R1 M7 - Tax Computations and Credits Flashcards
(8 cards)
List of Nonrefundable Personal Tax Credits
- Child and dependent care credit
- Elderly and Permanently disabled credit - Education Credit (Lifetime learning Credit and American Opportunity Credit ( 60% nonrefundable)
- Retirement Saving Contribution Credit
- Foreign Tax Credit - General Business Credit
- Adoption Credit
List of Refundable Credits
- Federal Income tax withheld ( Form W-2)
- American Opportunity Credit ( 40% refundable)
- Child Tax Credit ( Refund is limited)
- Earned income credit
- Excess Social Security tax paid
Which of the following is not a refundable tax credit?
A. Retirement savings contribution credit. B. Earned income credit. C. Child tax credit. D. Excess social security paid.
Explanation
Choice “A” 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.
Which of the following credits can result in a refund even if the individual had no income tax liability?
A. Lifetime learning credit B. Elderly and/or permanently disabled credit C. Earned income credit D. Retirement savings contribution credit
Explanation
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Choice “C” is correct. The earned income credit is refundable. The lifetime learning credit, elderly and/or permanently disabled credit, and retirement savings contribution are not refundable credits.
Which of the following personal tax credits can offset tax liability but cannot result in a refund to the taxpayer if the amount of the credit exceeds the taxpayerʹs tax liability?
A. Earned income credit B. Child tax credit C. Lifetime learning credit D. American opportunity credit
Explanation
Choice “C” is correct. The lifetime learning credit is an education credit that can offset an individual taxpayerʹs tax liability but does not result in a refund if the credit amount is more than the taxpayerʹs tax liability.
Choice “A” is incorrect. The earned income credit is a refundable credit for lower-income taxpayers.
Choice “B” is incorrect. The child tax credit for a dependent child may be refundable, but the amount that can be refunded is limited. A child tax credit for a non-child dependent is nonrefundable.
Choice “D” is incorrect. The American opportunity credit is a higher education credit. Forty percent of the allowable credit is refundable, subject to certain restrictions.
The maximum allowable expenses are $3000 for one qualifying person and $6,000 for two or more qualifying people.
It is available to disabled spouse
It is 20%- 35% of work-related expenses to care for qualifying person.
Frank and Mary Wood have 2 children, Becky, age 10, and Matt, age 14. The Woods incur expenses of $5,000 for after-school care for each child. Their only income is from wages. Frank’s wages are $60,000, and Mary’s wages are $2,500. What amount of Child and Dependent Care Credit may the Woods claim on their joint tax return?
A. $500 B. $1,000 C. $1,750 D. $2,000
Explanation
Choice “A” is correct. First, determine the eligible expenses. Only expenses for Becky will qualify because Matt is not under 13 years of age. Of the $10,000 spent, only $5,000 will qualify. The maximum eligible expenses for one dependent is $3,000. The eligible expenses are also limited to the lowest earned income of either spouse. That would be Mary’s $2,500. Because of Frank and Mary’s combined income level, the credit rate of 20 percent applies. The credit is 20 percent of $2,500, or $500.
Choices “B”, “C”, and “D” are incorrect, per the above explanation.
The Retirement saving contribution credit is a nonrefundable credit for contribution up to $2,000 to traditional or Roth IRA.
Eligible Taxpayer
-18 yrs old
-Not a full-time student
-Not a dependent of another taxpayer
Child Tax Credit (Limited Refundability)
- $2,000 per qualifying child
- Qualifying Child (CARES) but the child must be under 17
- phase out for high income (MFJ $400,000 | MFS & Single $200,000)
- $500 credit for each non-child dependent
Dawn White’s adjusted gross income on her Year 1 tax return was $100,000. The amount covered a 12-month period. For the Year 2 tax year, the minimum payments required from White to avoid the penalty for the underpayment of estimated tax is:
A. 90% of the current tax on the return for the current year paid in four equal installments or 110% of the prior year's tax liability paid in four equal installments. B. 110% of the prior year's tax liability paid in four equal installments only. C. 100% of the prior year's tax liability paid in four equal installments only. D. 90% of the current tax on the return for the current year paid in four equal installments or 100% of the prior year's tax liability paid in four equal installments.
