Unit 6: AMT & Other Taxes, Tax Credits, & Payments

Ginger is a United States citizen who paid the following 2018 foreign income taxes: -$10,000 tax paid to England on consulting fee income -$5,000 tax paid to Spain on earned income for which she claimed the foreign earned income exclusion -$1,000 tax paid to France, which she deducted as an itemized deduction These were Ginger's only sources of income during 2018. Her U.S. tax liability was $23,000. What amount of Foreign Tax Credit can she claim on her 2018 return? A. $0 B. $7,000 C. $10,000 D. $16,000

A. $0 A taxpayer may elect either a credit or deduction for income taxes paid to other countries or U.S. possessions. (S)he may not elect to do both a credit and a deduction (Publication 514). Since Ginger already claimed the foreign earned income exclusion for the $5,000 tax paid to Spain and she has already deducted the $1,000 tax paid to France, she can only take a deduction for the tax paid to England. Thus, Ginger may not claim a credit.

Jerry and Lori, who are married and file a joint return, have two qualifying children and earned income of $31,000 in 2018. What is the amount of their Child Tax Credit for 2018? A. $3,500 B. $2,000 C. $0 D. $700

A. $3,500 The nonrefundable Child Tax Credit is equal to the lesser of (1) $2,000 times the number of qualifying children or (2) the tax liability limitation (the taxpayer's regular tax liability plus the taxpayer's minimum tax). The nonrefundable credit is calculated as follows: Earned income: $ 31,000 Standard deduction: (24,000) Taxable income: $ 7,700 (1) Nonrefundable credit (2 × $2,000): $4,000 (2) Income (regular) tax on $7,700 taxable income: 700 (3) Tentative minimum tax (below exemption): 0 (4) Net regular tax (4) = (2) + (3): 700 (5) Nonrefundable credit allowed [lesser of basic credit ($4,000) or tax liability limitation ($700)]: 700 A refundable Child Tax Credit is equal to the lesser of (1) $1,400 times the number of qualifying children (without regard to the tax liability limitation) or (2) 15% of the taxpayer's earned income in excess of $2,500. The refundable credit is calculated as follows: (1) Refundable credit: $2,800 (2) 15% of $28,500: 4,275 (3) Refundable credit allowed [lesser of basic credit ($2,800) or 15% of earned income in excess of $2,500 ($4,275)]: 2,800 The $700 nonrefundable credit reduces the maximum Child Tax Credit of $4,000 to $3,300. However, the maximum refundable Child Tax Credit is $2,800. The total of the Child Tax Credit is $3,500 ($700 nonrefundable and $2,800 refundable).

Mark and Rita, both age 50, are married and file a joint tax return in the current year. They have a combined AGI of $50,000 and each contributed $1,500 to their IRAs. Assuming all requirements are met, what amount of the Retirement Savings Contributions Credit may they claim in the current year? A. $300 B. $1,500 C. $3,000 D. $0

A. $300 The amount of the Retirement Savings Contributions Credit is 50%, 20%, or 10% of the taxpayer's retirement plan or IRA contributions up to $2,000 ($4,000 if married filing jointly), depending on the taxpayer's AGI. Based on their AGI, Mark and Rita can claim up to 10% of their contributions. Mark and Rita contributed a total of $3,000, so they can claim a credit of $300.

In 2017, Ted and Alice had an alternative minimum tax liability of $19,000. This is the first tax year in which they ever paid the alternative minimum tax. They recomputed the alternative minimum tax using only exclusion preferences and adjustments. This resulted in an $8,500 alternative minimum tax liability. In 2018, Ted and Alice have a regular tax liability of $45,000. Their tentative minimum tax liability is $42,000. What is the Minimum Tax Credit carryover to 2019? A. $7,500 B. $16,000 C. $19,000 D. $0

A. $7,500 For the first tax year that the AMT is owed, the MTC is the portion of the AMT attributable to deferral preferences or adjustments. Exclusion preferences or adjustments are disallowed itemized deductions or standard deduction, excess percentage depletion, tax-exempt interest from private activity bonds not issued in 2009 or 2010, and excluded gain from the sale of small business stock except for stock purchased after September 27, 2010. In 2017, the deferral preferences and adjustments result in a $10,500 MTC ($19,000 - $8,500). This credit can be carried over to 2018 and used to the extent that the regular tax liability exceeds the tentative minimum tax. This amount is $3,000 ($45,000 - $42,000). Therefore, the $10,500 MTC offsets the $3,000 excess, and a $7,500 MTC is carried forward to 2019 (Publication 17).

Which of the following is NOT a qualifying student for purposes of the Lifetime Learning Credit? A. None of the answers are correct. B. A part-time student (less than half-time). C. A student in a continuing professional education program. D. A student in a graduate program.

