Chapter 2 - Tax calculation and Credits Flashcards

Question

What are the limitations on the General Business Credit ?

Answer 1

The general business credit is made up of a number of credits including: - investment credit - work opportunity credit - alcohol fuls credit - increased research credit - low income housing credit - qualified childcare expenditures - small employer plan start up costs credit - alternativ motor vehicle credit - other infrequent credits - Credit may not exceed net income tax minus the lessor of: 1) 25% of regular tax liability above $25,000 or 2) tentative minimum tax for the year. net income tax = regular income tax + AMT - nonrefunable tax credits, other than AMT credit. - Tentative tax from $0 - $25,000 * 100% allowable = allowable amount - Tentative tax in excess * allowable 75% = allowable amount - Unused credits may be carried back on year and forward 20 years.

Answer 2

The work opportunity credit is available to employers who hire employees from a targeted group (part of general business credit). limited to: - 40% of the first $6,000 of wages per employee paid during the first year of employment - 40% of the first $3,000 to certain summer youth Qualified targeted groups include: - disabled - 18 - 24 year olds from poor families - Vietnam veterans from economically disadvantaged areas - certain food stamp recipients

Answer 3

Taxpayers may claim a $1,000 tax credit for each qualifying child. - "CARES" rules apply, except tat a child must be under the age of 17 and a citizen. Higher income taxpayers must reduce the $1,000 credit by $50 for each $1,000 by which modified AGI exceeds: - $110,000 for MFJ - $75,000 for single - $55,000 for MFS - Low income families can use the credit to offset their income taxes as well as social securities taxes paid for the year. The credit is refundable to the extent of the lessor of: 1) excess child tax credit over tax liability 2) earned income minus $3,000 x 15%

Answer 4

The earned income credit is a refundable credit, can get refund even if no tax liability. To be eligible for the credit a taxpayer must: - live in the US for more than half the taxable year - meet certain low earned income thresholds - not have more than a specified amount of disqualified income (disqualified income cannot exceed $3,400) - be over 25 and under 65 if there are no qualifying children - file a joint return with a spouse, if married. Earned income = salaries, wages, tips, other employee compensation and earnings from self employment. It does not include pension and annuity income. Disqualified income = taxable and nontaxable interest, dividends, net rental and royalty income, net capital gains income, and net passive income other than self employment income. A qualifying child is not a requirement, however the earned income credit % goes up if there are qualifying children. A qualifying child is the taxpayers son/daughter/step/foster child/brother/sister/step brother or sister that was under 19 or under 24 and a full time student, lived with the taxpayer for more than half the year and is the taxpayers dependent (if the child is married). Computing the credit: - Single - 7.65% of earned income, for a max credit of $503 for taxpayers with no children. - Taxpayer with 1 qualifying child - 34% of earned income , for a max credit of $3,359. - Taxpayer with 2 qualifying children - 40% of earned income , for a max credit of $5,548. - Taxpayer with 3 or more qualifying children - 45% of earned income , for a max credit of $6,242.

Answer 5

All income taxes withheld from a taxpayers paycheck are considered a credit against the taxpayers tax liability. When this credit exceeds the tax liability, a refund is generated to the taxpayer.

Answer 6

Excess social security tax is treated as additional tax payments withheld. When an employee who has had social security tax withheld in an amount greater than the max for a particular year: - IF the excess was withheld by two or more employers then the taxpayer may claim the credit against income tax. - IF the excess was withheld by only one employer, the employer must refund the excess to the employee and no tax credit is allowed.

Answer 7

For small businesses (100 employees or less) who earned at least $5,000 in the prior tax year, a credit is allowed for 50% of the first $1,000 (up to $500 per year) of qualified start up costs for establishing a new qualified pension plan for three years (starting with the year the plan was established. Qualified costs = expenses to establish and administer the plan and provide information to employees regarding retirement. If the expenses are used for the credit, they cannot also be used as a deductible ordinary and necessary business expense. Employers are not required to take the credit for any ax year and can take the credit starting in the first year that precedes the first year of the plan.

Answer 8

A credit up to 50% of the employer's costs of the plans premiums )or the average of the group's premium for small businesses within taxpayers state) is allowed as a credit for eligible employers, provided the employer contributes at least 50% of the costs of health coverage on behalf of the employees enrolled in a qualified health plan offered through a small business health options program. smaller businesses receive the better tax benefits. The credit is allowable as an offset to AMT, however it is not refundable and the unused amount is carried back 1 year and forward 20 years (tax exempt organizations will receive a refund). The costs for family members, sole proprietors, partners, s corp owners with greater than 2% ownership and shareholders owning more than 5% of corp are excluded. If the expenses were used for the credit, they are not allowable as a tax deduction for employee benefits expense.

Answer 9

A max credit of 15% of qualifying nonbusiness energy property pr improvements ( high efficiency heat pumps, air conditioners, windows, door, certain roofs, insulation, etc) that were installed in 2014 is allowed, up to the max credit of $500. For qualified solar electric property, water heaters, small wind energy property, and geothermal pumps, there is no limit on the amount of the credit (15% of the cost is allowed as a credit)

Answer 10

Earned income credit.. Explanation: Choice "b" is correct. The earned income credit is refundable. Eligible taxpayers can get advance payments from their employers because the credit is assured.

Answer 11

$11,000. Explanation: Choice "b" is correct. The adoption fees would be qualifying expenses for the tax credit (medical expenses do not qualify). Choice "c" is incorrect. $5,000 of the $16,000 of total expenses are not eligible. Choice "a" is incorrect. The expenses ($8,000 + $3,000) are eligible. Choice "d" is incorrect. Medical expenses are not eligible for the credit.

