Transcript Liberty Tax Service Online Basic Income Tax Course. Lesson

Liberty Tax Service
Online Basic Income Tax
Course.
Lesson 7
1
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.
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HOMEWORK CHAPTER 6
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HOMEWORK CHAPTER 6
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HOMEWORK CHAPTER 6
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HOMEWORK CHAPTER 6
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HOMEWORK CHAPTER 6
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HOMEWORK CHAPTER 6
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HOMEWORK CHAPTER 6
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HOMEWORK CHAPTER 6
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HOMEWORK CHAPTER 6
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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
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Tax Credits
Tax Credits
 Reduce tax liability dollar-fordollar.
 Two types of credits:
1. Nonrefundable credits
2. Refundable credits
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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.
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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.
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Tax Credits
The most common types of credits are:
 CHILD TAX CREDIT
 CHILD AND DEPENDENT CARE CREDIT
 EARNED INCOME CREDIT
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CHILD TAX CREDIT
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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)
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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.
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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).
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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.
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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
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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.
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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?
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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.
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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
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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.
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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.
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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
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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.
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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?
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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.
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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:
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Claiming the Credit
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Claiming the Credit
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CREDIT FOR CHILD AND
DEPENDENT CARE EXPENSES
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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
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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).
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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.
b.
c.
d.
Tom’s expenses only
Eddie’s expenses only
All of Tom and Eddie’s expenses
All of Tom’s expenses and Eddie’s expenses
through August 9, 2008.
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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.
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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?
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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.
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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.
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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
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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.
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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.
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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?
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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
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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.
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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?
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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?
No
Because Maxine is not paying these expenses
so she can work or look for work, she
cannot claim the credit.
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Requirements To Claim The Credit –
Problem 3
Dave and Dora are married and have one
child, age 11. They pay child care expenses
so that Dave can work and Dora can attend
school full time. Are Dave and Dora eligible
to claim the credit?
Yes or No?
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Requirements To Claim The Credit –
Problem 3
Dave and Dora are married and have one
child, age 11. They pay child care expenses
so that Dave can work and Dora can attend
school full time. Are Dave and Dora eligible
to claim the credit?
Yes
If they meet the other conditions, they are
eligible to claim the credit.
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Requirements To Claim The Credit
4. The taxpayer makes payments for
dependent and/or child care payments to
someone who is not your spouse, your child
under the age 19, or a dependent claimed
by you on your tax return.
5. Your filing status is single, H/H, QW, or
MFJ.
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Requirements To Claim The Credit –
Problem 4
At the end of 2008, Connie was married. Her
husband moved out in April 2008. He
refused to file a joint return. Connie has
paid the costs of keeping up the home for
herself and her dependent daughter age 4.
Does Connie qualify to claim the credit?
Yes or No?
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Requirements To Claim The Credit –
Problem 4
At the end of 2008, Connie was married. Her
husband moved out in April 2008. He
refused to file a joint return. Connie has
paid the costs of keeping up the home for
herself and her dependent daughter age 4.
Does Connie qualify to claim the credit?
Yes
She will meet the requirement because she
can file as head of household.
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Requirements To Claim The Credit
6. You must identify the care provider on your
tax return.
7. Receive dependent care benefits from
employer.
 The total amount you exclude or deduct
must be less than the dollar limit for
qualifying expenses.
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Figuring the Credit
Work-related expenses:
1. For the care of a qualifying person while
you (and spouse) work or look for work.
2. For the qualifying person's well being and
protection.
3. Can count expenses for a child in a grade
below kindergarten. The amount paid for
food and schooling can be included if the
amount is small and cannot be separated
from the total cost of care.
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Figuring the Credit – Problem 1
Claudia’s older child attends first grade at a
private school for which Claudia pays
tuition. After school the child goes to a day
care center. Claudia’s younger child attends
a nursery school that provides some
educational activities. Which, if any, of
Claudia’s children can she claim child care
expenses for?
a.
b.
c.
d.
The youngest
The oldest
Both
Neither
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Figuring the Credit – Problem 1
Claudia’s older child attends first grade at a
private school for which Claudia pays
tuition. After school the child goes to a day
care center. Claudia’s younger child attends
a nursery school that provides some
educational activities. Which, if any, of
Claudia’s children can she claim child care
expenses for?
c. Both
The day care for the oldest counts, private
school tuition does not.
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Figuring the Credit
LIMITS ON WORK-RELATED EXPENSES
The amount of work-related expenses eligible for the
credit is limited to the lowest of:
1. Actual expenses.
2. Earned income ( cannot exceed the income of the
lower paid spouse)
a. Income for nonworking spouse who is a student
or disabled is considered to be $250 with one
qualifying person and $500 with two qualifying
persons for each month the spouse is a student
or disabled.
