Quiz Of The Week: Income Tax Credits

1. Which one of the following is not a refundable credit?

Dependent care credit

EIC

Adoption credit

American Opportunity credit

An eligible individual is allowed an EIC equal to the credit percentage times the amount of the individual’s earned income for the tax year that does not exceed the statutory earned income amount. The refundable credits include the EIC, an additional child credit, the adoption credit, the American Opportunity Credit (partially refundable) and credits for tax withheld, excess Social Security tax withheld, capital gains tax paid by a regulated investment company allocated to a shareholder, and excise tax for non-taxable use of fuels. Non-refundable credits are for the elderly and disabled, dependent care expenses, and also include the child tax credit for certain taxpayers, the mortgage credit, and Lifetime Learning credit, the credit for electric vehicles, a first-time homebuyer credit, a minimum tax credit, and the Retirement Savings Contribution Credit (Publication 17, Child and Dependent Care Credit).

Explanation

An eligible individual is allowed an EIC equal to the credit percentage times the amount of the individual’s earned income for the tax year that does not exceed the statutory earned income amount. The refundable credits include the EIC, an additional child credit, the adoption credit, the American Opportunity Credit (partially refundable) and credits for tax withheld, excess Social Security tax withheld, capital gains tax paid by a regulated investment company allocated to a shareholder, and excise tax for non-taxable use of fuels. Non-refundable credits are for the elderly and disabled, dependent care expenses, and also include the child tax credit for certain taxpayers, the mortgage credit, and Lifetime Learning credit, the credit for electric vehicles, a first-time homebuyer credit, a minimum tax credit, and the Retirement Savings Contribution Credit (Publication 17, Child and Dependent Care Credit).

2. Which of the following statement(s) is/are correct concerning the general business credit? I. The general business tax credit only applies to an individual or corporation with a tax liability in excess of $100,000. II. The general business credit only applies to an individual or corporation that has a tax credit carry-over.

Statement I is correct

Statement II is correct

Both statements are correct

Neither statement is correct

The general business credit for the year consists of the carry-forward of business credits from prior years plus the total of the current-year business credits (Publication 334, General Business Credits).

Explanation

The general business credit for the year consists of the carry-forward of business credits from prior years plus the total of the current-year business credits (Publication 334, General Business Credits).

3. The maximum amount of the American Opportunity credit for each qualified student is:

$1,000

$1,500

$2,500

$2,000

The maximum American Opportunity credit is $2,500 (100 percent of the first $2,000 and 25 percent of the second $2,000 spent on qualified higher education tuition and related expenses) for each eligible student (Publication 17, Education Credits).

Explanation

The maximum American Opportunity credit is $2,500 (100 percent of the first $2,000 and 25 percent of the second $2,000 spent on qualified higher education tuition and related expenses) for each eligible student (Publication 17, Education Credits).

4. Which of the following individuals or couples qualify for the child and dependent care credit? I. Jeff and Marion are married with two children, ages 5 and 7. Jeff earns $57,000 and Marion is a part-time graduate student at the local university and also works as a volunteer for the local hospital. When Marion is in class or working as a volunteer, they hire their neighbor to care for the children. During the year, they paid $1,200 to their neighbor. II. Michael is single and earns $75,000. He pays $10,000 for a nurse to help care for his disabled father, who lives with him. Michael is entitled to the dependency exemption for his father.

Statement I is correct

Statement II is correct

Both statements are correct

Neither statement is correct

To qualify for the child and dependent care credit, the employment-related expenses must enable the taxpayer, and his or her spouse if married, to be gainfully employed. Volunteer work, while laudable, is not gainful employment. The income considered to be earned by a spouse who is a full-time student or who is incapable of self-care is $250 per month for one qualifying individual and $500 per month if there are two or more qualifying individuals. Marion is a part-time graduate student and a volunteer, and does not qualify. Michael qualifies because his father is a qualifying individual (Publication 17, Child and Dependent Care Credits).

Explanation

To qualify for the child and dependent care credit, the employment-related expenses must enable the taxpayer, and his or her spouse if married, to be gainfully employed. Volunteer work, while laudable, is not gainful employment. The income considered to be earned by a spouse who is a full-time student or who is incapable of self-care is $250 per month for one qualifying individual and $500 per month if there are two or more qualifying individuals. Marion is a part-time graduate student and a volunteer, and does not qualify. Michael qualifies because his father is a qualifying individual (Publication 17, Child and Dependent Care Credits).

5. The general business credit generally may not exceed the net income tax minus the greater of the tentative minimum tax or:

20 percent of the net regular tax liability above $25,000

25 percent of the net regular tax liability above $25,000

20 percent of the net regular tax liability above $20,000

25 percent of the net regular tax liability above $20,000

The general business tax credit allowed for any year, except for the empowerment zone employment credit, is limited to the excess of the taxpayer’s net income tax over the greater of the tentative minimum tax for the tax year or 25 percent of the amount of the taxpayer’s net regular tax liability that exceeds $25,000. Because of the large number of special elements that make up the general business credit, the IRS does not have a specific publication dealing with the credit. To obtain specific information, review Form 3800 and the instructions for the form applicable to the appropriate credit.

Explanation

The general business tax credit allowed for any year, except for the empowerment zone employment credit, is limited to the excess of the taxpayer’s net income tax over the greater of the tentative minimum tax for the tax year or 25 percent of the amount of the taxpayer’s net regular tax liability that exceeds $25,000. Because of the large number of special elements that make up the general business credit, the IRS does not have a specific publication dealing with the credit. To obtain specific information, review Form 3800 and the instructions for the form applicable to the appropriate credit.