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HOMEWORK CHAPTER 6 HOMEWORK 1: Clarence D. (SSN 174-67-4443, born 10/14/1971) Eastwood is not married and lived all year at 1242 Castro Rd., Carmel, CA 93922 with his son, Harry, (SSN 345-12-7878, born 12/25/1991). Clarence provides all of his son’s support and all of the cost of keeping up the home. Clarence signed Form 8332 which allows Harry’s mother to claim him as a dependent. Clarence worked as a chef during the week and as a tour guide on the weekends. He also received $5,000 alimony and $6,000 of child support from his former wife. He will not itemize in 2008. His itemized deductions in 2007 were $8,650 and his filing status was single. His W-2 forms and other reported tax information follow. Prepare a return for Clarence.
Tax Credits Chapter Content: • Child Tax Credit • Credit for Child and Dependent Care Expenses • Earned Income Credit • Due Diligence for Tax Preparers • Key Ideas Objectives: • Be Able to Explain the Difference Between Nonrefundable and Refundable Credits • Know How to Figure and Report the Child Tax Credit, the Credit for Child and Dependent Care, and the Earned Income Credit
Tax Credits Tax Credits • Reduce tax liability dollar-for-dollar. • Two types of credits: • Nonrefundable credits • Refundable credits
Tax Credits Nonrefundable Credits 1. Subtracted from income tax liability on line 46 of Form 1040. 2. Can reduce income tax liability to zero. 3. If the credit is greater than tax liability, no refund of the additional amount of the credit.
Tax Credits Refundable Credits 1. Treated as payments 2. Subtracted from total tax liability on line 61 of Form 1040 3. Can reduce tax liability to zero and result in a refund if the credit is greater than the tax liability. 4. Credit amount is refunded even if no tax liability and no tax withheld.
Tax Credits The most common types of credits are: • CHILD TAX CREDIT • CHILD AND DEPENDENT CARE CREDIT • EARNED INCOME CREDIT
CHILD TAX CREDIT Child tax credit • A nonrefundable credit. 1. Line 52 on Form 1040 2. Up to $1,000 per qualifying child 3. If you cannot use the entire amount of the credit on line 52 you may be eligible to take the refundable Additional Child Tax Credit, Form 8812, on line 66 of Form 1040. (See Chapter 10)
Qualifying Child Qualifying Child 1. Did not provide over half of his or her own support 2. Your son, daughter, stepchild, eligible foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them. a. An adopted child qualifies even if adoption is not final if the child has been placed with you by an authorized agency for legal adoption. An adopted child is always treated as your own child. b. Grandchild includes any descendant of your child including great-grandchildren, great-great grandchild, etc. c. Eligible foster child is any child placed with you by an authorized placement agency or by judgment decree or any other order of any court of competent jurisdiction.
Qualifying Child 3. A citizen or resident of the United States. 4. Under age 17 on the last day of the tax year (age 16 or younger). 5. Generally, must be claimed as a dependent. 6. Lived with you for more than half the year (the noncustodial parent of a child of divorced or separated parents may be able the child tax credit if able to claim the exemption).
Qualifying Child On Form 1040, Page 2 Example: Ed and Marcie have two qualifying children and are eligible to take the child tax credit of $1,000 for each child ($2,000). Their tax on line 46 of Form 1040 is $320. The child tax credit is used to reduce their tax to zero. Their child tax credit is $320. They do not get the additional $1,680 ($2,000 - $320) unless they are able to claim part or all of the $1,680 as an additional child tax credit on line 66 of Form 1040.
Qualifying Child – Problem 1 Dan claims his two sons as dependents. Adam was 16 on October 10, 2008. Todd was 17 on December 31, 2008. Which son(s) is/are a qualifying child for the child tax credit? a. Todd b. Adam
Qualifying Child – Problem 1 Dan claims his two sons as dependents. Adam was 16 on October 10, 2008. Todd was 17 on December 31, 2008. Which son(s) is/are a qualifying child for the child tax credit? b. Adam Adam is a qualifying child for the child tax credit. Todd is not a qualifying child because he was not under age 17 at the end of 2008.
