Income Tax Fundamentals 2016 34th Edition

Income Tax Fundamentals 2016 34th Edition

Chapter 6 — Credits and Special Taxes

1. What would reduce income taxes more: a $100 tax credit or a $100 tax deduction?

ANSWER:

Tax credits reduce taxes more than deductions since credits are subtracted directly from the income tax. Deductions are subtracted from income before the income tax is calculated and therefore reduce taxes only by the tax rate (percentage) in effect.

POINTS:

1

DIFFICULTY:

Moderate

QUESTION TYPE:

Essay

HAS VARIABLES:

False

LEARNING OBJECTIVES:

ITF.WABG.16.LO:6-01 – LO:6-01

NATIONAL STANDARDS:

United States – BUSPROG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Comprehension

2. The child tax credit is not available for children ages 17 and older.

a.

True

b.

False

ANSWER:

True

POINTS:

1

DIFFICULTY:

Easy

QUESTION TYPE:

True / False

HAS VARIABLES:

False

LEARNING OBJECTIVES:

ITF.WABG.16.LO:6-01 – LO:6-01

NATIONAL STANDARDS:

United States – BUSPROG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Knowledge

3. The child tax credit is $1,000 per qualifying child unless it is phased out due to higher levels of parental income.

a.

True

b.

False

ANSWER:

True

POINTS:

1

DIFFICULTY:

Easy

QUESTION TYPE:

True / False

HAS VARIABLES:

False

LEARNING OBJECTIVES:

ITF.WABG.16.LO:6-01 – LO:6-01

NATIONAL STANDARDS:

United States – BUSPROG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Knowledge

4. Denice is divorced and files a single tax return claiming her two children, ages 7 and 9, as dependents. Her AGI for 2015 is $81,500. Denice’s child tax credit for 2015 is:

a.

$0

b.

$350

c.

$1,000

d.

$1,650

e.

$2,000

ANSWER:

d

RATIONALE:

(2 × $1,000) – [($81,500 – $75,000) / $1,000 rounded up to the nearest whole number × $50]

POINTS:

1

DIFFICULTY:

Moderate

QUESTION TYPE:

Multiple Choice

HAS VARIABLES:

False

LEARNING OBJECTIVES:

ITF.WABG.16.LO:6-01 – LO:6-01

NATIONAL STANDARDS:

United States – BUSPROG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Comprehension

5. Curly and Rita are married, file a joint return, and have two dependent children, ages 11 and 13. Their AGI is $117,000. By how much is their child credit reduced in 2015?

a.

$0

b.

$300

c.

$350

d.

$700

e.

$7,000

ANSWER:

c

RATIONALE:

($117,000 – $110,000) / $1,000 rounded up to the nearest whole number × $50

POINTS:

1

DIFFICULTY:

Challlenging

QUESTION TYPE:

Multiple Choice

HAS VARIABLES:

False

LEARNING OBJECTIVES:

ITF.WABG.16.LO:6-01 – LO:6-01

NATIONAL STANDARDS:

United States – BUSPROG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Comprehension

6. In 2015, the child tax credit available to married taxpayers filing jointly is phased out, beginning at:

a.

$55,000

b.

$75,000

c.

$95,000

d.

$110,000

ANSWER:

d

POINTS:

1

DIFFICULTY:

Easy

QUESTION TYPE:

Multiple Choice

HAS VARIABLES:

False

LEARNING OBJECTIVES:

ITF.WABG.16.LO:6-01 – LO:6-01

NATIONAL STANDARDS:

United States – BUSPROG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Knowledge

7. Bob and Carol file their tax returns using the married filing jointly status. Their AGI is $132,500. They have two children, ages 11 and 7. How much child tax credit can Bob and Carol claim for their two children?

a.

$0

b.

$850

c.

$875

d.

$1,150

e.

None of the above is correct.

ANSWER:

b

RATIONALE:

(2 × $1,000) – [($132,500 – $110,000) / $1,000 rounded up to the nearest whole number × $50]

POINTS:

1

DIFFICULTY:

Moderate

QUESTION TYPE:

Multiple Choice

HAS VARIABLES:

False

LEARNING OBJECTIVES:

ITF.WABG.16.LO:6-01 – LO:6-01

NATIONAL STANDARDS:

United States – BUSPROG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Comprehension

8. a. Norm and Linda are married, file a joint return, and have one 5-year-old child. Their adjusted gross income is $136,000. What is their child credit for the current year?

b. If Norm and Linda had a 3-year-old as well as the 5-year-old and an 18-year-old from Linda’s first marriage, what would their child tax credit be for the current year?

c. In b. above, how many qualifying children do Norm and Linda have? Explain.

ANSWER:

a. $0. They are above the phase-out limit. $50 × (($136,000 – $110,000) / $1,000) = $1,300, which is greater than the credit of $1,000 for one child, so no credit is available.

b. $700 = $2,000 – [$50 × (($136,000 – $110,000) / $1,000)].

c. Two. The 18-year-old does not qualify because of the age limitation.