3. A dollar limit: $3,000 for one qualifying person; or,
$6,000 for two or more qualifying persons,
reduced by excluded employer-paid dependent
care benefits shown in box 10 of Form W-2.
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Figuring the Credit – Problem 2
Barbara Scott earned $50,000 in 2008. She and
her husband Grant paid child care expenses of
$4,500 for their 3 year-old daughter Susan so
Barbara could work and Grant could attend
school. Grant was a full-time student from
August through December. Grant’s earned
income would be considered to be $1,250 (5
months as a full time student x $250). What are
the Scott’s eligible work-related expenses for
figuring the credit?
a. $3,000
b. $1,250
c. $4,500
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Figuring the Credit – Problem 2
Barbara Scott earned $50,000 in 2008. She and her
husband Grant paid child care expenses of $4,500 for
their 3 year-old daughter Susan so Barbara could
work and Grant could attend school. Grant was a fulltime student from
August through December. Grant’s earned income
would be considered to be $1,250 (5 months as a full
time student x $250). What are the Scott’s eligible
work-related expenses for figuring the credit?
b. $1,250
The dollar limit for Barbara and Grant’s child care
expenses is $3,000 because they have one child.
Their eligible work-related expenses to figure the
credit cannot exceed $1,250 which is considered to
be Grant’s income and is the lowest of the three
limits.
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Figuring the Credit – Problem 2
Form 2441 is for Barbara and Grant Scott
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Figuring the Credit – Problem 2
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Figuring the Credit – Problem 3
Sam has one dependent child, Becky. He can claim
the child and dependent care credit. Box 10 of
his W-2 form shows Sam received $1,200 in
dependent care benefits from his employer. His
care expenses were $3,200. He earned $25,800.
What is the total amount of Sam’s work-related
expenses for figuring his credit?
a. $3,200
b. $1,200
c. $1,800
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Figuring the Credit – Problem 3
Sam has one dependent child, Becky. He can claim the
child and dependent care credit. Box 10 of his W-2
form shows Sam received $1,200 in dependent care
benefits from his employer. His care expenses were
$3,200. He earned $25,800. What is the total
amount of Sam’s work-related expenses for figuring
his credit?
c. $1,800
Sam would figure his credit on work-related expenses
of $1,800, which is the lowest amount of the dollar
limit, his earned income or his actual expenses.
(his dollar limit is reduced to $1,800 ($3,000$1,200)).
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Figuring the Credit
The amount of the actual credit is a
percentage of eligible work-related
expenses. (See Table 7-1)
1. Ranges from 35% to 20% of eligible
expenses
2. Based on AGI.
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Figuring the Credit
Table 8-1
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Figuring the Credit – Problem 4
Sam, in our previous problem, can figure the
credit on $1,800 of his eligible expenses. In
addition to his wages of $25,800 he
reported $350 in interest on line 8a of his
tax return. His tax liability is $1,118.
Determine Sam’s AGI. Then using Table
7-1, how much credit Sam be able to claim?
a. $540
b. $522
c. $504
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Figuring the Credit – Problem 4
Sam, in our previous problem, can figure the credit on
$1,800 of his eligible expenses. In addition to his
wages of $25,800 he reported $350 in interest on
line 8a of his tax return. His tax liability is $1,118.
Determine Sam’s AGI. Then using Table
7-1, how much credit Sam be able to claim?
b. $522
He checks the chart and finds that based on his AGI of
$26,150, he can take 29% of his eligible expenses as
his credit. The amount of the credit Sam can claim
is $522 ($1,800 x 29%).
AGI = $25,800 + $350
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Claiming the Credit
1. Complete Form 2441 to report information and
figure the credit.
2. On Form 2441, identify with SSN or employer
identification number (EIN) all persons or
organizations that provided care.
3. If information is incomplete or incorrect, IRS may
disallow the credit unless you can show due
diligence in trying to provide the information.
4. Form 2441 is also used to figure the excludable
amount of dependent care benefits provided by your
employer.
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Claiming the Credit
The total amount of dependent care benefits you can
exclude is limited to the smallest of:
 The total amount of the benefits (box 10 of Form W2),
 The total amount of qualified expenses you incurred,
 Your earned income,
 Your spouse’s earned income, or
 $5,000 ($2,500 if married filing separately).
Benefits in excess of the excludable amount are taxable
income and must be added to the amount you report
on Form 1040, line 7.
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Claiming the Credit
In 2008, Betsy will file as head of household.
Her wages were $25,000 and she paid
$2,000 for day care for her child so she
could work. She received $2,500 in
dependent care benefits. Betsy’s W-2 form
and Part III of her Form 2441 (shown on
the next slide) would look like this:
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Claiming the Credit
75
Claiming the Credit
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Claiming the Credit
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Claiming the Credit
Betsy must add the $500 that is not excluded
from her income to the amount of wages
shown in box 1 of her W-2 form and enter
the total compensation of $25,500 on line 7
of Form 1040. She does not claim a credit,
as she has no eligible expenses. All her child
care costs were paid for by the dependent
care benefits provided by her employer.