Qualifying Child – Problem 2 Courtney age 13 lives with her father Calvin. Calvin has signed a written declaration that he will not claim an exemption for Courtney. Will Courtney be a qualifying child for the child tax credit for Calvin? Yes or No?
Qualifying Child – Problem 2 Courtney, age 13, lives with her father Calvin. Calvin has signed a written declaration that he will not claim an exemption for Courtney. Will Courtney be a qualifying child for the child tax credit for Calvin? No Courtney is not a qualifying child for the child tax credit for Calvin. She is a qualifying child for his former wife and she can claim the credit on her return because she will also claim the child’s exemption.
Qualifying Child – Problem 3 Tom and Tina have a son (age 13) and a daughter (age 12). They have also cared for their 14-year-old nephew since his parents died 2 years ago. They provide all of the support for their nephew and can claim him as a dependent. How many children are qualifying children for the child tax credit on Tom and Tina’s return? a. 1 b. 2 c. 3
Qualifying Child – Problem 3 Tom and Tina have a son (age 13) and a daughter (age 12). They have also cared for their 14-year-old nephew since his parents died 2 years ago. They provide all of the support for their nephew and can claim him as a dependent. How many children are qualifying children for the child tax credit on Tom and Tina’s return? c. 3 Tom and Tina have three qualifying children for the child tax credit on line 52 of Form 1040.
Qualifying Child In the Exemptions Section of Form 1040, you must provide the child’s social security number and the relationship. If you do not provide a valid social security number, the IRS may disallow the credit. An ITIN is allowed for the child tax credit.
Figuring the Credit Figuring the Credit You must reduce the amount of the credit if the: 1. Tax liability is less than the credit 2. Modified AGI is above the amount allowed for your filing status. a. MFJ - $110,000 b. H/H, QW, or single - 75,000 c. MFS - 55,000
Claiming the Credit Claiming the Credit • Must file Form 1040 or Form 1040A. • Provide child’s SSN in the exemption section or IRS may disallow. • Complete the Child Tax Credit Worksheet. • Keep the worksheet with your records, do not file.
Claiming the Credit – Problem 1 Harold and Donna are married and file a joint return. They have four children under the age of 17 that they claim as dependents. In 2008 Harold and Donna have a modified adjusted gross income of $108,498. Is their modified adjusted gross income under the phase-out threshold? Yes or No?
Claiming the Credit – Problem 1 Harold and Donna are married and file a joint return. They have four children under the age of 17 that they claim as dependents. In 2008 Harold and Donna have a modified adjusted gross income of $108,498. Is their modified adjusted gross income under the phase-out threshold? Yes And depending on their tax they are entitled to the full credit of up to $4,000 on line 52 of Form 1040.
Claiming the Credit Child Tax Credit Worksheet and Form 1040, Page 2 Wanda’s tax on line 46 of her 2008 tax return is $593. Her son, age 5, and her daughter, age 8, live with her and she claims them as dependents. Her filing status is head of household. She has no other credits on lines 47 through 54 of Form 1040. Wanda would fill in her child tax credit worksheet and her Form 1040 as follows:
CREDIT FOR CHILD AND DEPENDENT CARE EXPENSES A nonrefundable credit. 1. Line 48 on Form 1040 2. Work-related expenses. 3. Do not confuse this credit with the child tax credit. 4. To claim the credit for child and dependent care expenses, you have to pay someone to care for your child or other dependent so you can work. On Form 1040, Page 2
Qualifying Person Who Is A Qualifying Person? 1. A child under age 13 (12 or younger) when the care was provided whom you can claim as a dependent (special rules apply if you are divorced or separated). 2. Your spouse who was physically or mentally incapable of self-care. 3. Your dependent who was physically or mentally incapable of self-care and for whom you can claim a dependent exemption (or could claim an exemption except the person had a gross income of $3,500 or more).
