Fundamentals of Taxation 2017 Edition 10th Edition Cruz Solutions Manual

Fundamentals of Taxation 2017 Edition
10th Edition Cruz Solutions Manual

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Solutions Manual
CHAPTER 9 – SOLUTIONS
END OF CHAPTER MATERIAL
Discussion Questions
1. A taxpayer has $2,000 of qualified employment-related expenses paid on behalf of

one qualifying child. Determine the maximum and minimum amount of child and
dependent care tax credit available to the taxpayer and explain the circumstances in
which the maximum and minimum credit would be permitted.
Answer:
The maximum credit is 35% of qualified expenses ($700 in this case) and is
available if the AGI of the taxpayer is $15,000 or less. The minimum credit is
20% of qualified expenses ($400) and can be taken if the taxpayer’s AGI is
$43,001 or more.
Learning Objective: 09-01
Topic: Credit for Child and Dependent Care Expenses
Difficulty: 1 Easy
EA: Yes
2. Briefly explain the requirements that must be met to receive a tax credit for child and
dependent care expenses.
Answer:
A taxpayer must incur child-care expenses for one or more qualifying
individuals. Those expenses must be incurred so that the taxpayer can be
gainfully employed or look for work. The taxpayer must also maintain a
household that includes the qualifying individual(s). A qualifying individual is
either a dependent under age 13 or is a dependent or a spouse of any age who
is incapable of caring for him or herself.
Difficulty: 2 Medium
EA: Yes
3. For purposes of the tax credit for child and dependent care expenses, explain the
limitations concerning the amount of qualified expenses that can be used to calculate the
credit.
Answer:
© 2017 by McGraw-Hill Global Education Holdings, LLC. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or
posted on a website, in whole or part.
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Employment-related expenses are limited to $3,000 if there is one qualifying

individual and $6,000 if there are two or more qualifying individuals. These
amounts are further limited to the amount of earned income of the taxpayer
(or spouse, whichever is smaller).
EA: Yes
4. A taxpayer maintains a household and is entitled to a dependency exemption for an

incapacitated adult child. The child lives during the week at an adult day care center and
on the weekends at home with the taxpayer. The taxpayer pays a fee to the center so the
taxpayer can be gainfully employed. Does the fee qualify for treatment as a qualifying
expense for purposes of the child and dependent care tax credit? Why or why not?
Answer:
No. The Internal Revenue Code requires the incapacitated adult child to live
in the taxpayer’s household for at least 8 hours per day. If the child were to go
back to the taxpayer’s house at night for at least 8 hours, the fee would be a
qualifying expense. In this case, since the child was at home only on the
weekends, the costs do not qualify.
EA: Yes
5. To determine the amount of credit for the elderly or the disabled, the appropriate base
amount must be adjusted by the effect of two items. What are those two items, and in
what way is the base amount adjusted?
Answer:
The base amount ranges between $3,750 and $7,500, depending on the filing
status of the taxpayer. This amount must be reduced by (1) the amount of
non-taxable Social Security payments received and (2) one-half of the amount
that AGI exceeds $7,500 for single returns, $10,000 for joint returns, or $5,000
for married filing separately.
Topic: Credit for the Elderly or the Disabled
EA: No
6. Two kinds of education tax credits are available. Name them and briefly discuss the
criteria necessary to claim each of the credits.
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Answer:
The two credits that are available are the American opportunity tax credit
(AOTC, also known as the Hope credit) and the lifetime learning credit. They
are available to taxpayers who pay qualified higher education expenses for the
taxpayer, spouse, or dependent.
Topic: Education Credits
Difficulty: 1 Easy
EA: Yes
7. Explain what qualifies as education expenses for the purposes of educational tax
credits.
Answer:
Qualifying education expenses are amounts paid for tuition, fees, and other
related expenses paid to an eligible educational institution while pursuing
undergraduate, graduate or vocational degrees. These expenses include
books, supplies and other course materials but not room and board. For
lifetime learning credit, expenses paid for books and course materials must be
paid to the institution as a requirement for enrollment and attendance to
qualify.
EA: Yes
8. Jerome is single and cannot be claimed by anyone as a dependent. He is a student at a