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EARNED INCOME CREDIT
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EARNED INCOME CREDIT
The earned income credit (EIC) is a tax credit
for certain people who work and have
earned income under $38,646 ($41,646 if
MFJ). Because the earned income credit is a
refundable credit, you can receive a refund
even if you have no tax liability and had no
income tax withheld.
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EARNED INCOME CREDIT
On Form 1040, Page 2
The EIC is available to taxpayers who have
qualifying child(ren) and taxpayers who
do not have a qualifying child.
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Qualifying Child
(See diagram on page 7-17)
1. RELATIONSHIP TEST - your son, daughter, stepchild,
eligible foster child, your brother, sister, stepbrother
or stepsister or their descendant.
a. An eligible foster child for purposes of the EIC
must be a child placed with you by an authorized
agency.
2. AGE TEST - under age 19 (18 or younger) at the end
of the tax year, under age 24 (23 or younger) at the
end of the tax year and a full-time student, or
permanently and totally disabled at any time during
the tax year regardless of age.
3. RESIDENCY TEST - must live with you in the United
States for more than half the year.
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Qualifying Child – Problem 1
Todd was age 19 at the end of 2008 and he
lived with his mother and father who
supported him. Todd does not go to school
and he is not disabled. Is Todd a qualifying
child?
Yes or No?
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Qualifying Child – Problem 1
Todd was age 19 at the end of 2008 and he
lived with his mother and father who
supported him. Todd does not go to school
and he is not disabled. Is Todd a qualifying
child?
No
Todd does not meet the age test because he is
not under age 19 and does not meet either
of the exceptions.
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Qualifying Child
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Eligibility for the EIC
All requirements must be met whether or not you have a
qualifying child.
1. You must have a valid social security number for
yourself, your spouse and your qualifying child(ren). If
your social security number (or that of your spouse or
qualifying child) says “Not valid for employment” or is
an ITIN, you are not eligible for the EIC.
2. Your filing status cannot be married filing separately.
If you are married and your spouse did not live with
you at anytime during the last six months of the year,
you may be able to file as head of household .
3. You must be a U.S. citizen or resident alien all year .
4. You cannot file Form 2555 or 2555EZ (relating to
foreign earned income).
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Eligibility for the EIC
5. Your investment income (taxable and
nontaxable interest income, dividend income,
net capital gains income) cannot exceed $2,950.
6. You must have earned income which includes all
income you get from working.
a. If married, at least one spouse must work and
have earned income.
Lance’s only income is from his social security
benefits and investments. No matter what the
other circumstances of Lance’s life, he does not
qualify for the earned income credit because he
has no earned income.
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Eligibility for the EIC
The income section of Al’s Form 1040 follows. He does
not qualify for the earned income credit because the
total of lines 8a, 8b, 9a and 13 is $2,959.
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Eligibility for the EIC
Nontaxable combat pay election.
You can elect to have your nontaxable combat pay
included as earned income for the earned income
credit. Electing to include nontaxable combat pay in
earned income may increase or decrease EIC.
Linda is in the military and provides a home for her only
child. Her only income is from her Form W-2 which
shows $2,000 in box 1 and code Q of $23,000 in box
12. The EIC computation without the combat pay
election would be $689. If she makes the election to
include nontaxable combat pay in earned income, the
EIC would be $1,433. Linda should make the election.
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Eligibility for the EIC
7.
You cannot be a qualifying child of another person. You are
a qualifying child if you meet the relationship, age, and
residency tests for that person. If you are a qualifying child
of another person, you cannot claim the EIC even if the
other person does not claim the credit or does not meet all
the rules to claim the credit..
8. You Your earned income and your adjusted gross income
must be under certain limits. Your earned income and AGI
must be less than:
 $38,646 ($41,646 for married filing jointly) if you have
more than one qualifying child,
 $33,995 ($36,995 for married filing jointly) if you have
one qualifying child, or
 $12,880 ($15,880 for married filing jointly) if you do
not have a qualifying child.
90
Eligibility for the EIC – Problem 1
Donna is age 22 and was a full-time college
student in 2008. She and her 2-year-old son
lived with Donna’s mother for the entire
year. Donna meets all the relationship, age,
and residency tests and therefore is a
qualifying child for her mother. Her mother’s
2008 investment income of over $3,000 is
too high to allow her mother to claim the
credit. Can Donna claim the earned income
credit?
Yes or No?
91
Eligibility for the EIC – Problem 1
Donna is age 22 and was a full-time college
student in 2008. She and her 2-year-old son
lived with Donna’s mother for the entire
year. Donna meets all the relationship, age,
and residency tests and therefore is a
qualifying child for her mother. Her mother’s
2008 investment income of over $3,000 is
too high to allow her mother to claim the
credit. Can Donna claim the earned income
credit?