A. None of the answers are correct. The Lifetime Learning Credit can be applied to qualified tuition and related expenses paid during the tax year for all eligible students who are enrolled in eligible educational institutions. The credit is not based on the student's workload, is not limited to the first 4 years of post secondary education, and may be applied to graduate-level courses.

For the current year, Gannon Corporation has U.S. taxable income of $500,000, which includes $100,000 from a foreign division. Gannon paid $45,000 of foreign income taxes on the income of the foreign division. Assuming Gannon's U.S. income tax for the current year before credits is $170,000, its maximum Foreign Tax Credit for the current year is A. $45,000 B. $136,000 C. $34,000 D. $9,000

Answer C is correct. The Foreign Tax Credit is allowed under Sec. 27 and Sec. 901 for foreign income taxes paid or accrued during the year and is limited by Sec. 904(a). The limitation is the proportion of the taxpayer's tentative U.S. income tax (before the Foreign Tax Credit) that the taxpayer's foreign source taxable income bears to his or her worldwide taxable income for the year (Publication 514). The following calculation should be made: (Foreign source taxable income/worldwide taxable income) x US Income Tax = Foreign Tax Credit Limitation The unused credit of $11,000 ($45,000 - $34,000) may be carried back 1 year and then forward to the following 10 taxable years [Sec. 904(c)].

Mr. and Mrs. Ring, who file a joint tax return, have adjusted gross income of $110,000 for 2018. Their daughter Vicky was in her fifth year of college in 2018. The expenses incurred in 2018 were $20,000 for tuition. What is the amount of Lifetime Learning Credit that the Rings may claim in 2018? A. $20,000 B. $2,000 C. $4,000 D. $10,000

B. $2,000 A Lifetime Learning Credit is allowed in the amount of 20% of the first $10,000 of tuition paid. The Lifetime Learning Credit is available for the years the American Opportunity Tax Credit is not claimed. The Rings' credit for 2018 will be $2,000 ($10,000 × 20%). There is no phaseout of the Lifetime Learning Credit for the Rings since the credit phaseout for married taxpayers filing jointly commences when modified AGI is $114,000 and ends at $134,000.

Rose, a single parent, has two children ages 10 and 13. She earned $25,000 in 2018, and her investments earned $2,000 interest income. Taxable income on her 2018 return was $15,000. After applying her withholding, Rose's tax due was $700. Using the following Earned Income Credit information, determine Rose's balance due/overpayment for 2018: -Credit figured using $27,000 adjusted gross income = $3,960 -Credit figured using $25,000 earned income = $4,381 -Credit figured using $19,000 taxable income = $5,644 A. $4,944 overpayment (refund). B. $3,260 overpayment (refund). C. $3,681 overpayment (refund). D. $0, carryover $3,960 credit to next year.

B. $3,260 overpayment (refund). The initial Earned Income Credit for a taxpayer with two children is determined by multiplying the earned income by 40% with a maximum credit of $5,716. The Earned Income Credit is reduced by any adjusted gross income exceeding $18,660. Thus, the $27,000 adjusted gross income will be used to compute the credit. Since tax before the credit is $700, Rose would receive a refund of $3,260 ($3,960 - $700).

Mr. and Mrs. Pine both work full time. They have three children ages 18, 6, and 3. For purposes of claiming the Child Care Credit, which of the following expenses qualify? A. Payments to a private school for their 6-year-old to attend first grade. B. Payments to the taxpayer's mother who lives with them but does not qualify as their dependent. C. Payments to the taxpayer's 18-year-old daughter to care for her 3-year-old sister. D. Payments to the taxpayer's 20-year-old niece who lives with them and can be claimed as their dependent.

B. Payments to the taxpayer's mother who lives with them but does not qualify as their dependent. Qualifying expenses for a taxpayer who is eligible to receive the Child and Dependent Care Credit include the following: 1. Household services such as babysitting, housekeeping, and nursery. 2. Outside services such as day care. The outside expenses apply only if the qualified individual spends more than 8 hours a day in the taxpayer's home. 3. The cost of sending a child to school if the child is in a grade below kindergarten. 4. Payments to a relative for the care of a qualifying individual. However, these payments do not qualify for the credit if the taxpayer claims a dependent exemption for the relative or if the relative is the taxpayer's child and is under age 19. Thus, payments to the taxpayer's mother who lives with them but does not qualify as their dependent is the only qualifying expense, since it meets the criteria specified above (Publication 17).

To compute the Minimum Tax Credit (MTC), the taxpayer should A. Recompute the most recent year's alternative minimum tax with the adjustment for the tax amount, and subtract the carryover MTC. B. Recompute the most recent year's alternative minimum tax without adjustment for certain exclusion items, and add the carryover MTC. C. Recompute the most recent year's alternative minimum tax with adjustment for certain exclusion items, and add the carryover MTC. D. Recompute the most recent year's alternative minimum tax and subtract the carryover MTC.

