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Chapter 12 Tax Credits And Payments
Discussion Questions
1. LO.1 Would an individual taxpayer receive greater benefit from deducting an expenditure or from taking a credit equal to 25% of the expenditure? How would your response change if the item would only be deductible from AGI?
2. LO.3 Clint, a self-employed engineering consultant, is contemplating purchasing an old building for renovation. After the work is completed, Clint plans to rent out two-thirds of the floor space to businesses; he would live and work in the remaining portion. Identify the relevant tax issues for Clint.
3. LO.3 Sonja is considering the purchase and renovation of an old building. She has heard about the tax credit for rehabilitation expenditures, but Sonja does not know the specific rules applicable to the credit. Explain the most important and relevant provisions for her.
4. LO.4 Can the earned income credit be characterized as a form of negative income tax? Why or why not?
5. LO.4 How does the earned income credit fit into the Federal government’s plan to fight poverty?
6. LO.4, 7 Polly and her husband, Leo, file a joint return and expect to report 2016 AGI of $75,000. Polly’s employer offers a child and dependent care reimbursement plan that allows up to $5,000 of qualifying expenses to be reimbursed in exchange for a $5,000 reduction in the employee’s salary. Because Polly and Leo have two minor children requiring child care that costs $5,800 each year, Polly is wondering if she should sign up for the program instead of taking advantage of the credit for child and dependent care expenses.
Polly and Leo are in the 25% tax bracket. Analyze the effect of the two alternatives.
How would your answer differ if Polly and Leo’s AGI was $25,000 instead of $75,000? Assume in that case that their marginal tax rate is 10%.
7. LO.4 Mark and Lisa are approaching an exciting time in their lives as their oldest son, Austin, graduates from high school and moves on to college. What are some of the tax issues that Mark and Lisa should consider as they think about paying for Austin’s college education?
8. LO.5 Kathy owns and operates a grocery store as a sole proprietor. She pays wages to her husband Joe and their 17-year-old daughter Marla, both of whom work at the store. Should Kathy withhold FICA taxes from the wages paid to Joe and
Marla? Explain.
9. LO.6 Joan is a self-employed consultant. What is her exposure to the Federal selfemployment tax? Discuss the tax rates that apply to Joan’s profits and the income base amounts for the year.
10. LO.6 Chloe, a self-employed dentist, tells you “My profits for the year total $300,000, so I don’t need to pay any more Federal self-employment taxes.” Evaluate
Chloe’s comment.