local university enrolled full-time in an MBA program. His tuition bill was $5,000. He
paid the bill by withdrawing $2,000 from his savings account and borrowing the
remainder from a local bank. For purposes of the educational tax credits, what is the
amount of Jerome’s qualifying expenses?
Answer:
His qualifying expenses are $5,000. The fact that Jerome borrowed some of
the tuition payment does not disqualify the amount.
EA: Yes
9. Briefly explain when and how each of the two education credits is phased out.
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Answer:
Both the American opportunity tax credit (AOTC) and the lifetime learning
credit phase out when the modified AGI exceeds certain limits. For the
AOTC, the phase out begins when modified AGI exceeds $80,000 and
$160,000, for single and joint taxpayers, respectively. For the lifetime
learning credit, the phase out begins when modified AGI exceeds $65,000 and
$130,000, for single and joint taxpayers, respectively.
EA: Yes
10. Explain the two instances in which taxpayers may choose to deduct foreign taxes as
an itemized deduction rather than as a credit.
Answer:
One instance is when a taxpayer has income from one country and an equal
loss from another country. Another instance is when foreign taxes paid are
not based on income (e.g., property taxes).
Topic: Foreign Tax Credit
EA: No
11. Explain how the foreign tax credit limitation works.
Answer:
U.S. taxpayers pay U.S. taxes on their worldwide income. A credit is
permitted for foreign taxes paid on foreign income. The credit cannot exceed
the amount of U.S. tax that is owed on that foreign income. For example, if an
item of foreign income is taxed at a 20% rate, and that same income is taxed in
the U.S. at a 25% rate, the entire amount of foreign tax would be allowed as a
credit. However, if the foreign income were taxed in the U.S. at a 17% rate,
the credit would be limited to the amount of U.S. tax. Thus, the foreign tax
credit is equal to the lesser of the foreign tax or the U.S. tax.
EA: No
12. Taxpayers can claim a child tax credit for a qualifying child. Define qualifying child.
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Answer:
A qualifying child is a son or daughter, or descendant of either, a stepson or
stepdaughter, or descendent of either, a brother, sister, stepbrother, stepsister
or descendent of any of these, or a foster child whom the taxpayer can claim as
a dependent (based on definition of qualifying child for the dependency
exemption rules). The qualifying child must also be a U.S. citizen or resident,
under the age of 17 at the end of the tax year, younger than the person
claiming the credit and be unmarried.
Topic: Child Tax Credit
EA: Yes
13. Paul and Olivia filed a joint tax return and reported modified AGI of $92,000. They
have two qualifying children for the purposes of the child tax credit. What is the amount
of their child tax credit? What is the amount of their credit if their modified AGI was
$112,000?
Answer:
With a modified AGI of $92,000, Paul and Olivia are entitled to a $1,000 tax
credit for each child, for a total of $2,000.
For a joint return, the credit is reduced by $50 for each $1,000, or fraction
thereof that modified AGI exceeds $110,000. With a modified AGI of
$112,000, Paul and Olivia exceed the limitation by two $1,000 increments.
Thus, their credit is reduced by $100 ($50 X 2), for a total credit of $1,900.
EA: Yes
14. Explain the limitations pertaining to the retirement savings contributions credit.
Answer:
The credit is based on contributions to certain retirement accounts of up to
$2,000. The credit is a percentage (50% or 20% or 10%) of the contribution.
The percentage varies depending on the modified AGI of the taxpayer and
his/her filing status. For tax year 2016, no credit is given (i.e., the credit is
completely phased out) if the modified AGI is over $61,500 for a joint return,
$46,125 for head of household, and $30,750 for all other returns.
Topic: Retirement Savings Contributions Credit
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EA: Yes
15. Leonardo’s filing status is head of household. He has modified Adjusted Gross
Income of $28,000, and he made a $3,000 contribution to his IRA. What is the amount
of his retirement savings contributions credit? What would the credit be if he had a filing
status of single?
Answer:
Leonardo will receive a retirement savings contribution credit of $400. This is
calculated as the $2,000 maximum contribution multiplied by the applicable
percentage of 20%. If Leonardo were filing as a single person, his credit
would be $200 because at modified AGI of $28,000, the applicable percentage
is 10%.
EA: Yes
16. What limitations are associated with the adoption credit, both in terms of dollar
amounts and eligibility?
Answer:
The adoption credit is 100% of qualified adoption expenses paid or incurred
up to a maximum credit of $13,460 per eligible adopted child. The eligible
adopted child must be under age 18 or be incapable of caring for him or
herself. The child of an individual’s spouse is not eligible. The credit phases
out starting at modified AGI of $201,920.
Topic: Adoption Credit
EA: No
17. In the case of the adoption credit, what special rules apply when adopting a child
who is a child with special needs?
Answer:
A child with special needs is a U.S. citizen or resident with a special factor or
condition such that a U.S. state determines the child cannot be placed with
adoptive parents without providing adoption assistance. In case of an
adoption of a child with special needs, a taxpayer can take the maximum
adoption credit regardless of the actual expenses incurred.
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EA: No
18. In the case of the adoption credit, what special rules apply when adopting a child
who is a citizen of another country?
Answer:
If the child is not a U.S. citizen or resident, the credit is allowed only in the
year in which the adoption becomes final (or in a later year if the expenses are
paid in the later year). The credit is not available for a child with special
needs who is not a U.S. citizen or resident.
EA: No
19. What is the definition of qualifying child for purposes of the Earned Income Credit?
Answer:
A qualifying child is either (a) the taxpayer’s son or daughter or descendant of
either, (b) a stepson or stepdaughter or descendant of either, (c) a child who
has been adopted, or (d) an eligible foster child. The child must live with the
taxpayer for more than half the year and must be under age 19 or a full-time
student under age 24 at the end of the tax year or be permanently and totally
disabled. In addition, the child cannot be claimed as a dependent of another,
be a nonresident alien for any part of the year, must be younger than the
person claiming the child and not have filed a joint return.
Topic: Earned Income Credit
EA: Yes
20. Briefly explain the difference between a refundable and a nonrefundable tax credit
and give three examples of tax credits that may be refundable (or partly refundable)
discussed in this chapter.
Answer:
Tax credits reduce the amount of tax liability of a taxpayer. If tax credits
exceed the amount of tax liability of the taxpayer and the excess is as a result
of a refundable tax credit, then taxpayer will receive the excess as a refund.
This is known as a refundable tax credit. Non-refundable tax credits can only
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reduce a taxpayer’s tax liability to zero but cannot be refunded, even if it

