CTC and Credit for Other Dependents
For purposes of claiming the Child Tax Credit, which of the following is a requirement for a qualifying child:
Child must be claimed as a dependent.
For purposes of claiming the child tax credit (CTC) or additional child tax credit (ACTC), a qualifying child must be claimed as a dependent on the taxpayer's return. In addition, the following requirements must be met:
For the Child and Dependent Care Credit the qualifying child must be under age 13. It is easy to get these two credits confused.
The American Rescue Plan Act of 2021 increases the qualifying child age to younger than age 18 (previously younger than age 17) for the child tax credit for 2021 only.
Which of the following is NOT a test to determine if a child is a qualifying child for the Earned Income Tax Credit (EITC)?
Support
For EIC purposes, a qualifying child must meet three tests:
For purposes of the child and dependent care credit, a qualifying person is:
Under age 13 when the care is provided
For purposes of the child and dependent care credit, a qualifying person is a dependent who was under age 13 when the care was provided.
What is the minimum number of courses that must be taken to be eligible for the Lifetime Learning Credit?
One
For purposes of the Lifetime Learning Credit, an eligible student is a student who was enrolled at least one course at an eligible educational institution.
Daniel and Lindsey have recently adopted a little boy from Ethiopia. They incurred various expenses throughout this adoption process. Which of the following costs is not a qualified adoption expense?
Costs relating to the formal adoption of Daniel's step-son from Lindsey's previous marriage.
xpenses incurred to adopt a spouse's child are not qualified adoption expenses.
Qualified adoption expenses are reasonable and necessary expenses directly related to, and whose principal purpose is for, the legal adoption of an eligible child. These expenses include:
Nonqualified expenses:
Which contribution does NOT qualify for the retirement contribution credit?
Employer contributions
A taxpayer is eligible for this credit if he or she made contributions to a traditional or Roth IRA; elective deferrals to a 401(k), 403(b), governmental 457, SEP, or SIMPLE plan; or voluntary employee contributions to a qualified retirement plan. Employer contributions under 414(h)(2) are not voluntary employee contributions and do not qualify for the credit.
George has only passive income from a foreign country. When paid, the foreign country withholds income tax. When filing his US tax return, George may qualify for which credit?
Foreign tax credit
A taxpayer who pays income tax to a foreign country can choose to take a credit against his US income tax, or an itemized deduction. The credit is known as the Foreign Tax Credit.
The foreign earned income exclusion requires earned income, not passive income.
Which of the following is NOT a requirement for a qualifying child for purposes of the Child Tax Credit?
The child was under age 19 at the end of the year or under age 24 at the end of the year and was a student
The requirement that the child was under age 19 at the end of the year or under age 24 at the end of the year and was a student is a test for claiming an individual as a dependent and for determining if you have a qualifying child for the earned income tax credit, not the child tax credit.
A qualifying child for purposes of the child tax credit is a child who meets all the following criteria:
A qualifying child for purposes of the child tax credit is an individual who has not attained age 17 during the taxable year.
The American Rescue Plan Act of 2021 increases the qualifying child age to younger than age 18 (previously younger than age 17) for the child tax credit for 2021 only.
Peter and his son lived with his mother all year in 2021. Peter is 25 years old, and his only income was $9,300 from a part-time job. His mother's adjusted gross income was $15,000 and all her income was from her job. Which of the following is NOT correct?
Peter is a qualifying child for his mother.
This question is looking for the only incorrect statement. Peter is not a qualifying child for his mother because he is over the age of 24 and is not permanently and totally disabled.
Peter's son satisfies the relationship, age, and residency test for both Peter and his mother.
Peter can choose to claim his son for the earned income credit (EIC) or let his mom claim the EIC.
If a parent can claim the child as a qualifying child but no parent does so claim the child, the child is treated as the qualifying child of the person who had the highest AGI for the year, but only if that person's AGI is higher than the highest AGI of any of the child's parents who can claim the child.
Which filing status does not qualify for the Child and Dependent Care Credit?
Married filing separately
To qualify for the child and dependent care credit, a taxpayer must meet several tests. One of which is based on filing status. The filing status must be single, HOH, QW, or MFJ. Married couples must file a joint return.
Jerry has two dependent children, Greg and Mandy, who are attending an accredited college. Greg is a senior who spent $7,000 for tuition and fees for his 4th year. Mandy, a freshman with no prior postsecondary education, had tuition expenses of $4,000. Jerry meets all the income and filing status requirements for the education credits. There is no tax-free assistance to pay these expenses. Jerry's tax liability before credits equals $14,000. What is the maximum education credit that Jerry may claim on his tax return?
