Apply Individual Tax Credits
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CPA Tax Compliance & Planning (TCP) › Apply Individual Tax Credits
The earned income credit (EIC) is a refundable credit available to:
Only taxpayers with qualifying children.
Any taxpayer who reports self-employment income for the year.
Low-to-moderate income workers who meet earned income, filing status, and investment income requirements - it is available to workers with or without qualifying children, though the credit is much larger with children.
All taxpayers with earned income below a certain threshold, regardless of filing status.
Explanation
The EIC is available to qualified low-income workers with or without children, subject to earned income limits, filing status, and investment income limits. Answer C is correct. Specific filing status rules apply (A). Childless workers can claim a small EIC (B). Self-employment income alone doesn't qualify (D).
The American Opportunity Tax Credit (AOTC) provides a maximum credit of:
$2,000 per taxpayer for the first two years of higher education.
$2,500 per taxpayer for unlimited years of post-secondary education.
$2,500 per eligible student for the first four years of higher education, with 40% ($1,000) refundable.
$1,500 per student, fully refundable.
Explanation
The AOTC provides up to $2,500 per student for the first four years of post-secondary education, with 40% (up to $1,000) being refundable. Answer B is correct. The $2,000 credit (A) describes the Lifetime Learning Credit maximum. The AOTC is limited to four years (C). The AOTC is $2,500, not $1,500 (D).
The Lifetime Learning Credit provides:
A credit of 20% of up to $10,000 of qualified education expenses ($2,000 maximum per return), available for any year of post-secondary education and for courses to improve job skills, and it is not refundable.
A $2,000 credit per student, refundable up to 40%.
A $2,000 credit per taxpayer for qualified tuition and related expenses, limited to undergraduate education.
A $2,500 credit for the first four years of post-secondary education.
Explanation
The Lifetime Learning Credit is 20% of up to $10,000 of expenses = $2,000 max per return (not per student), available for any year of education, and non-refundable. Answer D is correct. $2,500 and four-year limit (A) describe the AOTC. The LLC is not refundable (B). It covers any year of education (C).
The child and dependent care credit allows taxpayers to claim a credit for:
Expenses paid for the care of a qualifying child under age 13 (or a qualifying person unable to care for themselves) that enable the taxpayer and spouse to work or look for work.
Education expenses for children through age 18.
Up to $5,000 of care expenses for any dependent.
All childcare expenses, regardless of whether both spouses work.
Explanation
The child and dependent care credit covers work-related care expenses for qualifying persons, enabling the taxpayer to work. Answer A is correct. Both spouses must work or be looking for work (B). Education expenses are separate (C). Eligible expenses are up to $3,000 or $6,000, not $5,000 (D).
A taxpayer makes a $6,000 contribution to a traditional IRA. The contribution may be deductible depending on:
Whether the contribution was made before April 15 of the current tax year.
Only the taxpayer's age - contributions are fully deductible for taxpayers under age 50.
Whether the taxpayer or spouse is an active participant in an employer-sponsored retirement plan, and if so, the taxpayer's modified AGI relative to applicable phase-out ranges.
Whether the taxpayer is employed - only employees may deduct IRA contributions.
Explanation
Traditional IRA deductibility depends on active participation in an employer plan and MAGI. Answer C is correct. Age affects contribution limits but not deductibility (A). Self-employed persons can also contribute (B). Timing affects which year the deduction applies (D).
The retirement savings contributions credit (Saver's Credit) is available to:
Low-to-moderate income taxpayers who contribute to a qualified retirement plan or IRA - the credit rate ranges from 10% to 50% of contributions, depending on AGI.
Only taxpayers over age 50 who make catch-up contributions.
Self-employed taxpayers who establish a SEP-IRA.
All taxpayers who contribute to a retirement account.
Explanation
The Saver's Credit incentivizes retirement savings for lower-income workers with a 10%-50% credit rate depending on AGI. Answer B is correct. Income limits apply (A). Age restrictions don't apply to the Saver's Credit (C). It's not limited to self-employed (D).
The additional child tax credit (ACTC) is:
A supplement to the earned income credit for taxpayers with more than 3 children.
A credit for childcare expenses paid for children under age 13.
The refundable portion of the child tax credit - if the child tax credit exceeds the taxpayer's tax liability, up to $1,700 (2024) per qualifying child may be refunded as the ACTC.
An additional $500 credit for children who are not qualifying children.
Explanation
The ACTC is the refundable component of the child tax credit - up to $1,700 per child may be refunded when the credit exceeds liability. Answer A is correct. The $500 credit (B) is the Credit for Other Dependents. Childcare expenses (C) describe the child and dependent care credit. The ACTC is separate from the EIC (D).
A taxpayer pays $15,000 of foreign income taxes on income earned abroad. The foreign tax credit:
Is limited to the U.S. tax on foreign-source income (the foreign tax credit limitation) - excess credits carry back 1 year and forward 10 years.
Provides a dollar-for-dollar credit with no limitations on the amount.
Is limited to the lesser of the foreign taxes paid or 10% of the taxpayer's U.S. tax liability.
Allows a full deduction of $15,000 against U.S. taxable income.
Explanation
The foreign tax credit is limited to the U.S. tax on foreign-source income. Excess credits carry back 1 year and forward 10 years. Answer D is correct. The credit is not a deduction (A). It has a limitation (B). The 10% limitation (C) is not the actual rule.
To claim the earned income credit, a taxpayer must meet which of the following requirements?
The taxpayer's investment income must be below $3,000.
The taxpayer must have earned income, investment income below the statutory limit, and must not file as Married Filing Separately.
The taxpayer must have at least one qualifying child.
The taxpayer must be under age 65 and have qualifying children.
Explanation
EIC requirements include having earned income, investment income below the limit, and not filing MFS. Answer C is correct. Childless workers can claim a small EIC (A). The investment income limit is much higher than $3,000 (B). Age limits apply to childless workers but not all EIC claimants (D).
The credit for other dependents provides:
A $500 non-refundable credit for each qualifying dependent who does not qualify for the child tax credit - including older children (age 17+), qualifying relatives, and other dependents.
A $1,000 credit for dependents who are enrolled in post-secondary education.
A $2,000 credit for each dependent regardless of age.
A refundable $500 credit for qualifying children under age 17.
Explanation
The credit for other dependents provides $500 per dependent who doesn't qualify for the child tax credit - such as older children or qualifying relatives. Answer A is correct. The $2,000 credit (B) describes the child tax credit. The credit is non-refundable (C). Education enrollment is not the criterion (D).