Answer 12

As a credit against federal income taxes due.. Explanation: Choice "a" is correct. A taxpayer may claim a credit against federal income taxes due for foreign income taxes paid to a foreign country or a U.S. possession. There is a limitation on the amount of the credit an individual can obtain. In lieu of this credit, an individual might find it better to deduct the taxes as an itemized deduction (NOT subject to the 2% floor) instead. Note that the only correct response to this question is choice "a"; however, also note that the other option for treating the taxes paid to the foreign country is not included as an answer option. Choice "b" is incorrect. Although taxes paid by an individual to a foreign country are allowable itemized deductions, they are NOT subject to the 2% floor. Choice "c" is incorrect. An adjustment is not allowed for taxes paid by an individual to a foreign country. A taxpayer may claim a credit against federal income taxes due for foreign income taxes paid to a foreign country or a U.S. possession. In lieu of this credit, an individual might find it better to deduct the taxes as an itemized deduction (NOT subject to the 2% floor) instead. Choice "d" is incorrect. A taxpayer may claim a credit against federal income taxes due for foreign income taxes paid to a foreign country or a U.S. possession. In lieu of this credit, an individual might find it better to deduct the taxes as an itemized deduction (NOT subject to the 2% floor) instead.

Answer 13

The credit is nonrefundable.. Explanation: Choice "c" is correct. The child and dependent care credit is nonrefundable. The only refundable credits are the child tax credit (which is a different credit with a similar name- $1,000 credit for qualifying children under 17), the earned income credit, withholding taxes, portions of the Hope Scholarship credit, and excess Social Security taxes paid. The child and dependent care credit is a "personal" tax credit. Choice "b" is incorrect. The child must be under age 13, not age 18, to be a qualifying child and for there to be a credit. Choice "a" is incorrect. The child need not be a direct descendant of the taxpayer for there to be a credit. To be a qualifying child, the child must merely be a dependent of the taxpayer. Choice "d" is incorrect. The maximum child and dependent care credit is 35% of eligible expenses, with a phase out for AGI over $15,000. There is no pure $600 limit.

Answer 14

$500. Explanation: Choice "d" is correct. First of all we need to determine the eligible expenses. Only expenses for Becky will qualify because Matt is not under 13 years of age. So of the $8,000 spent, only $4,000 will qualify. The maximum eligible for 1 dependent, though, is $3,000. Then it is further limited because it is limited to the lowest earned income of either spouse. That would be Mary's $2,500. Due to their combined income level, they are in the 20% credit range( Over $43,000 = lowest credit rate or 20%). The credit is 20% of $2,500, or $500. Choices "b", "c", and "a" are incorrect, per the above explanation.

Answer 15

Earned Income Credit. Explanation: Choice "d" is correct. The Earned Income Credit is refundable. The other credits listed are not refundable. Note: The Child Tax Credit (not listed) can be refundable in certain circumstances. Do not confuse this with the Child and Dependent Care credit, which is not refundable. Choices "a", "b", and "c" are incorrect, per the above explanation.

Answer 16

The taxpayer has a filing status of married filing separately. Explanation: Rules: Earned income tax credit is a refundable tax credit. It is designed to encourage low-income workers (i.e., those with earned income) to offset the burden of U.S. tax. A claimant can have one qualifying child or two or more qualifying children for this credit. There is a maximum credit available for this purpose. Further: The taxpayer must meet certain earned low-income thresholds. The taxpayer must not have more than the specified amount of disqualified income. The taxpayer must be over age 25 and less than 65 if there are no qualifying children. If married, the taxpayer must generally file a joint return with his/her spouse (i.e., the married filing separate status disqualifies a taxpayer from claiming the earned income credit). A qualifying child can be up to and including age 18 at the end of the tax year, provided the child shared a residence with the taxpayer for 6 months or more. The taxpayer must be related to the qualifying child (or children) through blood, marriage, or law. The child must be either in the same generation or a later generation of the taxpayer. A foster child qualifies if officially placed with the taxpayer by an agency. Choice "d" is correct. Based on the above rules, the filing status of married filing separately disqualifies a taxpayer from claiming the earned income credit. Choice "b" is incorrect. If the taxpayer's qualifying child is a 17-year-old grandchild, the requirement of age and relation is satisfied, and the taxpayer may qualify to claim the EIC. Choice "c" is incorrect. The taxpayer earning an income of $5,000 meets the earned low-income requirements; thus, it does not disqualify him or her from claiming the EIC. Choice "a" is incorrect. The taxpayer's five year old child lived in the taxpayer's home for eight months. The above rules indicate that the otherwise qualifying child must live with the taxpayer for six or more months; thus, this fact does not disqualify the taxpayer from claiming the EIC

Answer 17

Retirement savings contribution credit. Explanation: Choice "c" is correct. The Retirement savings contribution credit is a non-refundable credit. The EIC and child tax credit could result in a refunded amount beyond the actual tax liability, depending upon the taxpayer's income levels. In addition, if excess social security is paid, the taxpayer can receive a refund of those amounts regardless of the income tax liability being reduced to zero.

Answer 18

b.The excess as a credit against income tax, if that excess resulted from correct withholding by two or more employers. Explanation: Choice "b" is correct. An employee who has had social security tax withheld in an amount greater than the maximum for a particular year, may claim the excess as a credit against income tax, if that excess resulted from correct withholding by two or more employers. Choice "d" is incorrect. The excess resulting from the correct withholding by two or more employers may only be claimed as a credit against income tax. Choice "a" is incorrect. The employee may not seek reimbursement of the excess if the excess resulted from correct withholding by two or more employers. Choice "c" is incorrect. The employee may not claim the excess as a credit against income tax, if that excess was withheld by one employer. The employer must adjust the excess for the employee.