Chapter 9 - Tax Credits Flashcards
(26 cards)
What is a deduction?
A deduction reduces the income tax base or the income subject to tax
What is a credit?
A credit is the amount of money a taxpayer can subtract from the taxes they owe
What is a refundable credit?
- A tax credit that is refunded to the taxpayer no matter how much the taxpayer’s liability
What if the tax liability is less than the amount of the credit?
Paid no matter how much the taxpayer’s liability is.
Can a refundable credit generate a tax refund?
Yes - refundable credits can take the tax liability down below zero and the amount is refunded in cash to the taxpayer.
What is a nonrefundable credit?
A nonrefundable credit is a reduction in the amount of income taxes that a taxpayer owes.
Can a nonrefundable tax credit reduce the amount owed to zero?
Yes - but no further and no refund is issued
What if the nonrefundable credit exceeds the tax liability?
The excess is lost
What is the foreign tax credit?
The foreign tax credit is a nonrefundable US tax credit used to offset income tax paid abroad.
What if a taxpayer has paid income tax imposed by foreign country?
A taxpayer can claim a foreign tax credit or itemized deduction to reduce US tax liability and avoid getting taxed twice.
What is the child and dependent care expenses credit?
A nonrefundable tax credit for taxpayers that incur out-of-pocket expenses for childcare or disabled dependent while working.
How much is the child and dependent care expense credit?
Equal to up to $3000 for one qualifying individual or $6000 for two or more multiplied by the applicable percentage ($3k or $6k) x 20%
What is the Elderly or Disabled credit?
A nonrefundable credit that provides financial assistance to the elderly or disabled aged 65 or older or under 65 and permanently or totally disabled
What is the Lifetime Learning Credit (LLC)?
A nonrefundable tax credit that lowers the tax liability up to $2000 (up to 20% of $10k per year) to offset qualifying education expenses
If a taxpayer uses the LLC to pay taxes owed, will they get a refund on the credit?
No -
What is the American Opportunity Tax Credit?
A $2500 refundable tax credit (up to 40%) for qualifying education expenses for the first 4 years of undergrad; 100% of the first $2000 and 25% of the next $2000; no felony drug convictions
What is the MAGI for AOTC?
$80K-$90K single filing and $160K-$180K for married filing jointly
What is NOT included in the AOTC?
Room and board, transportation, insurance, 529 plan expenses
What is the Child Tax Credit?
A partially refundable ($1700/$2000) $2000 per child credit for qualifying child under 17 years of age
What Is the Earned Income Tax Credit (EITC)?
A refundable tax credit that reduces the amount of taxed owed on a dollar for dollar basis
Is the EITC available to all taxpayers?
No - only available to low and moderate income earners that have earned income (does not include investments)
What is the General Business Credit?
GBC is comprised of a number of nonrefundable business credits combined into one amount.
What is the Retirement Savings Contribution Credit?
A nonrefundable credit intended to encourage lower income payers save for retirement
What is the Adoption Expense Credit?
A nonrefundable credit used to offset reasonable and necessary adoption-related costs incurred by adopting a child younger than 18 years old or disabled and requires care