$5,000 American Opportunity Credit
Both students are eligible for the American Opportunity credit. The maximum American Opportunity credit per student is $2,500 (100% of first $2,000 and 25% of the next $2,000).
The Lifetime Learning credit of up to $2,000 is for all students. The Lifetime Learning credit is computed on a family-wide basis (per return). The amount of the Lifetime Learning credit is 20% of the first $10,000 of qualified education expenses paid for all eligible students.
This assumes Jerry's MAGI is low enough to allow full benefit of the credits.
$5,000 American Opportunity Credit ($2,500 per eligible student) is the maximum education credit that Jerry may claim on his tax return.
Qualified adoption expenses include expenses for all the following, EXCEPT:
For the adoption of spouse's child
Jason and Margaret report AGI of $70,000 on their 2021 joint tax return. They each contribute $5,000 to a qualified retirement plan for 2021. What is the amount of their saver’s credit (formerly retirement savings contributions credit)?
$0
The saver’s credit (formerly retirement savings contributions credit) is not available to taxpayers with 2021 AGI more than $33,000 ($49,500 HH, $66,000 MFJ).
Lorena prepares her US tax return and only owes $300 in tax. Before filing, Lorena remembers the dividends received from a French company had $500 withheld for tax by the French authorities. Lorena meets all the requirements to use the Foreign Tax Credit. Which of the following statements is correct?
Lorena can use the credit to reduce her tax liability to zero, but the remainder is non-refundable.
The foreign tax credit is a non-refundable credit that a taxpayer may use to reduce US income tax. The taxpayer also has the option to claim foreign taxes as an itemized deduction.
The foreign tax credit (deduction) cannot be taken for foreign income taxes paid on income excluded from US tax under any of the following:
Chris and his four children, ages 5, 6, 16, and 17, reside in his home. Chris and all his children are U.S. citizens. Chris files as head of household, his AGI is $95,000 and his tax is $17,000. How much child tax credit is he allowed in 2021?
$12,600
The American Rescue Plan Act of 2021 brought about changes to the child tax credit for 2021 only. Some of the changes to the child tax credit for 2021 include:
Under the American Rescue Plan Act of 2021, for 2021 only, all four children (ages 5, 6, 16, and 17) are qualifying children (younger than age 18) for the 2021 child tax credit. One of his children (age 5) is a qualifying child for the $3,600 credit for children under age 6 and three of his children (ages 6, 16, and 17) are qualifying children for the $3,000 credit for children ages 6 to 17.
His child tax credit is $3,600 for his one qualifying child under age 6 plus $9,000 ($3,000 per qualifying child × 3 qualifying children) for his three qualifying children ages 6 to 17. Chris is below the AGI threshold and will receive the full credit. Therefore, under the American Rescue Plan Act of 2021, his total child tax credit allowed is $12,600 ($3,600 + $9,000).
For 2021, a taxpayer with no qualifying children may NOT claim the earned income credit if:
Their only income is $5,000 in interest on a CD
Which one of the following could prevent an individual from qualifying for the child and dependent care credit?
Not identifying the care provider on the tax return
The tax return must identify the provider for the taxpayer to claim the child and dependent care credit.
All of the following are true with regards to education credits, EXCEPT:
The fees must be paid directly to the educational institute to qualify for the credit
There is no requirement for the fees to be paid directly to the educational institution; rather, the taxpayer must be able to prove amounts paid are for qualified expenses.
Melissa is a responsible, single adult. She rents a home for which she pays all the expenses. An unrelated 9-year-old child, Ella, has been living with Melissa since April. Melissa is raising Ella as her own and receives no financial assistance. Ella was not placed by an authorized adoption agency, but Melissa has filed for adoption although it is not yet final. Melissa has no other dependents. Which of the following statements is true?
Melissa can claim qualified adoption expenses the following year, even if the adoption is not final.
A dependent must be a qualifying child or a qualifying relative. Ella is not a qualifying child, as the adoption is not final. Ella did not live with Melissa the entire year, and therefore is also not a qualifying relative. Melissa cannot file as head of household without a dependent. For expenses paid prior to the year the adoption becomes final, the credit generally is allowed for the year following the year of payment. A taxpayer who paid qualifying expenses in the current year for an adoption which became final in the current year, may be eligible to claim the credit for the expenses on the current year return, in addition to credit for expenses paid in a prior year.
What type of contribution is excluded from the Saver's Credit?
Rollover contribution
A rollover is a tax-free movement of assets between retirement plans. A taxpayer may not claim the Saver's credit because of a rollover contribution.
