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Tax Credits on 1040 to Reduce Tax Liability
Assessment 5
Overview
Determine eligibility for available tax credits and complete an official worksheet for each credit, to demonstrate eligibility.Note: Completing a tax form requires specific steps that need to be executed in a sequence. The assessments in this course are presented in sequence and must be completed in order. Incorrect entries in previous assessments will result in incorrect entries in future assessments. Do not complete Assessment 5 until you have submitted and received faculty feedback for Assessment 4.
Tax credits work to lower taxpayer liability rather than provide refund incentives. A tax credit is subtracted directly from the taxpayer’s tax obligation, providing equal relief to all taxpayers. This can make the credit more valuable than a deduction taken during the filing process.
Tax Credits on 1040 to Reduce Tax Liability
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By successfully completing this assessment, you will demonstrate your proficiency in the following course competencies and assessment criteria:
• Competency 1: Analyze the background of the federal income tax system.
o Interpret official rules and instructions to record correct entries on tax forms.• Competency 2: Analyze the basics of individual income tax return preparation.o Analyze tax rules to complete tax credit worksheets to prove eligibility.o Apply laws and rules to correctly enter data on Schedule A.o Apply rules and tax tables to record the correct tax owed on the 1040.o Correctly calculate the amount of a refund on the 1040.
Context
“When a new source of taxation is found it never means, in practice, that the old source is abandoned. It merely means that the politicians have two ways of milking the taxpayer where they had one before.” — Henry Louis Mencken, one of the most influential American writers of the early twentieth century.
Politicians have a penchant for finding ways for doing one of two things:
• Enacting tax credits for the benefit of individual taxpayers as a means of putting more money in taxpayer pockets to stimulate the economy.• Enacting tax credit legislation for the benefit of specific groups or industries in the business sector.
The hope is that businesses will take the additional monies and reinvest them in the business for the benefit of the economy.
There are credits for foreign taxes paid, child and dependent care expenses, and for the elderly or disabled; credits for education, retirement savings contributions, and residential energy; and child tax credit, adoption, retirement savings, and earned income credits.
Tax Credits on 1040 to Reduce Tax Liability
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Reference
Quotegarden.com. (n.d.). Quotations about taxes. Retrieved from http://www.quotegarden.com/taxes.html
Question to Consider
To deepen your understanding, you are encouraged to consider the questions below and discuss them with a fellow learner, a work associate, an interested friend, or a member of the business community.
• How do tax credits directly benefit an individual taxpayer?• Which is more advantageous: a deduction or a tax credit?• What can you do if you have already filed your tax return and you discover you are eligible for a tax credit?
Resources
Required Resources
The following resources are required to complete the assessment.
Access the following resources by clicking the links provided. Please note that URLs change frequently. Permissions for the following links have been either granted or deemed appropriate
IRS.gov is the homepage for the federal IRS Web site. Use the tabs at the top of the page to navigate the site. The Interactive Tax Assistant and Tax Trails are tools that walk you through a series of questions to find answers to tax questions. Download the appropriate forms and publications from the IRS Web site to complete this assessment.
• IRS.gov. (n.d.). Retrieved from http://www.irs.gov/• IRS. (n.d.). Interactive tax assistant. Retrieved from http://www.irs.gov/uac/Interactive-Tax-Assistant-(ITA)-1• IRS. (n.d.). Tax trails. Retrieved from www.irs.gov/Individuals/Tax-Trails%2d%2d%2dMain-Menu
The following optional resources are provided to support you in completing the assessment or to provide a helpful context.
Click the links provided below to view the following multimedia pieces:
Tax Credits on 1040 to Reduce Tax Liability
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FORM 1040: TAX CREDITS
This final section of Form 1040 incorporates a variety of tax credits designed to reduce tax liability for certain taxpayer groups. The unique aspect of these credits is that they are subtracted directly from the total federal tax liability of the taxpayer(s). The affect of these credits can reduce or eliminate the taxpayer’s financial obligation.If a taxpayer is eligible for any/all of the credits, additional tax forms must be completed and filed with the Form 1040.
The primary forms are Form 1116 ( Foreign Tax Credit), Form 2441 (Credit for Child and Dependent Care Expenses), Form 8863 (Education Credits), Form 8880 (Credit for Retirement Savings Contributions, Form 8839 (Qualified Adoption Expenses), and Schedule EIC (Earned Income Credit).Licensed under a Creative Commons Attribution 3.0 License.
Library Resources
• J. K. Lasser Institute. (2015). Your income tax 2015: For preparing your 2014 tax return. Hoboken, NJ: Wiley.
• J. K. Lasser Institute. (2014). Your income tax 2014: For preparing your 2013 tax return. Hoboken, NJ: Wiley.