POINTS:

1

DIFFICULTY:

Challenging

QUESTION TYPE:

Subjective Short Answer

HAS VARIABLES:

False

LEARNING OBJECTIVES:

ITF.WABG.16.LO:6-01 – LO:6-01

NATIONAL STANDARDS:

United States – BUSPROG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Comprehension

9. Calculate the child tax credits for the following taxpayers. Please show your work.
a. Ninfa is a single mother with 8-year-old and 9-year-old dependent sons and has $50,000 of AGI.
b. Sharon and Mark have one dependent 2-year-old child and $126,300 of AGI.
c. Carol is single and has one dependent 18-year-old son and $21,000 of AGI.

ANSWER:

a. $2,000. Ninfa’s income is less than the phase-out range for a single taxpayer, so two child credits are allowed at $1,000 each.

b. $150, calculated as $126,300 – $110,000 = $16,300; $16,300 / $1,000 = 16.3, rounds to 17; 17 × $50 = $850 of the $1,000 child credit, phased out due to AGI limits.

c. $0. Carol’s son is too old to qualify for the child credit.

POINTS:

1

DIFFICULTY:

Challenging

QUESTION TYPE:

Subjective Short Answer

HAS VARIABLES:

False

LEARNING OBJECTIVES:

ITF.WABG.16.LO:6-01 – LO:6-01

NATIONAL STANDARDS:

United States – BUSPROG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Comprehension

10. ​To qualify for the additional child tax credit

a.

​the typical child yax credit must be limited by tax liability

b.

​the taxpayer must have earned income of over $3,000

c.

​the taxpayer must have at least one qualifying child

d.

​all of the above are required to qualify for the additional child tax credit

ANSWER:

d

POINTS:

1

DIFFICULTY:

Easy

QUESTION TYPE:

Multiple Choice

HAS VARIABLES:

False

LEARNING OBJECTIVES:

ITF.WABG.16.LO:6-01 – LO:6-01

NATIONAL STANDARDS:

United States – BUSPROG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Knowledge

11. The use of the earned income credit could result in a taxpayer receiving a refund even though he or she has not paid any income taxes.

a.

True

b.

False

ANSWER:

True

POINTS:

1

DIFFICULTY:

Easy

QUESTION TYPE:

True / False

HAS VARIABLES:

False

LEARNING OBJECTIVES:

ITF.WABG.16.LO:6-02 – LO:6-02

NATIONAL STANDARDS:

United States – BUSPROG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Knowledge

12. To be eligible for the earned income credit for 2015, a taxpayer must have a “qualifying child.”

a.

True

b.

False

ANSWER:

False

RATIONALE:

As long as adjusted gross income (AGI) is below a certain level and the taxpayer is over 25 and under 65 years old and not claimed as a dependent on another return, a taxpayer may be eligible for the earned income credit even if the taxpayer does not have a qualifying child.

POINTS:

1

DIFFICULTY:

Easy

QUESTION TYPE:

True / False

HAS VARIABLES:

False

LEARNING OBJECTIVES:

ITF.WABG.16.LO:6-02 – LO:6-02

NATIONAL STANDARDS:

United States – BUSPROG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Knowledge

13. The earned income credit:

a.

Must be calculated on earned income as well as adjusted gross income in some cases.

b.

Can not exceed the amount of the tax liability.

c.

Is available only if the taxpayer has qualifying children.

d.

Is available to married taxpayers who file separate returns.

ANSWER:

a

POINTS:

1

DIFFICULTY:

Easy

QUESTION TYPE:

Multiple Choice

HAS VARIABLES:

False

LEARNING OBJECTIVES:

ITF.WABG.16.LO:6-02 – LO:6-02

NATIONAL STANDARDS:

United States – BUSPROG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Knowledge

14. In 2015, Alex has income from wages of $16,000, adjusted gross income of $18,000, and tax liability of $300 before the earned income credit. What is the amount of Alex’s earned income credit for 2015, assuming he is single and his 5-year-old dependent son lives with him for the full year?

a.

$0

b.

$1,000

c.

$3,274

d.

$3,359

e.

None of the above

ANSWER:

d

POINTS:

1

DIFFICULTY:

Moderate

QUESTION TYPE:

Multiple Choice

HAS VARIABLES:

False

LEARNING OBJECTIVES:

ITF.WABG.16.LO:6-02 – LO:6-02

NATIONAL STANDARDS:

United States – BUSPROG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Comprehension

NOTES:

Additional tables, rates or other schedules may be required to assist the student in completing this test question.

15. Which one of the following taxpayers qualify for the earned income credit?

a.

A 70-year-old doctor whose practice had a net loss and who has an AGI of $5,000 in 2015.

b.

An 18-year-old college student who earns $8,000 at a part-time job.

c.