exceeds the liability. The three types of credits discussed in the chapter that
may be refundable tax credits are the EIC, American opportunity tax credit
and child tax credit. Each of these credits has a different maximum amount
per credit.
EA: Yes
21. Briefly explain the purpose of the premium tax credit.
Answer:
The premium tax credit is designed to help lower-income taxpayers pay for
health insurance required under the Affordable Care Act. If a taxpayer
purchased insurance through the Marketplace and if the household income is
between 100% and 400% of the Federal Poverty Level, the taxpayer may be
eligible for a tax credit that can be used to pay for a portion of the health
insurance premium.
Topic: Premium Tax Credit
EA: Yes
22. The amount of the premium tax credit is the lesser of what two factors?
Answer:
The premium tax credit is the lesser of:
• The premium for the insurance obtained from the Marketplace
• The premium for the applicable second lowest cost silver plan (SLCSP)
minus the taxpayer’s contribution amount.
EA: Yes
Multiple Choice
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23. Jamison is a single dad with two dependent children, Zoey, age 7 and Conner, age 3.
He has an AGI of $69,000 and paid $4,300 to a qualified day care center for the two
children. What amount can Jamison receive for the child and dependent care credit?
a. $4,300.
b. $1,505.
c. $860.
d. $430.
Answer: c
Feedback: $4,300 x .2 = $860.
Difficulty: 2 Easy
EA: Yes
24. Allie and Buddy are married, file a joint return, and have one son, Zack, age 5.
Buddy has earned income of $42,000 and Allie was a full-time student for 8 months (with
no income). They paid a qualified child care center $3,450. How much is Allie and
Buddy’s child and dependent care credit for the year?
a. $0.
b. $420.
c. $630.
d. $725.
Answer: b
Feedback: $250 x 8 months x .21 = $420.
EA: Yes
25. Avril and John are ages 70 and 72, respectively, and file a joint return. They have an
AGI of $18,000 and received $1,000 in nontaxable Social Security benefits. How much
can Avril and John take as a credit for the elderly or the disabled?
a. $2,700.
b. $1,000.
c. $525.
d. $375.
Answer: d
Feedback: [$7,500 – $1,000 – (1/2 [$18,000-$10,000])] x .15 = $375.
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EA: No
26. Dennis and Vera are ages 69 and 59, respectively, and file a joint return. They have
an AGI of $28,000 and received $2,000 in nontaxable Social Security benefits. How
much can Dennis and Vera take as a credit for the elderly or the disabled?
a. $0.
b. $1,125.
c. $2,000.
d. $7,500.
Answer: a
Feedback: Because Vera is 59 years old, Dennis is the only qualifying taxpayer.
[$5,000 – $2,000 – (1/2 [$28,000-$10,000])] = ($6,000) and therefore, the credit is $0.
EA: No
27. Nathan paid $2,750 in qualifying expenses for his daughter who attended a
community college. How much is Nathan’s lifetime learning credit without regard to
AGI limitations or other credits?
a. $250.
b. $550.
c. $825.
d. $1,375.
Answer: b
Feedback: $2,750 x .2 = $550.
Difficulty: 1 Easy
EA: Yes
28. DJ and Gwen paid $3,200 in qualifying expenses for their son, Nikko, who is a
freshman attending the University of Colorado. DJ and Gwen have AGI of $170,000 and
file a joint return. What is their allowable American opportunity tax credit (AOTC) after
the credit phaseout based on AGI is taken into account?
a. $0.
b. $1,150.
c. $2,300.
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d. $3,200.
Answer: b
Feedback: $2,000+ [($3,200-$2,000) * .25] = $2,300 is their pre-limitation credit; but
limited due to AGI as: $2,300 *[($180,000 – $170,000)/$20,000] = $1,150.
Difficulty: 1 Easy
EA: Yes
29. Darren paid the following expenses during November 2016 for his son Sean’s
college expenses for spring 2017 semester, which begins in January 2017:
Tuition $12,000
Housing 8,000
Books 1,500
In addition, Sean’s uncle paid $500 in fees on behalf of Sean directly to the college. Sean
is claimed as Darren’s dependent on his tax return. How much of the above paid
expenses qualify for the purpose of the American opportunity tax credit deduction for
Darren in 2016?
a. $12,000.
b. $13,500.
c. $14,000.
d. $22,000.
Answer: c
Feedback: $12,000 +$1,500+ $500 = $14,000.
EA: Yes
30. Which of the following expenses are qualifying expenses for purposes of the
education credits?
a. Books (purchased at the institution as a condition of enrollment).
b. Tuition.
c. Room and Board.
d. Both (a) and (b).
Answer: d
Feedback: Books and tuition are qualifying expenses for the education credits.
Room and board however, are not qualifying expenses for the purposes of education
credits deduction.
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Difficulty: 1 Easy
EA: Yes
31. Which of the following conditions must be met for a taxpayer to be able to claim the
foreign tax credit (FTC) without filing Form 1116?
a. All of the foreign-source income is passive income.
b. All of the foreign-source income was reported on Form 1099.
c. Total foreign taxes paid were less than $300 (or $600 if married filing jointly).
d. All of the above must be met to claim the FTC without Form 1116.
Answer: d
Feedback: All of the conditions must be met to claim FTC without the Form 1116.
Difficulty: 1 Easy
EA: No
32. Joyce has $82,000 total worldwide income, which includes $11,000 of taxable
income from China. She paid $2,200 in foreign income taxes to China, and her U.S. tax
liability is $21,610. Joyce’s foreign tax credit is:
a. $0.
b. $2,200.
c. $2,899.
d. $11,000.
Answer: b
Feedback: $11,000/$82,000 x $21,610=$2,899; $2,899 > $2,200; so the credit is
$2,200.
EA: No
33. Michael paid $3,350 in foreign income taxes to Argentina. His total worldwide
income was $75,000, which included $9,800 of income from Argentina. His U.S. tax
liability is $18,750. How much can Michael claim as a foreign tax credit?
a. $2,450.
b. $2,800.
c. $3,350.
d. $15,400.
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Answer: a
Feedback: $9,800/$75,000 x $18,750=$2,450; $2,450<$3,350; so the credit is limited
to $2,450.
EA: No
34. Under which of the following situations would a taxpayer most likely take the
foreign taxes paid as an itemized deduction rather than as a foreign tax credit?
a. The foreign tax paid was less than 15%.
b. The foreign tax paid was to a European country.
c. The foreign tax paid was a property tax.
d. The foreign tax paid was a tax on dividend income.
Answer: c
Feedback: The foreign tax credit is only available for foreign taxes paid based on
income. Therefore, foreign taxes paid based on property value can only be deducted
as an itemized deduction.
EA: No
35. Justin and Janet, whose AGI is $156,000, have twin boys, Jake and Jaime, age 5.
How much child tax credit can they take?
a. $0.
b. $1,000.
c. $2,000.
d. $2,300.
Answer: a
Feedback: ($156,000-$110,000) =$46,000/$1,000 x $50=$2,300; $2,300>$2,000 so
therefore, $0 credit.
EA: Yes
36. Julian is a single father with a son, Alex, who is 8 years old. If Julian’s AGI is
$87,000, what is his child tax credit for Alex?
a. $0.
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b. $400.
c. $600.
d. $1,000.
Answer: b
Feedback: ($87,000-$75,000) =$12,000/$1,000 x $50=$600; $1,000-$600 = $400
credit.
EA: Yes
37. Jerry and Ellen are married filing jointly with AGI of $45,000. They made a $1,500
contribution to a qualified retirement plan. How much is their retirement savings
contributions credit?
a. $0.
b. $150.
c. $300.
d. $750.
Answer: b
Feedback: $1,500 x .10 = $150.
EA: Yes
38. Marcia is a single filer and has AGI of $26,000. During the year, she contributed
$800 to a Roth IRA. What amount of retirement savings contributions credit can Marcia
take?
a. $0.
b. $80.
c. $160.
d. $800.
Answer: b
Feedback: $800 x .10 = $80.
EA: Yes
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39. After two and one-half years of working with the orphanage and the government,
Jake and Nikki adopted a little girl from Korea. The adoption process, which became
final in January 2016, incurred the following qualified adoption expenses. How much
and in which year can Jake and Nikki take the adoption credit? (Assume no limitation of
the credit due to AGI.)
Year 2015 $6,000