• Galletta, P. Z. (2014). Taking credit for your work: A roundup of federal tax credits available to individuals. The CPA Journal, 84(12), 17–23.
• Crawford, C., & Crawford, C. (2014). 2014 individual tax landscape. The CPA Journal, 84(12), 6–8.
• Baldwin, D. R., Carlton, L. H., Fava, K. L., Haim, D, Horn, J., Morrow, S., . . . Zidik, D. J., Jr. (2014). Individual taxation: Digest of recent developments: Part II. The Tax Adviser, 45(4), 274–280.
Internet Resources
Access the following resources by clicking the links provided. Please note that URLs change frequently. Permissions for the following links have been either granted or deemed appropriate for educational use at the time of course publication.
• lynda.com. (n.d.). Income tax fundamentals: Accounting tutorials. Retrieved from http://www.lynda.com/Business-Accounting-tutorials/Income-Tax-Fundamentals/188210-2.html
• IRS. (n.d.). IRS videos. https://www.youtube.com/user/irsvideos.
o The IRS has a channel on YouTube devoted to income tax information in a video format. There are numerous videos available to help you with the course assessments. Videos are available with closed captions and in ASL and multilingual versions. You can search this channel by topic.
Cruz, A., Deschamps, M., Niswander, F., Prendergast, D., Schisler, D., & Trone, J. (2016). Fundamentals of taxation 2016 [with taxation software] (9th ed.). New York, NY: McGraw-Hill.o Chapter 9, “Tax Credits (Lines 47 through 54 and Line 64A, Form 1040).”
Tax Credits on 1040 to Reduce Tax Liability
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Assessment Instructions
Note: The assessments in this course are presented in sequence and must be completed in order. In Assessments 2–5, you will work step-by-step toward completing a 1040 tax return and all the necessary related forms, based on a provided scenario. Do not complete Assessment 5 until you have submitted and received faculty feedback for Assessment 4.
This assessment will require significant research and critical thinking to complete each required form successfully. An incorrect entry on one form will create incorrect entries in other forms.
There are two parts to this assessment. Be sure to complete both parts and submit the necessary materials.• Part 1: Determine eligible tax credits by completing official worksheets.• Part 2: Complete Schedule A and the 1040.
Preparation
• Read the information provided in the scenario below.• Download the following tax forms and instructions from IRS.gov, linked in the Resources under the Required Resources heading:o 1040.o Schedule A.o 2441.o 3800.o 5884.o 6251.o 8826.
Part 1Use the information in the scenario, on IRS.gov, and in the interactive IRS tools to interpret official rules and instructions to determine available tax credits.
Tax Credits on 1040 to Reduce Tax Liability
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• Complete an official worksheet for each tax credit to demonstrate eligibility.• Submit each tax credit worksheet.
Part 2Use the information in the scenario, on IRS.gov, and in the interactive IRS tools to Interpret official rules and instructions to complete the following:
• Complete Schedule A.• Enter data from Schedule A into the 1040.• Apply the rules and tax tables to calculate the tax owed and the amount of any refund.• Submit Schedule A and the completed 1040.
Scenario—Use form for 2016
• Jacob and Taylor Weaver, ages 45 and 42 respectively, are married and are filing jointly in 2016.o They have three children, Ashley, age 9; Patrick, age 6; and John, age 18.o Social Security numbers are: Jacob, 222-33-4444; Taylor, 555-66-7777; Ashley, 888-99-1234; Patrick, 789-56-4321; John, 123-45-6789.
Jacob is self-employed as a contractor.o 2016 net income: $133,000.o Clients owe him a total of $53,000 for work completed in 2016.o 2016 estimated tax payments: $25,000.
• Taylor works part-time as a paralegal.o She earned $26,000 in 2016.o Federal income withholding: $2,350.• Weavers $350 paid with their 2015 state tax return.• Jacob and Taylor bought their house in 2016.o Home mortgage interest: $7,246.o Property tax: $2,230.
• Charities: $4,500.• $435 to rent a moving truck.• $8,000 to put new siding on the house.• $11,600 for child care expenses ($5,800 for each child).o It was paid to Lil Tigers Daycare, 1115 S. Garrison St., Muncie, IN 47305 (EIN 98-7654321).• Taylor is a part-time student at Ball State University in Muncie.
o She received a 1098-T indicating tuition and fees for 2016 in the amount of $6,011.• Health insurance for the family, through Taylor’s job, cost $6000 for all 12 months of 2016.o They paid deductibles and co-payments of $550.• Dental insurance for the family was $1200.• Car insurance for the family car was $600.
Tax Credits on 1040 to Reduce Tax Liability
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