No
Because she is a qualifying child for her mother, Donna
cannot claim the earned income credit either.
92
Eligibility for the EIC – Problem 2
Clark has two qualifying children and files
head of household. He has $36,000 in wages
on line 7 of his Form 1040 and his AGI is
$39,500. For EIC purposes, his earned
income is $36,000 (taxable wages of
$36,000). Can Clark claim the earned
income credit?
Yes or No?
93
Eligibility for the EIC – Problem 2
Clark has two qualifying children and files
head of household. He has $36,000 in wages
on line 7 of his Form 1040 and his AGI is
$39,500. For EIC purposes, his earned
income is $36,000 (taxable wages of
$36,000). Can Clark claim the earned
income credit?
No
Because his AGI is NOT less than $38,646 Clark cannot
claim the earned income credit even if he meets all
the other requirements.
94
Eligibility for the EIC
If you have a qualifying child, you must
meet these additional rules:
1. Your child must meet the relationship,
age, and residency tests.
2. Your qualifying child cannot be used by
more than one person to claim the EIC.
95
Eligibility for the EIC
If you and someone else have the same qualifying
child, you and the other person(s) can decide who
can claim the credit using that qualifying child.
The taxpayer claiming the child can take all of the
following tax benefits based on the qualifying child.
 The child’s exemption
 The child tax credit
 Head of household filing status
 The credit for child and dependent care expenses
 The exclusion for dependent care benefits
 The EIC
The other person cannot take any of these five tax
benefits unless he or she has a different qualifying
child.
96
Eligibility for the EIC
3. If two or more persons can claim the same
qualifying child you and the other person(s)
can choose who will claim the credit using
that qualifying child. If you and the other
person(s) cannot agree and more than one
person qualifies to claim the credit using
the same child, the tie- breaker rule
applies. Refer to Table 7-2.
4. You cannot be the qualifying child of
another person
97
Eligibility for the EIC
98
Eligibility for the EIC – Problem 3
Wanda, age 24, and her 4-year-old son lived with
Wanda’s mother for the entire year. Wanda would
not meet the age test so she would not be a
qualifying child for her mother. Wanda’s son is a
qualifying child for both Wanda and her mother. He is
Wanda’s son and her mother’s grandson, he is
under age 19, and he resided with Wanda and her
mother for more than half the year in the United
States. However, only one of them can use him to
claim EIC. Wanda’s only income for 2008 is $14,000
from her job and her mother’s only income is
$20,000 from her job. Who can claim Wanda’s son,
Wanda or her mother?
a. Wanda
b. Wanda’s Mom
99
Eligibility for the EIC – Problem 3
Wanda, age 24, and her 4-year-old son lived with Wanda’s
mother for the entire year. Wanda would not meet the age
test so she would not be a qualifying child for her mother.
Wanda’s son is a qualifying child for both Wanda and her
mother. He is Wanda’s son and her mother’s grandson, he
is under age 19, and he resided with Wanda and her
mother for more than half the year in the U.S. However,
only one of them can use him to claim EIC. Wanda’s only
income for 2008 is $14,000 from her job and her mother’s
only income is $20,000 from her job. Who can claim
Wanda’s son, Wanda or her mother?
a. Wanda OR b. Wanda’s mom
Wanda and her mother can choose who will treat the child
as a qualifying child to claim the EIC. If they cannot agree,
Wanda, as the child’s parent will be the only one allowed to
claim the credit using this child. She will also qualify to
claim all of the other tax benefits for this child. Wanda’s
mother cannot claim either Wanda or her son as a
dependent. If she has no other qualifying person, she also
cannot claim head of household, the child tax credit or the100
credit for child and dependent care benefits.
Eligibility for the EIC
If you do not have a qualifying child, you must
meet these additional rules.
1. Your age must be between 25 and 65 at the
end of the tax year.
2. You (and spouse if filing a joint return)
cannot be another person’s dependent.
3. You cannot be a qualifying child of another
person.
4. You must have lived in the United States
more than half of the year.
101
Eligibility for the EIC – Problem 4
Dan is age 25 and single. His parents provide over half
of his total support. Dan’s earned income in 2008
was $2,875. Because he meets all the dependency
tests, his parents can claim him as a dependent on
their tax return. Who can claim the earned income
credit, Dan or his parents?
a. Dan
b. His parents
c. Both
d. Neither
102
Eligibility for the EIC – Problem 4
Dan is age 25 and single. His parents provide
over half of his total support. Dan’s earned
income in 2008 was $2,875. Because he
meets all the dependency tests, his parents
can claim him as a dependent on their tax
return. Who can claim the earned income
credit, Dan or his parents?
d. Neither
Dan cannot claim EIC because he is eligible to
be claimed as a dependent (qualifying
relative) by his parents. Dan is not a
qualifying child for EIC purposes, so his
parents cannot claim EIC.