Eligible contributions include:
IRS Form 8880
Ms. Polly Atkini collects $1,000 in dividends from a company located in Italy. A foreign tax of $93 was withheld on this income by the local authorities. Ms. Atkini is attempting to determine the impact of this foreign tax when she is filing her United States income tax return for this year. Which of the following is correct?
The foreign tax can be taken as a tax credit or as an iThe payment of a foreign income tax is one of the few items in federal income tax rules that an item can be used at either of two places. Normally, the benefit is larger if a credit is taken but the taxpayer is also allowed the option of using the amount as an itemized deduction. temized deduction.
Which of the following statements is NOT true regarding the Child Tax Credit for 2021?
A qualifying child is any child under age 19 at the end of the year
Normally, a qualifying child must be under age 17 at the end of the year. Under the American Rescue Plan Act of 2021, for 2021 only, the qualifying child age increases to younger than age 18 (previously younger than age 17).
The American Rescue Plan Act of 2021 established several changes to the Earned Income Credit (EIC). Some changes are effective for 2021 only and some changes are effective for 2021 and continue in future years. Which changes are effective for 2021 only?
2, 4
The American Rescue Plan Act of 2021 established several changes to the Earned Income Credit (EIC). Most changes are effective only for the tax year 2021 and certain changes are effective for the tax year 2021 and continue in future tax years.
The EIC changes for 2021 only are primarily aimed at strengthening the earned income tax credit for individuals with no qualifying children. Changes to the Earned Income Credit for 2021 only include:
Changes to the Earned Income Credit for 2021 and future years include:
Which of the following individuals is not a qualifying person for the child and dependent care credit?
A spouse who is a full time student at a qualifying educational institution
or purposes of the Child and Dependent Care Credit, a qualifying person is:
A spouse who is a full-time student at a qualifying educational institution is not a qualifying person for the Child and Dependent Care Credit (unless the spouse meets one of the other criteria above).
Two taxpayers married on November 30. That same year, the husband enrolled in an accredited college to further his career and subsequently received a Form 1098-T, Tuition Statement. The wife was employed with an income of $45,000 and paid for the husband's education expenses. Based on their circumstances, what is the correct method to report the education credit?
Taxpayers must file a joint return to claim an education credit.
A taxpayer cannot claim an education credit if filing status is married filing separately.
IRC § 25A(g)(6); Instructions for Form 8863
Floyd and Lucy tried adopting a child who is a US citizen. They paid $10,000 in qualified adoption expenses in 2021. The adoption never became final. How much of the adoption credit can Floyd and Lucy take?
$10,000 – the amount of expenses paid – even though the adoption never finalized
If the eligible child is a U.S. citizen or resident, a taxpayer may claim the adoption credit even if the adoption never became final. A taxpayer may claim expenses paid prior to finalization in the year following the year of payment. The credit is up to $14,440 of qualified adoption expenses paid in 2021.
NOTE: A nonrefundable credit is subtracted from your tax. It may reduce your tax to zero. If the credit is more than your tax, the excess is not refunded to you. Because the adoption credit is not refundable, you may be able to carry forward any unused credit amounts to future tax years.
For purposes of the Credit for Qualified Retirement Savings Contributions (Form 8880), a taxpayer must report recent distributions from which of the following sources?
Qualified retirement plans
The amount of retirement distributions from a qualified retirement plan as defined in section 4974(c) must be reported by the taxpayer. The following payments are not reported: loans from a qualified employer plan, tax-exempt distributions, and military retirement plan.
IRS Form 8880.
If a taxpayer qualifies to take the foreign tax credit, which of the following statements is true?
The taxpayer may not take the foreign earned income exclusion and foreign tax credit for the same income
If a taxpayer paid income tax to a foreign country, he can choose to take a credit against his US income tax or an itemized deduction. The foreign tax credit (deduction) cannot be taken for foreign income taxes paid on income excluded from US tax under any of the following:
The foreign tax credit is non-refundable.
The choice to itemize (instead of taking the credit) is up to the taxpayer and is not dictated by their decision to otherwise itemize deductions.
Under the American Rescue Plan Act of 2021, which of the following is incorrect regarding the child tax credit for 2021?
The amount of credit allowed to any taxpayer for any taxable year shall be reduced (below zero) by the aggregate amount of advanced payments made to such taxpayer during such taxable year.
Under the American Rescue Plan Act of 2021, one of the child tax credit improvements for 2021 is:
Advance payment of credit – periodic payments to taxpayers during the calendar year (July 1 through December 31 for 2021). The annual advance amount is estimated as being equal to 50% of the amount which would be treated as allowed. Taxpayers can elect not to receive advance payments. Note: The amount of credit allowed to any taxpayer for any taxable year shall be reduced (but not below zero) by the aggregate amount of advanced payments made to such taxpayer during such taxable year.