A couple who have a combined AGI of $17,000 and three children but file separately.

d.

A 31-year-old construction worker with $22,000 of AGI and two children.

e.

None of the above qualifies for the earned income credit.

ANSWER:

d

POINTS:

1

DIFFICULTY:

Moderate

QUESTION TYPE:

Multiple Choice

HAS VARIABLES:

False

LEARNING OBJECTIVES:

ITF.WABG.16.LO:6-02 – LO:6-02

NATIONAL STANDARDS:

United States – BUSPROG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Knowledge

16. For the 2015 tax year, Sally, who is single, reported the following items of income:
Interest income

$ 600

Wages

$4,100

Earnings from self-employment

$3,000

She maintains a household for herself and her 1-year-old son who qualifies as her dependent. What is the earned income credit available to her for 2015, using the tables?

a.

$503

b.

$1,369

c.

$2,423

d.

$2,627

e.

None of the above

ANSWER:

c

POINTS:

1

DIFFICULTY:

Moderate

QUESTION TYPE:

Multiple Choice

HAS VARIABLES:

False

LEARNING OBJECTIVES:

ITF.WABG.16.LO:6-02 – LO:6-02

NATIONAL STANDARDS:

United States – BUSPROG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Comprehension

NOTES:

Additional tables, rates or other schedules may be required to assist the student in completing this test question.

17. Which of the following tax credits is not available for the 2015 tax year?

a.

Foreign tax credit

b.

Earned income credit

c.

Adoption credit

d.

Child and dependent care credit

e.

All of the above are available credits

ANSWER:

e

POINTS:

1

DIFFICULTY:

Easy

QUESTION TYPE:

Multiple Choice

HAS VARIABLES:

False

LEARNING OBJECTIVES:

ITF.WABG.16.LO:6-02 – LO:6-02
ITF.WABG.16.LO:6-03 – LO:6-03
ITF.WABG.16.LO:6-06 – LO:6-06
ITF.WABG.16.LO:6-07 – LO:6-07

NATIONAL STANDARDS:

United States – BUSPROG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Knowledge

18. For 2015, Beatrice qualifies for the earned income credit. She has one daughter who is 7 years old. Her earned income and adjusted gross income for 2015 are $6,200.
a.

Using the EIC tables, calculate the amount of her 2015 earned income credit.

b.

​

Calculate the amount of Beatrice’s 2015 earned income credit assuming her earned income for 2015 is $8,500 and her adjusted gross income is $10,000.

ANSWER:

​

a.

$2,117

b.

$2,899

POINTS:

1

DIFFICULTY:

Moderate

QUESTION TYPE:

Subjective Short Answer

HAS VARIABLES:

False

LEARNING OBJECTIVES:

ITF.WABG.16.LO:6-02 – LO:6-02

NATIONAL STANDARDS:

United States – BUSPROG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Comprehension

NOTES:

Additional tables, rates or other schedules may be required to assist the student in completing this test question.

19. For 2015, Wilson and Virginia Todd qualify for the earned income credit. They have two dependent children, ages 6 months and 4 years at the end of the year.
a.

​

​

Using the EIC tables, calculate the amount of Wilson and Virginia Todd’s earned income credit assuming Wilson has earned income of $7,300 and Virginia has no earned income. Their adjusted gross income for 2015 is $9,000.

b.

​

​

Calculate the amount of Wilson and Virginia Todd’s earned income credit assuming Wilson has earned income of $14,300 and Virginia has earned income of $2,000. Their adjusted gross income for 2015 is $16,500.

ANSWER:

a.

Earned income credit:

$2,930

The Todd’s earned income is less than the phase-out amount so they do not need to consider AGI.

b.

Earned income credit:

$5,548

Amount from table for earned income of $16,300

The Todd’s earned income is less than the phase-out amount so they do not need to consider AGI.

POINTS:

1

DIFFICULTY:

Moderate

QUESTION TYPE:

Subjective Short Answer

HAS VARIABLES:

False

LEARNING OBJECTIVES:

ITF.WABG.16.LO:6-02 – LO:6-02

NATIONAL STANDARDS:

United States – BUSPROG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Comprehension

NOTES:

Additional tables, rates or other schedules may be required to assist the student in completing this test question.

20. Maxine is a 29-year-old single mother. Her tax liability before credits is $1,000 and her earned income credit is $2,500. How much earned income credit will be refunded to Maxine? Explain.

ANSWER:

$1,500. The full earned income credit is available. The taxpayer is eligible to claim the credit and receive a refund equal to the amount of the credit in excess of the tax liability.

POINTS:

1

DIFFICULTY:

Easy

QUESTION TYPE:

Subjective Short Answer

HAS VARIABLES:

False

LEARNING OBJECTIVES:

ITF.WABG.16.LO:6-02 – LO:6-02

NATIONAL STANDARDS:

United States – BUSPROG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Knowledge