Qualifying Person – Problem 1 Blair pays someone to care for her husband Tom so she can go to work. Tom is physically unable to care for himself. Blair also pays someone to care for her son Eddie while she works. Eddie turned 13 on August 10, 2008. Which dependent care expenses can Blair use to figure her credit? a. Tom’s expenses only b. Eddie’s expenses only c. All of Tom and Eddie’s expenses d. All of Tom’s expenses and Eddie’s expenses through August 9, 2008.
Qualifying Person – Problem 1 Blair pays someone to care for her husband Tom so she can go to work. Tom is physically unable to care for himself. Blair also pays someone to care for her son Eddie while she works. Eddie turned 13 on August 10, 2008. Which dependent care expenses can Blair use to figure her credit? d. All of Tom’s expenses and Eddie’s expenses through August 9, 2008. Tom is a qualifying person, but Eddie is not for the time he was not under age 13. If Eddie was 13 on August 10, 2008, Blair can use the expenses she paid through August 9 to figure her credit.
Qualifying Person – Problem 2 Maria (age 28) is not mentally able to care for herself. Her brother pays someone to care for her while he works. He supports her and can claim her as a dependent. Is Maria a qualifying person for brother? Yes or No?
Qualifying Person – Problem 2 Maria (age 28) is not mentally able to care for herself. Her brother pays someone to care for her while he works. He supports her and can claim her as a dependent. Is Maria a qualifying person for brother? Yes Maria is a qualifying person. Her brother can claim the expenses he paid.
Qualifying Person If you are divorced or separated and are the CUSTODIAL PARENT (during the year, the child lived with you longer than the child lived with the other parent), you can treat the child as a qualifying child even if you cannot claim the dependent exemption for the child. You must have signed Form 8332 or a statement agreeing not to claim the child’s exemption. If you are the NONCUSTODIAL PARENT, you cannot treat the child as a qualifying person even if you can claim the child’s exemption.
Qualifying Person – Problem 3 Alan and Samantha are divorced. Their daughter Judy, age 11, lives with Samantha nine months of the year. The remaining three months she lives with Alan. Samantha has signed a statement allowing Alan to claim the exemption for Judy. She pays for day care for Judy so she can work. Who can claim Judy as a qualifying child for child care expenses? a. Alan b. Samantha
Qualifying Person – Problem 3 Alan and Samantha are divorced. Their daughter Judy, age 11, lives with Samantha nine months of the year. The remaining three months she lives with Alan. Samantha has signed a statement allowing Alan to claim the exemption for Judy. She pays for day care for Judy so she can work. Who can claim Judy as a qualifying child for child care expenses? b. Samantha Because she is the custodial parent, Samantha can treat Judy as a qualifying child for the credit for child care expenses even though Samantha cannot claim an exemption for Judy.
Requirements To Claim The Credit 1. The care is for one or more qualifying persons. 2. You (and your spouse if married filing jointly) have earned income for work performed during the tax year a. Earned income includes employee compensation and net earnings from self-employment b. Your spouse is treated as having earned income for any month he or she is: a full-time student (a student for some part of each of 5 calendar months during the year); or physically or mentally incapable of self-care.
Requirements To Claim The Credit –Problem 1 Barbara pays for day care for her daughter so she can go to her job as an attorney. Her husband Grant is a full-time medical student. He began school in August 2008 and was a student through December. Are both Barbara and Grant treated as having earned income during the year? Yes or No?
Requirements To Claim The Credit –Problem 1 Barbara pays for day care for her daughter so she can go to her job as an attorney. Her husband Grant is a full-time medical student. He began school in August 2008 and was a student through December. Are both Barbara and Grant treated as having earned income during the year? Yes
Requirements To Claim The Credit 3. The care is provided for the qualifying person so you (and spouse) can work or look for work. a. You must be paid for the work. b. Work includes actively looking for paid work as long as you have earned income during the year.
Requirements To Claim The Credit –Problem 2 Maxine has two children. She pays a day care center to take care of her children three days a week. Maxine does not work outside the home. Can Maxine claim the credit? Yes or No?