Which of the following taxpayers may claim the earned income credit for 2021?
Cinnamon, 42 years old, who was divorced the entire year. She had investment income of $2,500 and had W-2 wages of $7,000.
Neither Ginger nor Woody has earned income, so they cannot claim the earned income credit (EIC).
Cherrie has earned income, but her AGI of $55,000 is over the 2021 AGI limit (single with 1 qualifying child).
Only Cinnamon (age 42) can claim the EIC, she has earned income (W-2 wages) and her AGI of $9,500 ($2,500 investment income + $7,000 W-2 wages) is under the 2021 AGI limit (single with no children) and her investment income is $10,000 or less for 2021. Also, Cinnamon, 42 years old, meets the age requirement. Since she has no qualifying children, she must:
Sam and Sue both work and their daughters, ages 1 and 4, attend daycare. The cost of daycare is $650 per month for one daughter and $500 per month for the other daughter and both daughters attended all year. Sam's earned income for the year was $10,000; Sue's earned income was $40,000. They had no other income or adjustments. How much of their daycare payments are eligible for the child and dependent care credit for 2021?
$10,000
The American Rescue Plan Act of 2021 brought about changes to the child and dependent care credit for 2021 only. Some of the changes to the child and dependent care credit for 2021 include:
The credit is available only for employment-related expenses. The amount of employment-related expenses is capped at $8,000 for one qualifying person or $16,000 for two or more qualifying persons or the smaller of the taxpayer's or spouse’s (if married) earned income for the year.
Their cost of daycare is $7,800 ($650 per month × 12 months) plus $6,000 ($500 per month × 12 months) for a total cost of $13,800. However, the total amount of qualifying expenses cannot exceed $16,000 for two or more qualifying persons or the smaller of Sam's or Sue's earned income for the year. The child and dependent care expenses to figure their credit are $10,000; the smaller of their total qualifying expenses of $13,800 or $16,000 for two or more qualifying persons or Sam's earned income of $10,000 or Sue's earned income of $40,000. Since Sam's earned income is $10,000, their allowable expenses are capped at $10,000.
Karen, filing as head of household, and her son, James, and her daughter, Julia, are all in graduate school. James and Julia are not dependents on Karen's return, although they live with her and she pays all of their education expenses. Karen paid $6,000 in qualified tuition expenses for herself in January 2021 for the term starting in January 2021. She also paid $2,500 in qualified tuition expenses for James and another $2,500 for Julia in July 2021 for the term starting in July 2021. Her modified adjusted gross income is $90,000. Which of the following is correct?
Karen may claim neither the American Opportunity credit nor the Lifetime Learning Credit
Since Karen is not claiming either of her children as dependents, she cannot claim any of the education expenses for them on her return.
Karen may not claim the American Opportunity or Lifetime Learning credits for herself because her modified adjusted gross income (MAGI) of $90,000 is too high. A taxpayer cannot claim either education credit if MAGI is $90,000 or more ($180,000 or more MFJ).
In addition, the American Opportunity Credit is only available for the first four years of postsecondary education (not graduate school).
The Consolidated Appropriations Act, 2021 increased the phaseout limits for the Lifetime Learning credit, effective for taxable years beginning after December 31, 2020. Beginning in 2021, the phaseout limits for the Lifetime Learning credit will be the same as the phaseout limits for the American Opportunity credit (phaseout if MAGI is between $80,000 and $90,000 ($160,000 and $180,000 MFJ) and no credit if MAGI is $90,000 or more ($180,000 or more MFJ)). Also, like the American Opportunity credit, beginning in 2021 the Lifetime Learning credit phaseout limits will no longer adjust for inflation.
Margaret Michelson began the process of adopting Sahara in 20X1. She incurred over $20,000 in qualified expenses, including airfare to Sahara's native country of Kenya. Margaret did not finalize the adoption until 20X2. She did not incur any expenses in 20X2. When can Margaret claim the credit for her qualified adoption expenses?
Since Sahara was not a U.S. citizen, Margaret cannot claim the credit until the adoption becomes final in 20X2
If the eligible child is not a U.S. citizen or resident, a taxpayer cannot take the adoption credit or exclusion unless the adoption becomes final. Since Sahara was not a U.S. citizen, Margaret cannot claim the credit until the adoption becomes final in 20X2.
Bill is Single and uses the maximum percentage to determine his Credit for Qualified Retirement Savings Contributions. His contributions total $8,000. What is the amount of his credit?
$1,000
The maximum percentage for any filing status is 50%. Bill may not consider more than $2,000 of his contributions for purposes of this credit, which limits the credit to $1,000.