103
Claiming the Credit
1. Answer the eligibility questions in the tax
form instruction booklet.
2. If eligible, complete the Earned Income
Worksheet.
3. Use the Earned Income Credit Table to find
the amount of your credit.
4. If the amount of your earned income and
AGI are different, look up the credit for
each amount and claim the lower credit.
5. If you have qualifying children, complete
Schedule EIC and attach to your tax form.
104
Claiming the Credit – Problem 1
Walter is single and has one qualifying child.
In 2008, his earned income was $17,270
and his AGI was $17,352. Using the EIC
Table, he finds that the credit for the
amount $17,270 for one child is $2,672 and
the credit for the amount $17,352 for one
child is $2,592. Which is the credit amount
that Walter should take?
a. $2,672
b. $2,592
105
Claiming the Credit – Problem 1
Walter is single and has one qualifying child.
In 2008, his earned income was $17,270
and his AGI was $17,352. Using the EIC
Table, he finds that the credit for the
amount $17,270 for one child is $2,672 and
the credit for the amount $17,352 for one
child is $2,592. Which is the credit amount that
Walter should take?
b. $2,592
Walter’s earned income credit is $2,592, the lower
credit amount.
106
Earned Income Credit
107
Earned Income Credit
Tim (SSN 544-45-3333) and Lorrie (SSN 54432- 2222) Martin have two children. Aggie
(SSN 233-45-6789, born 12/12/1996) and
Lon (SSN 233-66- 5431, born 8/2/1994).
Their filing status is married filing jointly.
The amount on line 7 of their Form 1040 for
2008 is $22,225. Their only other taxable
income is $1,400 in unemployment giving
them an AGI of $23,625 on line 38. Tim and
Lorrie can claim the earned income credit.
Tim and Lorrie answered the eligibility
questions and filled out the worksheet and
Schedule EIC as shown on the following
slides and on pages 7-23 thru 26 in your
book.
108
109
110
111
112
113
114
Form 1040
115
DUE DILIGENCE FOR TAX
PREPARERS
Paid tax preparers who file EIC claims on
behalf of their taxpayers must meet four
due diligence requirements:
 Complete Form 8867, Paid Preparer's
Earned Credit Checklist. The information
must be provided by the taxpayer or
obtained in another reasonable manner. It
is important to ensure that the
questions are asked.
116
DUE DILIGENCE FOR TAX
PREPARERS
 Complete the appropriate EIC worksheet
found in Form 1040, 1040A or 1040EZ
instructions or in Publication 596, or an
equivalent paper or electronic form.
117
DUE DILIGENCE FOR TAX
PREPARERS
 The tax preparer must not know, or have reason
to know, that any information used by the tax
preparer in determining the taxpayer's eligibility
for, or the amount of, the EIC is incorrect.
The tax preparer may not ignore any
implications of information furnished to, or
known by, and he/she must make
reasonable inquiries if the information
furnished to, or known by him/her appears
to be incorrect, inconsistent, or incomplete.
118
DUE DILIGENCE FOR TAX
PREPARERS
 Keep Form 8867 and the EIC worksheet
(or equivalent of each), and a record of
how, when and from whom the
information used to prepare the form and
worksheet(s) was obtained. These
documents (paper or electronic) must be
kept for three years after June 30
following the date the return or claim for
refund was presented to the taxpayer for
signature.
119
DUE DILIGENCE FOR TAX
PREPARERS
Example 1
 During the interview process, the taxpayer
informs the tax preparer that she is separated
from her spouse. A child lives with her and the
taxpayer wants to claim the EITC. In reviewing
the taxpayer's records it is apparent the taxpayer
earns a minimal amount of income, which is not
sufficient to support a household (Pay
rent/mortgage, utilities, food, clothing, school
supplies, are a few examples).
 The tax preparer should ask the appropriate
questions to determine the correct filing status
for the taxpayer in order to meet the third EIC
knowledge requirement.
120
DUE DILIGENCE FOR TAX
PREPARERS
Example 2
 During the interview process, the taxpayer, who
is 18 years old, mentions that she and her
daughter live with her parents. She has earnings
of $3,000 from a part time job. She wants to
claim EIC. In order to meet the third EIC
knowledge requirement the tax preparer should
ask the appropriate questions to determine if this
taxpayer is a qualifying child of her parents and
therefore ineligible to claim EIC.
 In this example, the income level should alert the
tax preparer to ask additional questions even if
the client did not mention her living
arrangements.
121
DUE DILIGENCE FOR TAX
PREPARERS
Example 3
 The taxpayer comes in to have his return
prepared. He is 25 years old. He is
claiming that he has two sons ages 10 and
11 that are his qualifying children for EIC.