Year 2016 $1,000
a. $6,000 in 2015.
b. $1,000 in 2016.
c. $7,000 in 2015.
d. $7,000 in 2016.
Answer: d
Feedback: For foreign adoptions, credit is only allowed in the year in which the
adoption becomes final.
EA: No
40. Abel and Loni adopted a boy (a U.S. citizen), during the current tax year and
incurred a total of $14,675 in qualified adoption expenses. Abel and Loni have modified
AGI of $225,000. What is the amount of adoption credit they can take?
a. $5,694.
b. $7,766.
c. $13,460.
d. $14,675.
Answer: a
Feedback: [($241,920 - $225,000)/$40,000] x $13,460 = $5,694.
EA: No
41. Juan and Lydia both work, file a joint return, and have one qualifying child. They
have AGI of $17,000. What is their EIC?
a. $506.
b. $3,373.
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c. $5,440.
d. $9,920.
Answer: b
Feedback: $3,373; no phase out
EA: Yes
42. Thomas and Stephani are married with four qualifying children. Their AGI is
$24,500. Calculate their EIC using the EIC formula.
a. $5,160.
b. $5,509.
c. $6,109.
d. $6,269.
Answer: c
Feedback: $6,269 – [($24,500-$23,740) x .2106] = $6,109.
EA: Yes
43. Which of the following credits is never a refundable credit?

