Ch 11 - Questions (Credits vs Deductions)

Question 1

What is the difference between credits and deductions?

Answer 1

Both help reduce the amount of tax, but deductions lower the tax by reducing the amount of income that would be taxable, whereas credits come into play after taxable income is computed and tax determined - credits reduce that tax liability dollar for dollar.

Question 2

What does nonrefundable credit mean?

Answer 2

The combined amount of credits cannot reduce the taxpayer’s tax liability to below zero.

Question 3

What does refundable credit mean?

Answer 3

Refundable credits may reduce the taxpayer’s liability below zero, and the difference is refunded to the taxpayer.

Question 4

What is required to qualify for the Child Tax Credit (CTC)?

Answer 4

The taxpayer must have a qualifying child
The qualifying child must be under age 17
The QC must be a dependent on the taxpayer’s return
The QC must be a US Citizen, US National, or US Resident.

Question 5

How much is the Child Tax Credit worth?

Answer 5

Up to $1000 for each qualifying child.

Question 6

If a taxpayer has little or no tax liability they may not receive the entire CTC since it is non-refundable. What may they be eligible for?

Answer 6

The Additional Child Tax Credit, which is a refundable credit.

Question 7

What are the qualifications for the Additional Child Tax Credit?

Answer 7

Taxpayer either has to have :
earned income exceeding $3000
or
three or more qualifying children.

Question 8

What is Earned Income in terms of the Additional Child Tax Credit?

Answer 8

Taxable earned income and nontaxable combat pay.

Question 9

What is used to compute the Additional Child Tax Credit?

Answer 9

Schedule 8812

Question 10

What are the four specific due diligence requirements of a H&R Block tax professional when claiming the EITC, AOTC, CTC/ACTC?

Answer 10

1. Complete and submit form 8867
2. Complete and keep copies of all worksheets used to compute any of these 4 refundable credits
3. Satisfy the knowledge requirement
4. Satisfy the documentation requirement

Question 11

What is the penalty for failure to meet the due diligence requirements for the tax credits?

Answer 11

$510 for each failure.

Question 12

For the ACTC, what parts of the 8867 form need to be completed?

Answer 12

Parts I, III, and V.

Question 13

What should do do if a question on Form 8867 does not apply to the taxpayer?

Answer 13

Leave it blank

Question 14

What are the most commmon CTC and ACTC errors?

Answer 14

Taxpayers claiming children who do not meet the age, relationship, or residency requirements.

Question 15

How do you get additional info needed for due diligence to satisfy the knowledge requirement?

Answer 15

Ask open-ended questions to clear up any incomplete or inconsistent information.

Question 16

How can you show that you have fulfilled the knowledge requirement?

Answer 16

Keep detailed notes of each tax interview conversation. Personalize the notes with the individuals names.

Question 17

What should happen to documentation provided by the taxpayer to support the residence of the child or support the relationship test?

Answer 17

Attach copies to the printed form 8879, which will be stored in the client file.

Question 18

What is the EITC

Answer 18

Earned Income Tax Credit

Question 19

What is the EIC

Answer 19

Earned Income Tax Credit

Question 20

What is the EITC used for?

Answer 20

To give a credit to lower-income taxpayers with earned income.

Question 21

How much is the EITC worth?

Answer 21

Up to $6318 for 2017, depending upon the taxpayer’s filing status, income, and number of QCs claimed.

Question 22

Is the EITC a refundable or non-refundable credit?

Answer 22

Refundable

Question 23

Do you need a child in order to qualify for the EITC?

Answer 23

No, a child is not required, although the rules differ for taxpayers with qualifying children.

Question 24

What are the rules to qualify for the EITC, if a taxpayer has one or more qualifying children?

Answer 24

Have a valid SSN
Not use the filing status MFS
Be a US citizen or resident alien all year
Not file Form 2555 (or 2555-EZ) foreign income
Have investment income of $3450 or less
Have earned income of at least $1

Question 25

What are the rules to qualify for the EITC without qualifying children?

Answer 25

Be at least 25 years old, but younger than age 65
Not be able to be claimed as a dependent
Not be a QC of another person
Live in the US for more than half the year
Earned income and AGI of less than $15010 ($20600 MFJ)

Question 26

What constitutes living in the US in terms of the EITC qualifications?

Answer 26

Live in any of the 50 states, and the District of Columbia. Does not include Puerto Rico or US possessions (e.g. Guam, USVI). US Military personnel stationed outside the US on active duty are still considered to live in the US for EITC purposes.

Question 27

Are all SSNs valid for qualifying for the EITC?

Answer 27

No, there are some SSNs that are issued only to allow taxpayers to receive certain federal benefits. The SSN must be one that allows the holder to work. If the words “Not valid for employment” are on the SS card, the number is not valid for EITC.

Question 28

Can a person filing MFS claim the EITC?

Answer 28

No.

Question 29

What are Forms 2555 and 2555-EZ?

Answer 29

Forms filed to exclude income earned in foreign countries from gross income, or to deduct or exclude a foreign housing amount. Taxpayers who file these forms cannot claim the EITC.

Question 30

What is the investment income limitation for EITC?

Answer 30

To prevent people with substantial assets from receiving the EITC, must have investment income at $3450 or below.

Question 31

What is investment income?

