Study Unit 8: Tax Credits and Payments

In 2022, Ruth had wages of $34,000, and her husband John’s wages were $27,000. They have three children ages 3, 6, and 9. They paid a total of $7,200 to Creative Child Care School, Inc. Assuming a 20% credit rate, what will be their Child and Dependent Care Credit?

• 
  $1,440

• 
  $1,200

• $6,000

• 
  $7,200

Answer explanation

In 2022, the maximum amount of employment-related expenses to which the credit may be applied is $3,000 if one qualifying child or dependent is involved, or $6,000 if two or more are involved. The maximum credit that can be claimed in this situation is $1,200 (20% of $6,000 limit) (Publication 17).

For the current year, Gannon Corporation has U.S. taxable income of $500,000, which includes $100,000 from a foreign division. Gannon paid $45,000 of foreign income taxes on the income of the foreign division. Assuming Gannon’s U.S. income tax for the current year before credits is $105,000, its maximum Foreign Tax Credit for the current year is

• $9,000

• 
  $45,000

• 
  $21,000

• 
  $84,000

Answer explanation

The Foreign Tax Credit is allowed under Sec. 27 and Sec. 901 for foreign income taxes paid or accrued during the year and is limited by Sec. 904(a). The limitation is the proportion of the taxpayer’s tentative U.S. income tax (before the Foreign Tax Credit) that the taxpayer’s foreign source taxable income bears to his or her worldwide taxable income for the year (Publication 514). The following calculation should be made:

Foreign earned

taxable income × U.S. income tax =Foreign tax credit limitation

Worldwide

taxable income

$100,000 × $105,000 = $ 21,000

$500,000

Which one of the following could prevent an individual from qualifying for the Child and Dependent Care Credit?

• Unearned income of more than $400.

• Paying for care for more than one qualifying person.

• Not identifying the care provider on the tax return.

• Paying for child care while looking for work.

Answer explanation

Taxpayers must provide each dependent’s taxpayer identification number in order to claim the credit, as well as the identifying number of the service provider [Publication 503].

Jerry has two dependent children, Greg and Mandy, who are attending an accredited college in 2022. Greg, a fifth-year senior since January 1, spent $7,000 for tuition and fees. Mandy, a freshman with no prior post-secondary education, had tuition expenses of $4,000. Jerry meets all the income and filing status requirements for the education credits. There is no tax-free assistance to pay these expenses. Jerry’s tax liability before credits equals $14,000. What is the maximum credit that Jerry may claim on his 2022 tax return?

• $2,200 Lifetime Learning Credit.

• 
  $5,000 AOTC.

• 
  $2,500 AOTC and $1,000 Lifetime Learning Credit.

• 
  $2,500 AOTC and $1,400 Lifetime Learning Credit.

Answer explanation

There are two education-related credits: the AOTC and the Lifetime Learning Credit. These credits may be claimed by the individuals for tuition, fee, and book expenses incurred by students pursuing college or graduate degrees or vocational training. In 2022, the AOTC provides a maximum allowable credit of $2,500 per student for each of the first 4 years of post-secondary education. The calculation is the sum of 100% of the first $2,000 and 25% of the second $2,000 paid. The Lifetime Learning Credit allows a credit of 20% of the amount of tuition paid by the taxpayer for each student for which the AOTC is not claimed and is available for the first $10,000 of tuition. Thus, the credit is $2,500 [($2,000 × 100%) + ($2,000 × 25%)] AOTC credit for Mandy plus $1,400 ($7,000 × 20%) Lifetime Learning Credit for Greg (Publication 970).

Liz incurred qualified adoption expenses of $17,000 in 2022. Liz’s AGI for 2022 was $60,000. What is the amount of the credit Liz can take in 2022 for the adoption expenses she incurred?

• $0

• 
  $7,500

• 
  $14,890

• 
  $17,000

Answer explanation

A credit is allowed for qualified adoption expenses incurred after 1996 (Sec. 23). The maximum credit for 2022 is $14,890 per child. Liz’s AGI is well below the threshold of $223,410.

