Fundamentals of Taxation

Business

Quiz 9 :

Tax Credits

Quiz 9 :

Tax Credits

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Explain the two instances in which taxpayers may choose to deduct foreign taxes as an itemized deduction rather than as a credit.
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Income tax is the tax paid by individuals, household and business entities to the government on the earnings that they have. The rules and regulations are supervised by IRS which is a government body. Tax credit is a form of tax incentive or rebate which is given by government to the taxpayer when taxpayer fulfills certain criteria. One tax credit is equal to one dollar and is subtracted by the tax liability of taxpayer. Tax credits are both refundable and nonrefundable.
Foreign tax credit is a tax incentive which is given to those who are earning in foreign countries and paying tax in foreign country as well as in resident country. So, the tax credit is given as per the tax paid in foreign country to reduce the effect of double taxation.
There are scenarios where taxpayer has option to deduct foreign tax as itemized deduction instead of tax credit. Two such scenarios are as follows:
• This can be done when there is loss of taxpayer in one country which is equal to gain in other country.
• This is allowed when the taxes paid in foreign country are like property tax i.
e. taxes which are not based on income of individual.

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Paul and Olivia filed a joint tax return and reported modified AGI of $92,000. They have two qualifying children. What is the amount of their child tax credit? What is the amount of their credit if their modified AGI was $112,000?
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Income tax is the tax paid by individuals, household and business entities to the government on the earnings that they have. The rules and regulations are supervised by IRS which is a government body. Tax credit is a form of tax incentive or rebate which is given by government to the taxpayer when taxpayer fulfills certain criteria. One tax credit is equal to one dollar and is subtracted by the tax liability of taxpayer. Tax credits are both refundable and nonrefundable.
Dependent is the one who depends on the taxpayers for his expenses and survival and is relative of the taxpayer. Dependency exemption is the amount that the taxpayer is allowed to deduct from his gross income for each of his qualifying dependent.
Qualifying dependent could be a relative, spouse, child, etc. Qualifying dependent is the one who has passed several test depending upon the relationship with the taxpayer, and taxpayer is allowed to take exemptions on these dependents.
The five tests which are necessary to qualify as child of the taxpayer are as follows:
• Relationship test: The child should have certain specific relationship to qualify like descendant, step child, foster child, sibling, etc.• Age test: The child should be less than 17 years of age, or less than 24 if he is full-time student. There is no age limit in case of totally and permanently disabled child.• Residency test: The child should live with the taxpayer for at least half year except for the reasons of studies, military service, vacation or illness.
• Support test: The taxpayer should provide money for more than 50 percent support item including food, clothing, accommodation, healthcare, education, etc.• Special test: This is applicable in case of divorced or legally separated couple and all other test should lead to qualification. This tells the scenario when a non-custodial parent could show kid as dependent in their returns.
The maximum permissible amount for child tax credit is $1,000 per qualifying child. The amount at which the phasing out of the tax credit starts is when modified AGI is above $110,000. The amount phased out for every $1,000 over and above modified AGI of $110,000 is $50.
When modified AGI was $92,000 then taxpayer will be able to claim $1,000 which is maximum tax credit for each child. There are two children so total tax credit that could be claimed is $2,000.
When modified AGI was $112,000 then taxpayer will not be able to claim $1,000 which is maximum tax credit for each child. There will be deduction of $50 per $1,000 above $110,000 per child. So, tax credit per child will be $900 and as there are two children so total tax credit that could be claimed is $1,800.

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Explain what qualifies as education expenses for the purposes of educational tax credits.
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Income tax is the tax paid by individuals, household and business entities to the government on the earnings that they have. The rules and regulations are supervised by IRS which is a government body. Tax credit is a form of tax incentive or rebate which is given by government to the taxpayer when taxpayer fulfills certain criteria. One tax credit is equal to one dollar and is subtracted by the tax liability of taxpayer. Tax credits are both refundable and nonrefundable.
Education tax credit is a tax incentive which is given to those who are spending on higher education. This credit is provided for certain expenses which are specified. This tax credit is basically to promote higher education and development of human capital.
Education tax credits can be claimed for expenses against higher education for self, spouse or qualifying dependent. The specific expenses that are allowed are tuition fees, other fees, and related expenses like books, stationary, course materials, etc. However, it does not include cost of staying, board, food, etc.