a. Earned Income Credit
b. Foreign Tax Credit
c. Child tax credit
d. American opportunity tax credit
Answer: b
Feedback: All of the other choices above may be fully or partially refundable.
Difficulty: 1 Easy
EA: No
44. Which of the following statements is incorrect?

a. Taxpayers who purchased qualified health insurance through the Marketplace may be
eligible for a premium tax credit.
b. Taxpayers must apply the credit towards their health insurance premium.
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c. The premium tax credit is designed to help eligible taxpayers pay some of their health
insurance premium.
d. Taxpayers who receive a credit must file a federal tax return and attach Form 8962.
Answer: b
Feedback: Taxpayers can choose to apply the credit towards their health insurance
premium OR may choose to receive the entire credit when they file their tax return.
Difficulty: 1 Easy
EA: Yes
45. Dwayne is single with one dependent. He enrolled in a qualified plan through the
Marketplace at a cost of $4,200 per year. His household income was $40,000. The
SLCSP premium is $4,700. What is Dwayne’s premium tax credit?
a. $1,416
b. $3,284
c. $4,200
d. $4,700
Answer: a
Feedback: Dwayne’s household income is 251% of the Federal Poverty Level for a
household of two [$40,000 / $15,930 = 251%]. His factor from Appendix B is .0821.
His contribution amount is $40,000 X .0821 = $3,284.
His premium tax credit is the lesser of:
• His health care premium of $4,200
• His SLCSP cost of $4,700 minus his contribution amount of $3,284, or
$1,416.
Thus, his premium tax credit is $1,416.
Difficulty: 3 Hard
EA: Yes
Problems
46. Tim and Martha paid $7,900 in qualified employment-related expenses for their three
young children who live with them in their household. Martha received $1,800 of
dependent care assistance from her employer, which was properly excluded from gross
income. The couple had $57,000 of AGI earned equally. What amount of child and
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dependent care tax credit can they claim on their Form 1040? How would your answer
differ (if at all) if the couple had AGI of $36,000 that was earned entirely by Tim?
Answer:
The amount of employment-related expenses is limited to $6,000 for two or
more children. This amount must be reduced by the $1,800 that Martha
received from her employer. Thus, their allowed expenses are $4,200. Since
their AGI was over $43,000, Tim and Martha are entitled to a credit equal to
20% of their expenses, or $840.
If the couple had AGI of $36,000 earned by solely Tim, the credit would be
zero. The credit is permitted if you have child care expenses incurred to be
gainfully employed. Since Martha was not employed, no credit is permitted.
Allowed expenses are limited to the earned income of the taxpayer or the
taxpayer’s spouse, whichever is smaller.
Difficulty: 3 Hard
EA: Yes
47. Adrienne is a single mother with a 6-year-old daughter who lived with her during the
entire year. Adrienne paid $2,900 in child care expenses so that she would be able to
work. Of this amount, $500 was paid to Adrienne’s mother whom Adrienne cannot claim
as a dependent. Adrienne had net earnings of $1,900 from her jewelry business. In
addition, she received child-support payments of $21,000 from her ex-husband. What
amount, if any, of child and dependent care tax credit can Adrienne claim?
Answer:
The payment to Adrienne's mother is a permitted child-care expense. The
amount of employment-related expense is limited to the lesser of $3,000 (in
the case of one qualifying child) or the amount of earned income. Here,
Adrienne's expense amount is limited to $1,900 - the amount of her earned
income from her business. Child support received, for the purposes of the
child care credit, is not considered earned income nor is it used to determine
the amount of AGI for this credit. Therefore, Adrienne is entitled to a credit
percentage of 35% based on her AGI of $1,900. Adrienne is entitled to a
child and dependent care tax credit of $665 ($1,900 x .35).
Difficulty: 3 Hard
EA: Yes
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48. What is the AGI limit above which each the following taxpayers would not be
eligible to receive a credit for the elderly or the disabled?
a) A single taxpayer eligible for the credit who receives $1,000 of nontaxable
social security benefits.
b) Taxpayers filing a joint return for which one taxpayer is eligible for the credit
and the taxpayers have received no taxable social security benefits.
c) Taxpayers filing a joint return and both are eligible for the credit and received
$3,000 of nontaxable social security benefits.
Answer:
In each case, you are trying to determine when the base amount goes to zero.
The base amount is $3,750 for married filing separately, $7,500 for joint
returns where both spouses qualify, or $5,000 for single returns or joint
returns where only one spouse qualifies. The base amount must be reduced
by the amount of non-taxable Social Security benefits and by one-half the
amount by which AGI exceeds $7,500 (single), $10,000 (joint), or $5,000
(married filing separately).
To calculate, first determine the base amount and subtract the nontaxable
social security benefits. The resultant number will be half of the required
AGI excess. Then multiply the resultant number by two and add it to the
appropriate AGI amount.
a. Base amount of $5,000 minus $1,000 nontaxable benefits = $4,000 x 2 =
$8,000 + $7,500 AGI lower limit = $15,500. For this example, the credit for
the elderly will be zero when AGI reaches $15,500.