For which of the following dependent children will a parent NOT be allowed a Child Tax Credit?

• 15-year-old daughter.

• 12-year-old foster child.

• 
  19-year-old stepchild.

• 
  16-year-old grandchild.

Answer explanation

A “qualifying child” is a child, descendant, stepchild, eligible foster child, sibling, or descendant of siblings. The child must also be under 17 years of age and be claimed as a dependent by the taxpayer (Publication 503).

Mr. and Mrs. Robinson are both over age 65 and file a joint return. During the current year, they received $4,000 in nontaxable benefits from Social Security. This was their only nontaxable income. Their adjusted gross income was $12,000. How much can they claim as tentative credit for the elderly?

• $0

• 
  $225

• 
  $375

• 
  $525

Answer explanation

In the case of an individual who has attained age 65 before the close of the taxable year, the credit for the elderly or disabled allows a credit equal to 15% of the individual’s applicable base amount. On a joint return when both spouses are eligible for the credit, the applicable base amount is equal to an initial amount of $7,500 reduced by any amounts received as Social Security benefits or otherwise excluded from gross income [Sec. 22(c)(3)]. The base amount is also reduced by one-half of the excess of adjusted gross income over $10,000 (in the case of a joint return), which is $1,000 [($12,000 AGI – $10,000 phaseout threshold) × 50%] for the Robinsons (Publication 524).

Initial base amount $ 7,500 

Less: Social Security (4,000)

Less: AGI limitation (1,000)

Adjusted amount $ 2,500 

 

×     .15 

Robinsons’ tentative

credit for the elderly $    375 

Authors’ note: The actual credit received would be $0 because there would be no taxable income after subtracting the basic standard deduction, the additional standard deduction.

The Earned Income Credit is available to

• Persons with a qualifying child.

• 
  Persons without a qualifying child.

• 
  Persons who are age 40.

• All of the answers are correct.

Answer explanation

A taxpayer can be eligible for the Earned Income Credit by having a qualifying child or meeting three qualifications: (1) The individual must have his or her principal place of abode in the United States for more than one-half of the taxable year, (2) the individual must be at least 25 years old but under age 65 at the end of the taxable year, and (3) the individual cannot be claimed as a dependent of another taxpayer for any tax year beginning in the year the credit is being claimed.

Which of the following is NOT required for a taxpayer to be eligible for the Premium Tax Credit?

• The taxpayer’s health insurance is purchased through the Marketplace.

• The taxpayer is not eligible to be claimed as a dependent by another taxpayer.

• 
  The taxpayer does not file a separate return if married, unless an exception applies.

• 
  The taxpayer is eligible for coverage through an employer plan.

Answer explanation

Taxpayers may be eligible for the Premium Tax Credit if they

1. 1. Buy health insurance through the Marketplace;

2. 2. Are ineligible for coverage through an employer or government plan;

3. 3. Do not file a separate return, if married (though exceptions exist if the taxpayer is a victim of domestic violence); and

4. 4. Cannot be claimed as a dependent by another taxpayer.

Thus, to be eligible for the Premium Tax Credit, the taxpayer must be ineligible for coverage through an employer or government plan.

Brad, age 19, is a full-time student in 2022. Brad works a part-time job and contributes $500 to his IRA account. He has AGI of $15,000 for the year and cannot be claimed as a dependent by another taxpayer. Assuming that Brad files as a single taxpayer, what amount of Retirement Savings Contributions Credit may Brad claim in 2022?

• $250

• $0

• $100

• $50

Answer explanation

A taxpayer is eligible for the Retirement Savings Contributions Credit if the taxpayer is

1. 1. Age 18 or older,

2. 2. Not claimed as a dependent on another person’s return, and

3. 3. Not a full-time student.

Because Brad is a full-time student, he is ineligible for the credit.