Explanation
Choice “D” is correct. The requirement is 90% of the current tax on the return for the current year paid in four equal installments or 100% of the prior year’s tax liability paid in four equal installments.
Choice “A” is incorrect. 110% of the prior year’s tax liability is only required if AGI is in excess of $150,000.
Choices “B” and “C” are incorrect. There is always an option to pay 90% of the current year’s tax.
Which of the following statements is true regarding the net investment income (NII) tax?
A. The tax is 3.8 percent of the lesser of (1) the taxpayer’s net investment income; or (2) the excess of modified AGI over a threshold amount. B. The tax is 3.8 percent of the greater of (1) the taxpayer’s net investment income; or (2) the excess of modified AGI over a threshold amount. C. The tax is 2.8 percent of the lesser of (1) the taxpayer’s net investment income; or (2) the excess of modified AGI over a threshold amount. D. The tax is 2.8 percent of the greater of (1) the taxpayer’s net investment income; or (2) the excess of modified AGI over a threshold amount.
Explanation
Choice “A” is correct. The net investment income (NII) tax is 3.8 percent of the lesser of (1) the taxpayer’s net investment income; or (2) the excess of modified AGI over a threshold amount.
Choice “B” is incorrect. The tax is levied on the lesser amount rather than the greater amount.
Choices “C” and “D” are incorrect. The tax rate is equal to 3.8 percent rather than 2.8 percent.
The Welles family has three children. Which of the children listed below would be subject to the “kiddie tax”?
A. Willy: 20 years old, not a college student, supports himself fully B. Walker: 25 years old, full-time college student, supports himself fully C. Wilson: 20 years old, full-time college student, fully supported by his parents D. None of these
Explanation
Choice “C” is correct. The net unearned income of a dependent child under 18 years of age (or a child age 18–24 who does not provide over half of his or her own support and is a full-time student) is taxed at the parents’ marginal rate under the “kiddie tax” rules. Because Wilson is under the age of 24 and is a full-time college student who does not support himself, his net unearned income over the allowable threshold is taxed at his parents’ marginal rate.
Choice “A” is incorrect. Because Willy supports himself fully, his income is not subject to the “kiddie tax.”
Choice “B” is incorrect. Because Walker is over the age of 24, his income is not subject to the “kiddie tax.”
Choice “D” is incorrect. The net unearned income of a dependent child under 18 years of age (or a child age 18–24 who does not provide over half of his or her own support and is a full-time student) is taxed at the parents’ marginal rate under the “kiddie tax” rules.
Krete, an unmarried taxpayer with income exclusively from wages, filed her initial income tax return for Year 8. By December 31, Year 8, Krete’s employer had withheld $16,000 in federal income taxes and Krete had made no estimated tax payments. On April 15, Year 9, Krete timely filed an extension request to file her individual tax return and paid $300 of additional taxes. Krete’s Year 8 income tax liability was $16,500 when she timely filed her return on April 30, Year 9, and paid the remaining income tax liability balance.
What amount would be subject to the penalty for the underpayment of estimated taxes?
A. $0 B. $200 C. $500 D. $16,500
Explanation
Choice “A” is correct. Provided the taxes due after withholdings were not over $1,000, there is no penalty for underpayment of estimated taxes. Note that there would be a failure to pay penalty on the $200 that was not paid until April 30, but this is a separate penalty.
Choice “B” is incorrect. This $200 would be subject to a failure to pay penalty, but if the balance due after withholdings is not over $1,000, there is no penalty for underpayment of estimated taxes.
Choice “C” is incorrect. If the balance of tax due after withholdings is not over $1,000, there is no penalty for underpayment of estimated taxes.
Choice “D” is incorrect. The penalty for underpayment of estimated taxes is not assessed on the full amount of the income tax liability, only the unpaid amount after withholdings to the extent it exceeds $1,000.