b. Base amount of $5,000 minus $0 nontaxable benefits = $5,000 x 2 =
$10,000 + $10,000 AGI lower limit = $20,000.
c. Base amount of $7,500 minus $3,000 nontaxable benefits = $4,500 x 2 =
$9,000 + $10,000 AGI lower limit = $19,000.
Difficulty: 3 Hard
EA: No
49. Assuming that an AGI limitation does not apply, what amounts of credit for the
elderly or the disabled would be permitted in each of the instances in Problem 48?
Answer:
The credit for the elderly or the disabled is equal to 15% of the allowable
base amount. Since the AGI limit is assumed not to apply, the allowable
amount for this problem is the base amount ($7,500 joint return where both
qualify, $5,000 single return or joint where only one spouse qualifies, or
$3,750 for married filing separately), reduced by the amount of nontaxable
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Social Security benefits. The credit will then be 15% of the resultant
allowable amount.
a. Base amount of $5,000 minus $1,000 nontaxable benefits = $4,000 x .15 =
$600 credit for the elderly or the disabled.
b. Base amount of $5,000 minus $0 nontaxable benefits = $5,000 x .15 = $750
credit for the elderly or the disabled.
c. Base amount of $7,500 minus $3,000 nontaxable benefits = $4,500 x .15 =
$675 credit for the elderly or the disabled.
Difficulty: 3 Hard
EA: No
50. In each of the following cases, certain qualifying education expenses were paid
during the tax year for individuals who were the taxpayer, spouse, or dependent. The
taxpayer has a tax liability and no other credits. Determine the amount of American
opportunity tax credit (AOTC) and/or lifetime learning credit that should be taken in each
instance.
a) A single individual with modified AGI of $32,900 and expenses of $3,400 for a
child who is a full-time college freshman.
b) A single individual with modified AGI of $44,500 and expenses of $3,800 for a
child who is a full-time college junior.
c) A couple, married filing jointly, with modified AGI of $79,300 and expenses of
$8,000 for a child who is a full-time graduate student.
Answer:
a. The AOTC is $2,350 (100% of the first $2,000 and 25% of the remaining
$1,400). Lifetime learning credit is $680 ($3,400 x 20%). The AGI
limitations do not apply. Thus, the $2,350 AOTC should be taken.
b. The AOTC is $2,450 (100% of the first $2,000 and 25% of the remaining
$1,800). Lifetime learning credit is $760 ($3,800 x 20%). The AGI
limitations do not apply. Thus, the $2,450 AOTC should be taken.
c. The AOTC is only permitted in the first four years of college education so
only lifetime learning credit would apply. The lifetime learning credit is 20%
of $8,000 or $1,600. Since AGI limitations do not apply, the total credit that
may be claimed is $1,600.
Difficulty: 3 Hard
EA: Yes
51. Walt and Deloris have two dependent children, Bill and Tiffany. Bill is a freshman
at State University and Tiffany is working on her graduate degree. The couple paid
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qualified expenses of $3,900 for Bill (who is a half-time student) and $7,800 for Tiffany.
What are the amount and type of education tax credits that Walt and Deloris can take,
assuming they have no modified AGI limitation?
Answer:
The American opportunity tax credit (AOTC) is available for students in
their first four years of study who are attending at least half-time.
Therefore, the expenses for Bill are allowed for the AOTC, resulting in a
credit of $2,475. Tiffany is not eligible for the AOTC since she is past her
first four years of postsecondary education. The lifetime learning credit is
20% of up to $10,000 of qualified expenses incurred for study at any
postsecondary level. Thus, Tiffany’s expenses are eligible for a lifetime
learning credit of $1,560. Although Bill also qualifies for a lifetime learning
credit, the AOTC is greater. Both credits cannot be taken for the same
expenses. Thus, Walt and Deloris should claim an AOTC of $2,475 for Bill
and a lifetime learning credit of $1,560 for Tiffany, for a total of $4,035.
Difficulty: 3 Hard
EA: Yes
52. Use the information in Problem 51. What education tax credits are available if Walt
and Deloris report modified AGI of $110,300? Does your answer change if Tiffany is
taking one class a semester (is less than a half-time student) and not taking classes in a
degree program? Why or why not?
Answer:
Since the couple’s modified AGI is less than the lower threshold for the
American opportunity tax credit (AOTC) of $160,000, the AGI limits do not
affect the AOTC for Bill.
The lower threshold for the lifetime learning credit for married filing jointly
however, is $110,000 and completely phases out at $130,000, and therefore,
the credit for Tiffany must be phased out. The fact that Tiffany is not in a
degree program or is attending less than half-time does not affect the answer
since these are not limitations for the lifetime learning credit (although both
are limitations of the AOTC). The credit after phase-out is $1,537 calculated
as follows: $1,560 x [($130,000- $110,300)/$20,000] = $1,537.
Walt and Deloris would take the same amount of AOTC as #51 but the
lifetime learning credit would be limited to only = $1,537.
Difficulty: 3 Hard
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EA: Yes
53. In 2016, Jeremy and Celeste who file a joint return, paid the following amounts for
their daughter, Alyssa, to attend the University of Colorado, during academic year 2016-
2017. Alyssa was in her first year of college and attended full-time:
Tuition and fees (for fall semester 2016) $1,950

