CPA Regulation (REG) : Common Tax Credits

Study concepts, example questions & explanations for CPA Regulation (REG)

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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?

Possible Answers:

Earned income credit

Elderly and permanently and totally disabled credit

Credit for prior year minimum tax

Child and dependent care credit

Correct answer:

Earned income credit

Explanation:

“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?

Possible Answers:

As a credit against federal income taxes due

As an adjustment to gross income

As a nondeductible expense

As an itemized deduction subject to a 2% floor

Correct answer:

As a credit against federal income taxes due

Explanation:

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?

Possible Answers:

$1,000

$4,000

$3,000

$2,000

Correct answer:

$4,000

Explanation:

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?

Possible Answers:

Elderly and permanently and totally disabled credit

Earned income credit

Child and dependent care credit

Credit for prior year minimum tax

Correct answer:

Earned income credit

Explanation:

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?

Possible Answers:

As an itemized deduction subject to a 2% floor

As a credit against federal income taxes due

As a nondeductible expense

As an adjustment to gross income

Correct answer:

As a credit against federal income taxes due

Explanation:

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?

Possible Answers:

Federal service of 2004 credit

Principal home financing credit

Elderly care credit

Earned income credit

Correct answer:

Earned income credit

Explanation:

Only the Earned income credit is a real credit. The others are made up of credits.

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