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Juliette White is a head of household taxpayer with an 8-year-old daughter named Sabrina. They live at 1009 Olinda Terrace Apt 5B, Reno, NV 78887. Juliette works as a receptionist at a local law firm, Law Offices of Dane Gray, and attends school in the evenings at Reno Community College (RCC). She is taking some general classes and is not sure what degree she wants to pursue yet. She is taking three units this semester. Full-time status at RCC is nine units. Fortunately, Sabrina goes to a free after-school program at her elementary school, Mondays through Thursdays until 4PM. On Fridays, Juliette works half a day to spend more time with Sabrina. Juliette's mother watches Sabrina two nights a week so that Juliette can take classes at RCC. SSNs are as follows: Juliette, 412-34-5670; and Sabrina, 412-34-5672. The Form W-2 Juliette received from the Law Offices of Dane Gray contained information in the following boxes: Box 1 = $19,502.50 Box 2 = $ 2,000.14 Box 3 = $19,502.50 Box 4 = $ 1,209.16 Box 5 = $19,502.50 Box 6 = $ 282.79 In addition, Juliette had the following expenses: img Prepare Juliette's federal tax return for 2010. Use Form 1040 and any appropriate schedules or forms she may need for credits. For any missing information, make reasonable assumptions.
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Brian and Corrine Lee are married taxpayers, filing jointly. They live in the home they own, located at 3301 Pacific Coast Hwy, Laguna Beach, CA 92701. Brian is an optometrist who owns his own business; Corrine is a social worker for the County of Orange. They have two biological children, Brady and Hank, ages 14 and 11. After their trip to China last year, they fell in love with a beautiful one-year-old girl from an orphanage near Shanghai and are in the process of adopting her. The SSNs of the four current members of their household are: Brian, 412-34-5670; Corrine, 412-34-5671; Brady, 412-34-5672 and Hank, 412-34-5673. The following are Brian's income and expense information from his business and Corrine's W-2 from the County of Orange.: Lee's Optometrist Office Income and Expenses for the current year: img The Lees also made $34,000 in federal estimated tax payments during the year. The Form W-2 Corrine received from the County of Orange contained this information: Box 1 = $76,925.04 Box 2 = $13,085.90 Box 3 = $76,925.04 Box 4 = $ 4,769.35 Box 5 = $76,925.04 Box 6 = $ 1,115.41 In addition, the Lees had the following income and expenses during the year: img Prepare the Lees' federal tax return for 2010. Use Form 1040, Schedule A, Schedule B, Schedule C, and any appropriate schedules or forms they may need for credits. Do not complete Form 4562 (with the Schedule C). For any missing information, make reasonable assumptions.
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For purposes of the tax credit for child and dependent care expenses, explain the limitations concerning the amount of qualified expenses that can be used to calculate the credit.
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Leonardo's filing status is head of household. He has modified adjusted gross income of $26,000, and he made a $3,000 contribution to his IRA. What is the amount of his retirement savings contributions credit? What would the credit be if he had a filing status of single?
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A taxpayer has $2,000 of qualified employment-related expenses paid on behalf of one qualifying child. Determine the maximum and minimum amount of child and dependent care tax credit available to the taxpayer and explain the circumstances in which the maximum and minimum credit would be permitted.
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To determine the amount of credit for the elderly or the disabled, the appropriate base amount must be adjusted by the effect of two items. What are those two items, and in what way is the base amount adjusted?
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What limitations are associated with the adoption credit, both in terms of dollar amounts and eligibility?
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Taxpayers can claim a child tax credit for a qualifying child. Define qualifying child.
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Explain how the foreign tax credit limitation works.
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Jerome is single and cannot be claimed by anyone as a dependent. He is a full-time student at a local university enrolled full-time in an MBA program. His tuition bill was $5,000. He paid the bill by withdrawing $2,000 from his savings account and borrowing the remainder from a local bank. For purposes of the educational tax credits, what is the amount of Jerome's qualifying expenses?
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A taxpayer maintains a household and is entitled to a dependency exemption for an incapacitated adult child. The child lives during the week at an adult day care center and on the weekends at home with the taxpayer. The taxpayer pays a fee to the center so the taxpayer can be gainfully employed. Does the fee qualify for treatment as a qualifying expense for purposes of the child and dependent care tax credit? Why or why not?
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Two kinds of education tax credits are available. Name them and briefly discuss the criteria necessary to claim the credits.
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Married taxpayers David and Lillian Perdue are 75 and 69 years old, respectively, who file jointly and have no dependents. They live at 9510 Bluebird Canyon Drive, Seattle, WA 99201. The Perdues are both retired and own their home, which was paid off 4 years ago. Their SSNs are: David, 412-34-5670 and Lillian, 412-34-5671. The Perdues received $4,000 in nontaxable social security benefits, and had a taxable pension distribution of $12,500 from the school district. Prepare the Perdues' federal tax return for 2010. Use Form 1040 and any appropriate schedules or forms they may need for credits. For any missing information, make reasonable assumptions.
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Briefly explain the requirements that must be met to receive a tax credit for child and dependent care expenses.
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Briefly explain when and how each of the two education credits is phased out.
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For purposes of the adoption credit, what is the definition of special needs child ? Give some examples (you may find it helpful to refer to the IRC and Regulations to prepare your answer).
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Explain the limitations pertaining to the retirement savings contributions credit.
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