 In order to meet the third EIC knowledge
requirement the tax preparer should ask
the appropriate questions and request
adequate documentation if necessary to
determine if these children are really his.
The ages of the children appear
inconsistent with the client's age.
122
DUE DILIGENCE FOR TAX
PREPARERS
Example 4
 The taxpayer comes in to have her return
prepared. She states that she is head of her
household and has two children ages 13 and 14.
Mary states that she is self-employed as a
babysitter. She states that she made $12,000
and had no expenses.
 The tax preparer should ask the appropriate
questions about expenses related to Mary's
babysitting business, what records Mary has
kept, etc. to determine that it is a business. It is
inconsistent that she would have no expenses
and it appears that the information she is giving
the tax preparer is incomplete.
123
DUE DILIGENCE FOR TAX
PREPARERS
To comply with the knowledge
requirement, tax practitioners
should:
 Apply a common sense standard to client
provided information.
 Evaluate whether the information appears
to be complete; identify missing facts.
124
DUE DILIGENCE FOR TAX
PREPARERS
 Determine whether the information is
consistent; recognize contradictory
statements or statements that are
inconsistent with what you know to be
true.
 Conduct a thorough, in depth interview
with every client, every year.
 Ask questions when client information
appears to be incomplete, incorrect or
inconsistent. Ask enough questions to
ensure the return is correct and complete.
125
Tax Credits
KEY IDEAS
♦ A tax credit is subtracted dollar-for-dollar from your
tax.
♦ A nonrefundable credit reduces or eliminates your
income tax but will not give you an additional refund.
♦ A refundable credit reduces or eliminates your total
tax and also gives you a refund of any amount of the
credit that is more than your tax liability.
♦ The child tax credit is a nonrefundable credit (the
additional child tax credit will be covered later). The
credit for child and dependent care expenses is a
nonrefundable credit. The earned income credit is a
refundable credit.
126
Tax Credits
KEY IDEAS
♦ The rules for the qualifying child or person for each
credit generally concern the age of the person, their
relationship to you and where they live. However, the
rules are different for each credit.
♦ The amount of the child tax credit is $1,000 per
qualifying child. To claim up to the full $1,000 for the
child tax credit, your modified adjusted gross income
must be below a certain amount for your filing
status.
♦ The amount of the child and dependent care credit is
a percentage of your eligible expenses. You can claim
the child and dependent care credit only for workrelated care expenses.
127
Tax Credits
KEY IDEAS
♦ You have to have earned income (usually wages or
salary) to claim the earned income credit. The
amount of the earned income credit is found in the
EIC Table.
♦ You can elect to include or not include nontaxable
combat pay as earned income when determining the
earned income credit.
♦ You should ask sufficient questions to comply with
due diligence.
128
Tax Credits
CLASSWORK ONE: True or False.
(1) To be eligible to claim the earned income credit, you
must have a qualifying child.
(2) A refundable credit reduces your total tax liability and can
result in a refund if the credit is greater than the tax
owed.
(3) Generally, a qualifying child for the child tax credit must
be claimed as your dependent.
(4) Sue’s 7-year-old child attends private elementary school.
Sue can use the tuition she paid as a qualified expense to
figure the child and dependent care credit.
(5) A tax credit is subtracted from adjusted gross income.
(6) To be a qualifying child for the earned income credit, your
child must be claimed as your dependent.
129
Tax Credits
CLASSWORK ONE: True or False.
(7) Eddie, age 12, lives with his mother who supports
him. His mother is divorced and has agreed in
writing that Eddie’s father can claim Eddie as a
dependent. Eddie is not a qualifying child for his
mother for the child and dependent care credit.
(8) Paulette’s parents pay for after school care for
Paulette so they can work. Paulette turned 13 on
October 10, 2008. None of Paulette’s 2008 care
expenses are eligible for the child and dependent
care credit.
9) You can claim EIC if your filing status is Married
Filing Separately.
130
Tax Credits
CLASSWORK ONE: True or False.
(10) In 2008, Connie paid work-related childcare
expenses of $3,100 for her qualifying child. She
earned $24,000. The amount of her work-related
expenses that she will use to figure the child and
dependent care credit is $3,100.
(11) Amy’s 25-year-old son lives with her because he is
totally and permanently disabled. He is a
qualifying child for Amy for the earned income
credit.
(12) Roberta (born 1984) is single and has no children.
Because her 2008 AGI and earned income are
both less than $12,880 she is eligible for the
earned income credit for 2008.
131
Tax Credits
CLASSWORK ONE: True or False.
(1) To be eligible to claim the earned income credit, you must
have a qualifying child. F
(2) A refundable credit reduces your total tax liability and can
result in a refund if the credit is greater than the tax
owed. T
(3) Generally, a qualifying child for the child tax credit must
be claimed as your dependent. T
(4) Sue’s 7-year-old child attends private elementary school.