Answer 31

Taxable and exempt interest, taxable dividends, net capital gain income, net nonbusiness rental and royalties, net passive income that is not self-employment income.

Question 32

What is Earned Income for the EITC?

Answer 32

Wages, commissions, tips, farming, other business income, military nontaxable combat pay, taxable disability benefits from employer plan prior to retirement age.

Question 33

What is the relationship requirement for a taxpayer’s QC for EITC?

Answer 33

Son, daughter, stepchild, eligible foster child, adopted child, or descendant of any of them
or
Brother, sister, half-brother, half-sister, stepbrother, stepsister, or descendant.

Question 34

What is the age requirement for a taxpayer’s QC for EITC?

Answer 34

Under age 19 and younger than taxpayer or spouse.
or
Full time student under age of 24 and younger than taxpayer or spouse
or
Permanently and totally disabled, regardless of age.

Question 35

What is the residency requirement for a taxpayer’s QC for EITC?

Answer 35

Must have lived with taxpayer in the US for more than 1/2 the year.

Question 36

What it the joint return requirement for a taxpayer’s QC for EITC?

Answer 36

Cannot file a joint return, unless it is just to claim a refund.

Question 37

If a taxpayer’s QC is married, do they qualify under EITC?

Answer 37

The taxpayer must be able to claim a dependency exemption (unless the divorced parents rules apply) for a married child in order for that child to be a QC for EITC.

Question 38

What is the support qualification for a taxpayer’s QC for EITC?

Answer 38

A child that would qualify for dependency, except they provided more than 50% of their own support, may b e a QC for purposes of the EITC.

Question 39

Can multiple taxpayers use the same QC to qualify for the EITC?

Answer 39

No. Only one can claim the child as a QC.

Question 40

Are there tiebreaker rules for QCs for the EITC?

Answer 40

Yes, if more than one taxpayer claims the credit with respect to the same child, the tiebreaker rules apply.

Question 41

Does the waiver of the exemption under the divorced parents rules apply for EITC?

Answer 41

No. Only the custodial parent may claim the EITC. The waiver would not be relevant for EITC.

Question 42

If a taxpayer is a QC of another taxpayer, but is not claimed by that taxpayer, can they claim the EITC?

Answer 42

No. Any taxpayer who is the QC of another taxpayer cannot claim the credit.

Question 43

What is used to compute the EITC?

Answer 43

Scheule EIC

Question 44

If a taxpayer has more than three QC, do they list them all on the EIC for EITC?

Answer 44

No, three maximum

Question 45

Are EITC tables the same as Tax Tables?

Answer 45

No, they are different

Question 46

If a return is completed in BlockWorks, do hard copies of the EITC worksheets need to be kept?

Answer 46

No, copies are stored in BlockWorks.

Question 47

What are some questions if a taxpayer claims a QC for the EITC other than their son or daughter?

Answer 47

Why aren’t the parents claiming the dependend?

Do the parents live with the taxpayer? If so, what was their approximate annual income?

How is the taxpayer related to the child’s parents?

Did anyone else live with the taxpayer? If so, what was their AIG? Was the person related to them? DId this person provide support to you and the other children living in the home?

Can anyone else possibly claim the child? Be sure to address this question in due diligence notes.

Question 48

What are some questions if the age of the taxpayer compared to the age of the QC is inconsistent to the average?

Answer 48

How are you related to the child?

Do you have the same biological parents?

Are you related by marriage?

Question 49

What are some questions if the taxpayer claims an adult with a disability as a QC for the EITC.

Answer 49

Would the taxpayer be able to provide the IRS with a letter from a doctor to verify disability?

Is the condition expected to last more than one year?

Does the individual receive social security disability income?

Question 50

How do you check that a married taxpayer is claiming single or HoH when they shouldn’t, in order to qualify or maximize the EITC? (Some married taxpayers can be treated as not married so they can claim HoH)

Answer 50

Be sure to ask adequate questions to determine the taxpayer’s correct filing status when

The taxpayer states they are separated and qualify for HoH

The taxpayer states they are HoH or single when they are married.

The taxpayer claims HoH when they should be claiming MFS

There is more than one HoH at the same address.

Question 51

What are some questions to determine the taxpayer’s correct filing status?

Answer 51

Were you married or legally separated under a decree of divorce or separate maintenance on the last day of the tax year?

Did you pay more than half the cost of maintaining the household for the year for either: Your QC or QR who lived with you more than half the year and who you can claim as an exemption. OR Your parent who is an exemption on your return for the entire year (but is not required to live in your home).

Are you filing a separate return from your spouse?

Did your spouse live with you in your home at any time during the last six months of the tax year?

Question 52

Can BlockWorks alone satisfy the knowledge requirement?

Answer 52

No. Ask additional questions and record questions and responses.

Question 53

What happens with records used to document qualifications for the EITC that are provided by the taxpayer?

Answer 53

Keep copies with their printed form 8879, which is stored in the client file.

Question 54

How long are records used to document qualifications for the EITC kept?

Answer 54

Three years from the latest date that would apply:
The original due date of the tax return.

The date you present the tax return for signature if not filed electronically and you sign it as preparer.

If you complete part of the return and another preparer complets and signs the return, you must keep the part of the return you were responsible to complete for three years from the date you submit it to the signing tax return preparer.