Question 1

An example of a tax preference item that must be added to taxable income when computing AMTI would be:

Accepted Answer

Tax preference items that must be added to taxable income when computing Alternative Minimum Taxable Income (AMTI) include percentage depletion in excess of the adjusted basis in property, excess intangible drilling costs, and tax-exempt interest on certain private activity bonds.

Question 2

Taxpayers may take both a credit for some of the qualiﬁed foreign taxes they paid or accrued during the year and a deduction for the rest of the qualiﬁed foreign taxes they paid or accrued during the tax year.

Accepted Answer

They may not take a credit for some foreign taxes and a deduction for other foreign taxes.

Question 3

What is the amount of dependent care credit allowed Sally Smith, a divorcee, who pays $3,100 for the year to send her daughter to a babysitter while she works? The daughter is claimed as a dependent by the father. Sally has adjusted gross income of $16,500 for the year.

Accepted Answer

Sally is limited to $3,000 of expenses and must multiply that amount by 34% since she exceeds $15,000 of adjusted gross income

Question 4

What is the earned income credit allowed Don Andersen assuming he has adjusted gross income of $8,500 and earned income of $5,000? He maintains a household for his daughter.

Accepted Answer

$5,000 × 34% = $1,700 EARNED INCOME CREDIT.

Question 5

On July 10, 2008, Test Corporation purchased energy equipment for $15,000. The equipment has a 5-year cost recovery period. The corporation took the appropriate investment credit for 2008. On August 15, 2012, the corporation sold the asset for $10,000. What is the amount of investment credit recapture that is due to the IRS?

Accepted Answer

The asset was held for over four but less than ﬁve years; thus, 20% of the investment credit taken must be recaptured
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Question 6

Mr. and Mrs. Gumball are both over age 65. They had income this year consisting of $8,500 earned income and $1,500 in social security beneﬁts. What amount may they claim as a credit for the elderly? They ﬁle a joint return.

Accepted Answer

There is no tax liability, so there is no credit.

Question 7

An alternative minimum tax applies to items that are considered to be of a tax preference nature. Which of the following items is not considered to be a tax preference item?

Accepted Answer

Tax-exempt bond interest is not a tax preference item.

Question 8

The minimum tax credit:

Accepted Answer

The minimum tax credit allows corporations to use the amount of Alternative Minimum Tax (AMT) paid in one year to offset their regular tax liability in future years (A), it cannot be used to offset future AMT liabilities (B), and it can be carried forward indefinitely to offset regular tax liabilities (C).

Question 9

What is the "alternative minimum tax" that must be paid by a taxpayer ﬁling a joint return, if the taxpayer has taxable income of $95,450, adjustments to taxable income of $29,000, tax preferences of $50,000, and an income tax before the alternative minimum tax of $6,000?

Accepted Answer

The alternative minimum tax that must be paid by the taxpayer is $20,000, computed as follows:
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Question 10

Which of the following is not a tax preference item for purposes of the alternative minimum tax?

Accepted Answer

Amortized circulation costs are not considered a tax preference item for the purposes of calculating the alternative minimum tax (AMT). Tax preference items typically include adjustments that are added back to the taxpayer's income to calculate the AMT, such as excess intangible drilling costs, percentage depletion, and tax-exempt interest on certain private activity bonds, but not amortized circulation costs.

Question 11

Lorence Lange's tax for the year is $7,000. He has paid in $4,400 in four quarterly payments during the year. Last year, his tax liability was $6,600. Which of the following is correct?

Accepted Answer

The underpayment penalty is determined by subtracting the payments made from the smaller of 90% of the present year's tax liability or the previous year's tax liability.
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Question 12

A qualiﬁed child care facility cannot discriminate in favor of the taxpayer's highly compensated employees.

Accepted Answer

According to IRS regulations, a qualified child care facility must provide equal access to services for all eligible children, regardless of their parents' income or employment status. This means that the facility cannot give preferential treatment to highly compensated employees of the taxpayer.

Question 13

What is the amount of dependent care credit for a couple with two children where they spend $5,000 for dependent care and the husband earns $40,000 for the year and the wife earns $4,500?

Accepted Answer

The expenses for dependent care are limited to $4,500, the income of the lower-earning spouse, and the credit percentage for $44,500 of adjusted gross income is 20%.

Question 14

The amount of the low-income housing credit may be taken each year for a total of 15 years, beginning with the tax year during which the building is placed in service or, at the building owner's election, the following tax year.

Accepted Answer

The credit is allowed over a 10-year period
 The recapture provisions remain in eﬀect for 15 years.

Question 15

What is the maximum amount that Mr. and Mrs. Jones, both over 65, may take as a credit for the elderly before the income tax limitation, assuming that they have gross income of $23,000 and adjusted gross income of $21,500?

Accepted Answer

The maximum base amount must be reduced by one-half of the adjusted gross income over $10,000.
 11eb4b56_5176_c1bb_acd1_45cff9c06470_TB1942_00 The credit is limited to the tax liability of $0 [($21,500 - $14,200 - $7,600 = $0) × 10%].

Question 16

Allied Corporation's tax liability for the year is $49,000 before claiming a general business credit. The corporation earns a general business credit of $60,000. What is the amount of credit allowable for the year?

Accepted Answer

The general business credit is limited to the tax liability minus 25% of the liability in excess of $25,000.
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Question 17

Although a work opportunity credit usually is available only for qualiﬁed ﬁrst-year wages, qualiﬁed second-year wages paid to a long-term family recipient can qualify for the credit.

Accepted Answer

The statement is true. Second-year wages paid to a long-term family recipient can qualify for the work opportunity credit.

Question 18

Sam and Betty Taylor maintain a home and they have two children. Their earned income was $10,000 and adjusted gross income was $11,000. They ﬁle a joint return. What is the amount, if any, of their earned income tax credit for the year?

Accepted Answer

$10,000 × 40% = $4,000 EARNED INCOME CREDIT.

Question 19

Carlton Corporation's 2012 general business credit exceeded its 2012 income tax liability. The resultant general business credit:

Accepted Answer

The general business credit carryover period is back one year and forward 20 years.

Question 20

A business qualiﬁes as an "eligible small business" if during the preceding tax year it met either of the following conditions: (1) its gross receipts did not exceed $1 million and (2) it employed no more than 30 full-time employees.

Accepted Answer

A business qualiﬁes as an "eligible small business" if during the preceding tax year it met either of the following conditions: (1) its gross receipts did not exceed $1 million or (2) it employed no more than 30 full- time employees.

Quiz 9: Tax Credits, Prepayments and Special Methods