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Chapter 12 Tax Credits And Payments
Research Problems
Research Problem 1. Ashby and Curtis, married professionals, have a 2-year-old son,
Jason. Curtis works full-time as an electrical engineer, but Ashby has not worked outside the home since Jason was born. As Jason is getting older, Ashby thinks that Jason would benefit from attending nursery school several times a week, which would give her an opportunity to reinvigorate her love of painting at a nearby art studio. Ashby thinks that if she is lucky, the proceeds from the sale of her paintings will pay for the nursery school tuition.
Ashby also is planning to claim the credit for child and dependent care expenses, because the care provided Jason at the nursery school is required for her to pursue her art career. Can Ashby and Curtis claim the credit for child and dependent care expenses for the nursery school expenditure? Why or why not?
Research Problem 2. During a recent Sunday afternoon excursion, Miriam, an admirer of early twentieth-century architecture, discovers a 1920s-era house in the countryside outside Mobile, Alabama. She wants to purchase and renovate this house, and to move the structure into Mobile so that her community can enjoy its architectural features.
Being aware of the availability of the tax credit for rehabilitation expenditures,
Miriam wants to maximize her use of the provision, if it is available in this case, once the renovation work begins in Mobile. Miriam informs you that she will pursue the purchase, relocation, and renovation of the house only if the tax credit is available.
Comment on Miriam’s decision and on whether any renovation expenditures incurred qualify for the tax credit for rehabilitation expenditures.
Research Problem 3. The IRS makes available a web-based tool to help taxpayers determine whether they are eligible for the earned income credit. Locate this tool at the IRS website; then apply the facts related to at least three hypothetical taxpayers, and determine whether the earned income credit is available.
Research Problem 4. For your state and three of its neighbors, determine how many tax returns claimed an earned income credit. On a line or bar chart, track these data for the last five years, using www.irs.gov. Send your results in an e-mail to your instructor.
Research Problem 5. Some observers believe that the earned income tax credit is riddled with fraud, including claims involving nonexistent relatives and misreported income amounts. Others believe that the credit is too complex to compute and that it should provide more generous aid to low-income families. Find three articles or postings discussing the operation of the credit and addressing the issue of fraud concerning its application. Summarize the articles in no more than four PowerPoint slides designed to help you present to your classmates.
Internet
Activity
Use the tax resources of the Internet to address the following questions. Do not restrict your search to the Web, but include a review of newsgroups and general reference materials, practitioner sites and resources, primary sources of the tax law, chat rooms and discussion groups, and other opportunities.
Roger CPA Review Questions
1. The following facts apply to Brooke, a self-employed individual.
Income $50,000
Student loan interest 1,000
Alimony received 6,000
Child support received 12,000
The FICA/Medicare tax rate is 15.3%. Considering only the above, what is Brooke’s adjusted gross income?
a. $47,350
b. $51,175
c. $53,350
d. $57,175
2. Kellye is a calendar year taxpayer who makes and sells custom dog collars. This year, her cash receipts were $10,000, and her cost to make the collars was $2,000.
Additionally, Kellye contributed $2,000 to a retirement plan. What amount will be the basis for Kellye’s self-employment tax?
a. $10,000
b. $8,000
c. $7,000
d. $6,000
3. Which of the following is correct regarding the deduction for self-employment taxes?
a. Self-employment taxes are deductible in full to arrive at adjusted gross income
b. Self-employment taxes are deductible on Schedule A, subject to a 10% AGI limitation
c. 50% of self-employment taxes are deductible on Schedule A
d. 50% of self-employment taxes are deductible to arrive at adjusted gross income
4. What are the due dates for estimated tax payments for a calendar-year taxpayer who is self-employed?
a. April, June, and September 15 of the current year, and January 15 of the subsequent year
b. March, June, September, and December 15 of the current year
c. January, April, July, and October 15 of the current year
d. April, July, and October 15 of the current year, and January 15 of the subsequent year
5. Which of the following education-related expenses can be used to claim an education credit?
Tuition Fees Room and Board Meals
a. Yes Yes Yes Yes
b. Yes Yes Yes No
c. Yes Yes No Yes
d. Yes Yes No No
6. Michael and Kathy have one dependent, Dustin, who is in his third year of college.
Michael is taking classes in the evening toward an MBA. What credit(s) can Michael and Kathy claim as to these amounts?
I. American Opportunity Tax Credit
II. Lifetime Learning Credit
a. I only
b. II only
c. I and II
d. I or II
7. Which of the following best describes the effect of a tax credit?
a. It reduces a person’s gross income
b. It reduces a person’s adjusted gross income
c. It reduces a person’s taxable income
d. It reduces a person’s tax liability