CPA Regulation (REG) : Common Tax Credits
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Example Questions
Example Question #1 : Common Tax Credits
Which of the following credits can result in a refund even if the individual had no income tax liability?
Child and dependent care credit
Earned income credit
Credit for prior year minimum tax
Elderly and permanently and totally disabled credit
Earned income credit
“Refundable” tax credits are allowable in excess of a taxpayer’s tax obligation and may result in a refund. Among the possible answers, only the earned income credit is “refundable.” While the other answers may result in reducing a tax obligation to zero, they may not be taken in excess of this to result in a tax refund in a given year.
Example Question #2 : Common Tax Credits
How may taxes paid by an individual to a foreign country be treated?
As a credit against federal income taxes due
As an itemized deduction subject to a 2% floor
As an adjustment to gross income
As a nondeductible expense
As a credit against federal income taxes due
Generally speaking, taxes paid to foreign entities result in a dollar-for-dollar reduction in the US tax obligation (a credit), rather than a reduction of taxable income (a deduction).
Example Question #3 : Common Tax Credits
Ron and Leslie have two children, ages 7 and 9. Both children meet the definition of qualifying child. The family has adjusted gross income of $325,000. What is the amount of the child tax credit on the couple’s income tax return?
$3,000
$4,000
$1,000
$2,000
$4,000
The child tax credit is worth up to $2,000 for children classified as dependents who are under age 17 as of the last day of the tax year. The credit phases out starting at $200,000 for single filers, and $400,000 for joint filers.
Example Question #4 : Common Tax Credits
Of the following, which credit can result in a refund even if the individual had no income tax liability?
Earned income credit
Credit for prior year minimum tax
Child and dependent care credit
Elderly and permanently and totally disabled credit
Earned income credit
The earned income credit is refundable. Eligible taxpayers can get advance payments from their employers because the credit is assured.
Example Question #5 : Common Tax Credits
How many taxes paid by an individual to a foreign country be treated?
As an adjustment to gross income
As an itemized deduction subject to a 2% floor
As a nondeductible expense
As a credit against federal income taxes due
As a credit against federal income taxes due
A taxpayer may claim a credit against federal income taxes due for foreign income taxes paid to a foreign country or a US possession. There is a limitation on the amount of the credit an individual can obtain.
Example Question #6 : Common Tax Credits
Of the following, which is a valid tax credit in the United States under the IRS?
Principal home financing credit
Earned income credit
Elderly care credit
Federal service of 2004 credit
Earned income credit
Only the Earned income credit is a real credit. The others are made up of credits.
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