Tuition and fees (for spring semester 2017) 1,000
Books 600
Room and board 1,200
The spring semester at University of Colorado begins in January. In addition to the
above, Alyssa’s uncle Devin sent $800 as payment for her tuition directly to the
University. Jeremy and Celeste have modified AGI of $165,000. What is the amount of
qualifying expenses for purposes of the American opportunity tax credit (AOTC) in tax
year 2016? What is the amount of the AOTC that Jeremy and Celeste can claim based on
their AGI?
Answer:
Qualifying expenses for the AOTC total $4,350 ($1,950 + $1,000 + $600 +
$800). Qualifying expenses do not include amounts paid for room and board.
Since Jeremy and Celeste’s modified AGI exceeds $160,000, their AOTC is
$1,875, calculated as follows:
[($180,000 - $165,000)/20,000 x $2,500] = $1,875.
Difficulty: 3 Hard
EA: Yes
54. Jenna paid foreign income tax of $1,326 on foreign income of $8,112. Her
worldwide taxable income was $91,400, and her U.S. tax liability was $23,000. What is
the amount of foreign tax credit (FTC) allowed? What would be the allowed FTC if
Jenna had paid foreign income tax of $2,400 instead?
Answer:
The amount of foreign tax credit is limited to the lesser of foreign tax paid or
[(foreign-source taxable income / worldwide taxable income) x U.S. tax
liability]
In this case, the limitation calculation is ($8,112 / $91,400) x $23,000 = $2,041.