Sue can use the tuition she paid as a qualified expense to
figure the child and dependent care credit. F
(5) A tax credit is subtracted from adjusted gross income. F
(6) To be a qualifying child for the earned income credit, your
child must be claimed as your dependent. F
132
Tax Credits
CLASSWORK ONE: True or False.
(7) Eddie, age 12, lives with his mother who supports
him. His mother is divorced and has agreed in
writing that Eddie’s father can claim Eddie as a
dependent. Eddie is not a qualifying child for his
mother for the child and dependent care credit. F
(8) Paulette’s parents pay for after school care for
Paulette so they can work. Paulette turned 13 on
October 10, 2008. None of Paulette’s 2008 care
expenses are eligible for the child and dependent
care credit. F
9) You can claim EIC if your filing status is Married
Filing Separately. F
133
Tax Credits
CLASSWORK ONE: True or False.
(10) In 2008, Connie paid work-related childcare
expenses of $3,100 for her qualifying child. She
earned $24,000. The amount of her work-related
expenses that she will use to figure the child and
dependent care credit is $3,100. F
(11) Amy’s 25-year-old son lives with her because he is
totally and permanently disabled. He is a
qualifying child for Amy for the earned income
credit. T
(12) Roberta (born 1984) is single and has no children.
Because her 2008 AGI and earned income are
both less than $12,880 she is eligible for the
earned income credit for 2008. F
134
Tax Credits
CLASSWORK TWO: Answer the questions for each of the
following situations. Explain each answer.
1. Rose is 12-years-old. She came to live with
her grandmother Violet in March 2008.
Rose’s father supports Rose, but does not
live with her. Violet’s earned income is
$21,320, which is the same as her AGI.
Violet claims Rose as a dependent.
a. Can Violet claim the EIC?
b. Can Violet claim the child tax credit?
135
Tax Credits
2. Kent (born in 1980) and his 3-year-old son
live with Kent’s grandmother. Kent
provides all of the support for his son. His
earned income and AGI are both $12,354.
His grandmother has earned income of
$14,671 and an AGI of $16,721, which
includes $2,150 in interest from savings.
a. Can Kent claim the EIC?
b. Can Kent’s grandmother claim the EIC?
c. Can either of them claim the child tax
credit? If yes who can claim the credit?
136
Tax Credits
3. Mary Jane and Riley send their 9-year-old daughter
to day care so Riley and Mary Jane can work. In
2008, Riley’s taxable earned income was $23,660
and Mary Jane’s was $2,100. They had no other
income. Their work-related childcare expenses
were $2,450.
a.
b.
What is the amount of their work-related expenses
eligible for the child and dependent care credit?
What percentage of the eligible expenses can they
take as the credit?
137
Tax Credits
4. Mike and Maureen have a son Ted (born
12/12/1991), a son Richard (born 4/8/1996), a
daughter Melissa (born 7/12/1992) and a daughter
Laurie (born 2/14/1999). Their nephew Gordie
(born 8/11/1998) also lived with them all year. They
support their nephew and claim him as a dependent
on their tax return. Mike and Maureen’s modified
adjusted gross income in 2008 was $46,460. Their
2008 income tax on Form 1040, line 46 was $1,198.
a. Which children are qualifying children for the child
tax credit?
b. What is the amount of the credit Mike and Maureen
will enter on Form 1040, line 52?
138
Tax Credits
5. Brad is divorced. His two children live with
him. His daughter Sadie was born in 1991
and his son Noah was born in 1998. Brad
has signed a written agreement allowing his
former wife to claim the dependent
exemption for Noah. Noah goes to day care
after school so Brad can work at his job as a
plumber. His earned income and AGI are
both $26,379.
a. Which tax credits will Brad be eligible to
claim?
139
Tax Credits
CLASSWORK TWO: Answer the questions for each of the
following situations. Explain each answer.
1.
Rose is 12-years-old. She came to live with her
grandmother Violet in March 2008. Rose’s father
supports Rose, but does not live with her. Violet’s
earned income is $21,320, which is the same as her
AGI. Violet claims Rose as a dependent.
a. Can Violet claim the EIC? Yes, Rose meets all the
requirements to be her qualifying child for EIC.
b. Can Violet claim the child tax credit? Yes, Rose
meets all the requirements to be her qualifying
child for child tax credit.
140
Tax Credits
2. Kent (born in 1980) and his 3-year-old son live with
Kent’s grandmother. Kent provides all of the support
for his son. His earned income and AGI are both
$12,354. His grandmother has earned income of
$14,671 and an AGI of $16,721, which includes
$2,150 in interest from savings.
a. Can Kent claim the EIC? Yes, Kent meets all the rules
and has a qualifying child (his son).
b. Can Kent’s grandmother claim the EIC? Yes, Kent’s
grandmother also meets all the rules and has a
qualifying child (Kent’s son).
c. Can either of them claim the child tax credit? If yes
who can claim the credit? Yes, Kent because he can
claim the child as a dependent.
