of the above is correct.

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

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? a. $0 b. $2,150 c. $2,250 d. $2,600 e. $4,000

b 100% × $2,000 + 25% × $600

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? a. $910 b. $1,300 c. $2,000 d. $5,000 e. None of the above

b 26% × ($3,500 + $1,500)