Thus, the amount of foreign tax credit is equal to the $1,326 foreign tax paid,
since it is less.
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If the amount of foreign income tax paid had changed to $2,400, the
limitation calculation above would be less than the tax paid and thus, the
allowed foreign tax credit would be limited to $2,041.
Difficulty: 3 Hard
EA: No
55. Determine the amount of child tax credit in each of the following cases.
a) A single parent with modified AGI of $43,400 and two children.
b) A single parent with modified AGI of $77,058 and three children.
c) A married couple with modified AGI of $107,933 and one child.
Answer:
A taxpayer is entitled to a $1,000 credit for each qualifying child unless
limited by modified AGI. The credit is reduced by $50 for each $1,000, or
fraction thereof, by which modified AGI exceeds $110,000 (married), $75,000
(single), or $55,000 (married filing separately).
a. $2,000. The modified AGI limits do not apply.
b. $2,850. Without regard to the limitation, the person is entitled to a child
tax credit of $3,000. However, modified AGI exceeds the limitation by $2,058
($77,058 - $75,000). Thus, there are three $50 reductions.
c. $1,000. The modified AGI limits do not apply.
Difficulty: 3 Hard
EA: Yes
56. Determine the retirement savings contributions credit in each of the following cases.
a) A married couple filing jointly with modified AGI of $37,500 and an IRA
contribution of $1,600.
b) A married couple filing jointly with modified AGI of $58,000 and an IRA
c) A head of household taxpayer with modified AGI of $33,000 and an IRA
d) A single taxpayer with modified AGI of $12,000 and an IRA contribution of
$2,300.
Answer:
a. $320 ($1,600 x .2)
b. $150 ($1,500 x .1)
c. $200 ($2,000 x .1)
d. $1,000 ($2,000 x .5); maximum contribution is $2,000.
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EA: Yes
57. Niles and Marsha adopted a little boy (a U.S. citizen). They paid $14,500 in 2015
for adoption-related expenses. The adoption was finalized in early 2016. Marsha
received $3,000 of employer-provided adoption benefits. For question (a) assume that
any adoption credit is not limited by modified AGI or by the amount of tax liability.
a. What amount of adoption credit, if any, can Niles and Marsha take in 2016?
b. Using the information in (a), assume that their modified AGI was $205,000 in
2016. What amount of adoption credit is permitted in 2016?
Answer:
In general, a credit is allowed for 100% of adoption expenses (minus any
reimbursements) up to a maximum of $13,460 per child. In this case, all of
the expenses are incurred in the year before the adoption became final. Pre-
final expenses are deductible in the year following payment. In addition, the
total adoption expenses are $14,500, which exceeds the maximum.
Therefore, the maximum allowed amount of $13,460 should be used to
calculate the credit in 2016, the year the adoption was finalized.
a. $ 10,460 of credit is allowed for year 2016 – the maximum amount allowed
of $13,460 minus the $3,000 reimbursement from Marsha’s employer.
b. The year 2016 preliminary credit of $13,460 would be further limited to
$9,655 as follows: [($241,920- $205,000) / $40,000] x $10,460 = $9,655.
Difficulty: 3 Hard
EA: No
58. Determine the amount of Earned Income Credit in each of the following cases.
Assume that the person or persons is/are eligible to take the credit. Calculate the credit
using the formulas.
a) A single person with earned income of $7,554 and no qualifying children.
b) A single person with earned income of $21,500 and two qualifying children.
c) A married couple filing jointly with earned income of $29,190 and one
qualifying child.
Answer:
a. $506; no phaseout.
b. $5,572 – [($21,500-$18,190) x .2106] = $4,875.
c. $3,373 – [($29,190 - $23,740) x .1598] = $2,502.
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Solutions Manual
Difficulty: 3 Hard
EA: Yes
Tax Return Problems

The solutions to the chapter tax return problems can be found on the online learning
center: www.mhhe.com/cruz2016.
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10th Edition Cruz Solutions Manual

1. A taxpayer has $2,000 of qualified employment-related expenses paid on behalf of

Employment-related expenses are limited to $3,000 if there is one qualifying

4. A taxpayer maintains a household and is entitled to a dependency exemption for an

8. Jerome is single and cannot be claimed by anyone as a dependent. He is a student at a

11. Explain how the foreign tax credit limitation works.

Topic: Adoption Credit

reduce a taxpayer’s tax liability to zero but cannot be refunded, even if it

21. Briefly explain the purpose of the premium tax credit.

Topic: Credit for the Elderly or the Disabled

Topic: Education Credits

Year 2015 $6,000

43. Which of the following credits is never a refundable credit?

44. Which of the following statements is incorrect?

Tuition and fees (for fall semester 2016) $1,950

In this case, the limitation calculation is ($8,112 / $91,400) x $23,000 = $2,041.

Learning Objective: 09-06

Tax Return Problems

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