B. Recompute the most recent year's alternative minimum tax without adjustment for certain exclusion items, and add the carryover MTC. The MTC amount is the AMT that would have been computed if the only adjustments made to taxable income in computing alternative minimum taxable income had been those for (tax-favored) items that result in deferral, as opposed to exclusion, of income. To compute the MTC amount, recompute the most recent year's AMT without adjustment for certain exclusion items, and add carryover MTC. The exclusion items include the following: (1) standard deduction, (2) tax-exempt interest on private activity bonds (not issued in 2009 or 2010), (3) interest expense, (4) depletion, and (5) taxes.

Brad, age 19, is a full-time student in 2018. Brad works a part-time job and contributes $500 to his IRA account. He has AGI of $15,000 for the year and cannot be claimed as a dependent by another taxpayer. Assuming that Brad files as a single taxpayer, what amount of Retirement Savings Contributions Credit may Brad claim in 2018? A. $250 B. $50 C. $0 D. $100

C. $0 A taxpayer is eligible for the Retirement Savings Contributions Credit if the taxpayer is 1. Age 18 or older, 2. Not claimed as a dependent on another person's return, and 3. Not a full-time student. Because Brad is a full-time student, he is ineligible for the credit.

Mr. and Mrs. Ball adopted a special-needs child in the current year. During the year, the Balls' qualified adoption expenses were $8,000, and their adjusted gross income was $212,140. What is the amount of the Balls' Adoption Credit for the current year? A. $8,000 B. $13,810 C. $12,084 D. $15,536

C. $12,084 Taxpayers may claim a nonrefundable credit of up to $13,810 for qualified adoption expenses (Sec. 23). However, the credit is phased out for taxpayers with income exceeding $207,140. The phaseout is completed when AGI exceeds $247,140. The phaseout for the Balls will be $1,726 [$13,810 × ($212,140 - $207,140) ÷ $40,000], resulting in an allowable credit of $12,084 ($13,810 - $1,726) for the current year.

Jerry and Ann Moore are married and keep up a home for their two preschool children, ages 2 and 4. They claim their children as dependents and file a joint return using Form 1040A. Their adjusted gross income (AGI) is $27,500. Jerry earned $12,500, and Ann earned $15,000. During the year, they pay work-related expenses of $3,000 for child care for their son, Daniel, at a neighbor's home and $2,200 for child care for their daughter, Amy, at Pine Street Nursery School. How much of their child care payments are eligible for the Child and Dependent Care Credit on their return? A. $6,000 B. $2,400 C. $5,200 D. $0

C. $5,200 Section 21 allows a Child Care Credit for a portion of qualifying child or dependent care expenses paid for the purpose of allowing the taxpayer to be gainfully employed. The payments cannot be to someone whom you or your spouse can claim as a dependent. The maximum amount of employment-related expenses to which the credit may be applied is $3,000, if one qualifying person is involved, or $6,000, if two or more are involved, less excludable employer dependent-care assistance program payments. Also, the credit is limited to the actual expense incurred during the taxable year (Publication 17).

Which of the following statements is correct regarding Form 1095A, Health Insurance Marketplace Statement? A. Taxpayers do not need Form 1095A to complete Form 8962, Premium Tax Credit, to reconcile advance payments of the Premium Tax Credit or claim the Premium Tax Credit on their tax return. B. Taxpayers will attach a Form 1095A with their return to reconcile advance payments of the Premium Tax Credit or claim the Premium Tax Credit on their tax return. C. Taxpayers will use Form 1095A to complete Form 8962, Premium Tax Credit, to reconcile advance payments of the Premium Tax Credit or claim the Premium Tax Credit on their tax return. D. Taxpayers will receive Form 1095A to complete Form 8962, Premium Tax Credit, if they have been covered by an employer insurance plan for the entire year.

C. Taxpayers will use Form 1095A to complete Form 8962, Premium Tax Credit, to reconcile advance payments of the Premium Tax Credit or claim the Premium Tax Credit on their tax return. Form 8962 is used by taxpayers to compute the Premium Tax Credit for the year. The form determines the amount of premium credit the taxpayer can take on his or her return for the year or, if (s)he has chosen to take the premium credit as an advance, whether (s)he has an additional credit or has to repay part or all of the credit received as an advance. Form 1095A provides information about any advance payments the taxpayer may have received. It comes from the Health Insurance Marketplace and is not attached to the tax return.