141
Tax Credits
3. Mary Jane and Riley send their 9-year-old daughter
to day care so Riley and Mary Jane can work. In
2008, Riley’s taxable earned income was $23,660
and Mary Jane’s was $2,100. They had no other
income. Their work-related childcare expenses were
$2,450.
a. What is the amount of their work-related expenses
eligible for the child and dependent care credit?
$2,100, Mary Jane’s earned income is $2,100. Work
related expenses cannot exceed the earned income
of the lower paid spouse.
b. What percentage of the eligible expenses can they
take as the credit? 29%, Their AGI is $25,760.
142
Tax Credits
4. Mike and Maureen have a son Ted (born 12/12/1991), a
son Richard (born 4/8/1996), a daughter Melissa (born
7/12/1992) and a daughter Laurie (born 2/14/1999).
Their nephew Gordie (born 8/11/1998) also lived with
them all year. They support their nephew and claim him as
a dependent on their tax return. Mike and Maureen’s
modified adjusted gross income in 2008 was $46,460. Their
2008 income tax on Form 1040, line 46 was $1,198.
a. Which children are qualifying children for the child tax
credit? Richard, Melissa, Laurie, Gordie. Ted was 17 at the
end of 2008 so he is not a qualifying child. The others are
qualifying ages and the nephew is an eligible qualifying
child.
b. What is the amount of the credit Mike and Maureen will
enter on Form 1040, line 52? $1,198. Line 52 is a
nonrefundable credit. The amount of the credit cannot
exceed the tax liability.
143
Tax Credits
5. Brad is divorced. His two children live with him. His
daughter Sadie was born in 1991 and his son Noah
was born in 1998. Brad has signed a written
agreement allowing his former wife to claim the
dependent exemption for Noah. Noah goes to day
care after school so Brad can work at his job as a
plumber. His earned income and AGI are both
$26,379.
a. Which tax credits will Brad be eligible to claim? Child
and dependent care credit and earned income credit;
Sadie is too old for the child tax credit and Brad can’t
claim Noah as a dependent. Noah is a qualifying
child for the child and dependent care credit because
Brad is the custodial parent. Both children are
qualifying children for EIC and Brad meets all the
other rules.
144
Tax Credits
CLASSWORK THREE: Multiple Choice.
1. Harry’s and Louise’s three nephews ages
12, 14 and 17 came to live with them on
March 20, 2008. Line 46 of their 2008
Form 1040 is $798 and they have no other
credits. Harry and Louise can claim a child
tax credit on line 52 of:
a. $1,000
b. $2,000
c. $798
d. $0
145
Tax Credits
CLASSWORK THREE: Multiple Choice.
2. If you can claim the child and dependent
care credit you can receive:
a. an additional refund
b. a reduction in your taxable income
c. a reduction in your income tax
d. all of the above
146
Tax Credits
CLASSWORK THREE: Multiple Choice.
3. Paul and Pam are married and have two children
ages 10 and 17. In 2008, Paul had earned income of
$21,775. Pam had earned income of $3,425. They
also received $500 in interest from a bank account
and they had no other income. What is the amount
of earned income they must use to figure the
earned income credit?
a. $25,700
b. $25,200
c. $21,775
d. $3,425
147
Tax Credits
4. Fred sends his dependent child (age 8) to
after school day care so he can work. In
2008, he paid $2,200 for the care. He
received wages of $23,740 and $1,360 of
taxable interest. He had no other income.
What is the amount of the child and
dependent care credit he can claim?
a. $616
b. $682
c. $660
d. $638
148
Tax Credits
CLASSWORK THREE: Multiple Choice.
1. Harry’s and Louise’s three nephews ages 12, 14 and
17 came to live with them on March 20, 2008. Line 46
of their 2008 Form 1040 is $798 and they have no
other credits. Harry and Louise can claim a child tax
credit on line 52 of: c. $798
2. If you can claim the child and dependent care credit
you can receive: c. a reduction in your income tax
149
Tax Credits
CLASSWORK THREE: Multiple Choice.
3. Paul and Pam are married and have two children
ages 10 and 17. In 2008, Paul had earned income of
$21,775. Pam had earned income of $3,425. They
also received $500 in interest from a bank account
and they had no other income. What is the amount of
earned income they must use to figure the earned
income credit? b. $25,200
4. Fred sends his dependent child (age 8) to after
school day care so he can work. In 2008, he paid
$2,200 for the care. He received wages of $23,740
and $1,360 of taxable interest. He had no other
income. What is the amount of the child and
dependent care credit he can claim? d. $638
150
Questions & Answers
151