Judy purchased her first home in January of the current year. She obtained a new mortgage and paid $6,000 of interest during the current year. Her state has elected to issue mortgage credit certificates in lieu of mortgage subsidy bonds. If Judy receives a mortgage credit certificate specifying a 20% credit rate, how much are her income tax credit and interest deduction? Credit Deduction A. $1,200 $0 B. $1,200 $6,000 C. $2,000 $4,000 D. $1,200 $4,800

D. $1,200 $4,800 Section 25 allows a credit to home purchasers who receive mortgage credit certificates in an amount equal to a specified percentage of the interest that the home purchaser pays or accrues during the taxable year on the mortgage on his or her principal residence. This percentage may not exceed 50% (but may not be less than 10%) of the interest on the qualifying indebtedness. If the percentage exceeds 20%, the credit is limited to $2,000 [Sec. 25(a)(2)]. The amount of the home buyer's interest deduction in any year is reduced by the amount of the mortgage credit certificate interest for that year. Judy is entitled to a credit of $1,200 ($6,000 mortgage interest paid × 20% applicable credit rate). She may deduct the balance of the interest for the year ($4,800) as an itemized deduction.

A single taxpayer, age 54 with no children, has income of $36,960. If the taxpayer has no health insurance all year, what is the individual shared responsibility payment in 2018? A. $325 B. $0 C. $624 D. $695

D. $695 The taxpayer must pay the greater penalty between the flat dollar amount and the applicable percentage. The flat dollar amount is $695 in 2018. With income of $36,960, the applicable percentage amount is $624 [2.5% × ($36,960 - $12,000 filing threshold)]. Therefore, the individual shared responsibility payment is $695.

Mr. and Mrs. Hall adopted a special-needs child in the current year. During the year, the Halls' qualified adoption expenses were $14,000, and their adjusted gross income was $219,600. What is the amount of the Halls' Adoption Credit for the current year? A. $13,810 B. $14,000 C. $4,302 D. $9,508

D. $9,508 Taxpayers may claim a credit of up to $13,810 for qualified adoption expenses, including expenses for the adoption of a child with special needs (Sec. 23). However, the credit is phased out for taxpayers with income exceeding $207,140. The phaseout is completed when AGI exceeds $247,140. The phaseout for the Halls will be $4,302 [$13,810 × ($219,600 - $207,140) ÷ $40,000], resulting in an allowable credit of $9,508 ($13,810 - $4,302) for the current year.

All of the following statements with respect to qualifications for the Earned Income Credit are true EXCEPT A. An individual must have earned income during the year. B. An individual must not have disqualified income in excess of $3,500. C. The taxpayer must be eligible to work in the United States. D. An individual must have a qualifying child living with him or her for more than 6 months.

D. An individual must have a qualifying child living with him or her for more than 6 months. An individual who does not have a qualifying child may still be eligible for the Earned Income Credit if (1) the principal residence of such individual is in the United States for more than one-half of the year, (2) the individual is at least 25 but under 65, and (3) the individual is not claimed as a dependent by another.

Which of the following is an expense that is eligible for the Adoption Credit? A. Expenses incurred in connection with the adoption of a child of the taxpayer's spouse. B. Costs associated with a surrogate parenting arrangement. C. Expenses incurred in violation of state or federal law. D. Expenses incurred for attorneys during the course of the adoption.

D. Expenses incurred for attorneys during the course of the adoption. Qualified adoption expenses are reasonable and necessary adoption expenses, including adoption fees, court costs, attorney fees, and other directly related expenses.

Two taxpayers married on November 30. That same year, the husband enrolled in an accredited college to further his career and subsequently received a Form 1098-T, Tuition Statement. The wife was employed with an income of $45,000 and paid for the husband's education expenses. Based on their circumstances, what is the correct method to report the education credit? A. Wife should report nonqualified education expenses on Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits). B. Husband is ineligible to claim an education credit because the wife paid his education expenses. C. Based on the wife's AGI, they do not qualify to claim an education credit. D. Taxpayers must file a joint return to claim an education credit.

D. Taxpayers must file a joint return to claim an education credit. The American Opportunity Credit provides individuals with a tax credit of up to $2,500 per eligible student per year for qualified tuition and related expenses (including course materials) paid for each of the first 4 years of the student's post-secondary education in a degree or certificate program. The credit rate is 100% on the first $2,000 of qualified tuition and related expenses and 25% on the next $2,000 of qualified tuition and related expenses. The American Opportunity Credit is phased out ratably for taxpayers with modified AGI between $80,000 and $90,000 ($160,000 and $180,000 for married taxpayers filing a joint return). Form 1098-T, Tuition Statement, must be received from an eligible educational institution in order to receive the credit. A taxpayer may be able to claim the credit if (s)he, his or her spouse, or a dependent (s)he claimed on his or her tax return was a student enrolled at or attending an eligible education institution. The credit may be claimed against a taxpayer's AMT liability. Forty percent of a taxpayer's otherwise allowable modified credit is refundable. Married taxpayers must file a joint return to claim the credit. Form 8863 is used to claim the credit.