CHAPTER 12 TAX CREDITS AND PAYMENTS

1. The calculation of FICA and the self-employment tax both involve two components: the Social Security portion and the Medicare portion, each portion of which is imposed on the same base amounts.

a. True

b. False

2. An expatriate who works in a country with an income tax rate higher than the U.S. rate probably will find the foreign earned income exclusion preferable to the foreign tax credit.

a. True

b. False

3. Certain high­income individuals are subject to three additional Medicare taxes beginning in 2013—on wages, unearned income, and tax credits claimed.

a. True

b. False

4. The additional Medicare taxes assessed on high-income individuals carry differing tax rates depending on the tax base.

a. True

b. False

5. Roger is considering making a $6,000 investment in a venture that its promoter promises will generate immediate tax benefits for him. Roger, who does notanticipate itemizing his deductions, is in the 30% marginal income tax bracket. If the investment is of a type that produces a tax credit of 40% of the amount of the expenditure, by how much will Roger’s tax liability decline because of the investment?

a. $0.

b. $1,800.

c. $2,200.

d. $2,400.

e. None of the above.

6. Ahmad is considering making a $10,000 investment in a venture which its promoter promises will generate immediate tax benefits for him. Ahmad, who normally itemizes his deductions, is in the 28% marginal tax bracket. If the investment is of a type where the taxpayer may claim eithera tax credit of 25% of the amount of the expenditure or an itemized deduction for the amount of the investment, what treatment normally would be most beneficial to Ahmad and by how much will Ahmad’s tax liability decline because of the investment?

a. $0, take neither the itemized deduction nor the tax credit.

b. $2,500, take the tax credit.

c. $2,800, take the itemized deduction.

d. Both options produce the same benefit.

e. None of the above.

.

7. Refundable tax credits include the:

a. Foreign tax credit.

b. Tax credit for rehabilitation expenses.

c. Credit for certain retirement plan contributions.

d. Earned income credit.

e. None of the above.

8. The components of the general business credit include all of the following except:

a. Credit for employer-provided child care.

b. Disabled access credit.

c. Research activities credit.

d. Tax credit for rehabilitation expenditures.

e. All of the above are components of the general business credit.

9. Which of the following best describes the treatment applicable to unused business credits?

a. Unused amounts are carried forward indefinitely.

b. Unused amounts are first carried back one year and then forward for 20 years.

c. Unused amounts are first carried back one year and then forward for 10 years.

d. Unused amounts are first carried back three years and then carried forward for 15 years.

e. None of the above.

10.Molly has generated general business credits over the years that have notbeen utilized. The amounts generated and notutilized follow:

2010	$2,500
2011	7,500
2012	5,000
2013	4,000

In the current year, 2014, her business generates an additional $15,000 general business credit. In 2014, based on her tax liability before credits, she can utilize a general business credit of up to $20,000. After utilizing the carryforwards and the current year credits, how much of the general business credit generated in 2014 is available for future years?

a. $0.

b. $1,000.

c. $14,000.

d. $15,000.

e. None of the above.

11.Which of the following correctlydescribes the tax credit for rehabilitation expenditures?

a. The cost of enlarging any existing business building is a qualifying expenditure.

b. The cost of facilities related to the building (e.g., a parking lot) is a qualifying expenditure.

c. No recapture provisions apply.

d. No credit is allowed for the rehabilitation of personal use property.

e. None of the above.

12.Several years ago, Sarah purchased a structure for $150,000 that was originally placed in service in 1929. In the current year, she incurred qualifying rehabilitation expenditures of $200,000. The amount of the tax credit for rehabilitation expenditures, and the amount by which the building’s basis for cost recovery would increase as a result of the rehabilitation expenditures are the following amounts:

a. $20,000 credit, $180,000 basis.

b. $20,000 credit, $200,000 basis.

c. $20,000 credit, $350,000 basis.

d. $40,000 credit, $160,000 basis.

e. None of the above.

13.Several years ago, Tom purchased a structure for $300,000 that was originally placed in service in 1929. Three and one-half years ago he incurred qualifying rehabilitation expenditures of $600,000. In the current year, Tom sold the property in a taxable transaction. Calculate the amount of the recapture of the tax credit for rehabilitation expenditures.

a. $0.

b. $24,000.

c. $36,000.

d. $48,000.

e. None of the above.

14.Cardinal Corporation hires two persons certified to be eligible employees for the work opportunity tax credit under the general rules (e.g., food stamp recipients), each of whom is paid $9,000 during the year. As a result of this event, Cardinal Corporation may claim a work opportunity credit of:

a. $1,440.

b. $2,880.

c. $4,800.

d. $7,200.

e. None of the above.

15.Black Company paid wages of $180,000, of which $40,000 was qualified wages for the work opportunity tax credit under the general rules. Black Company’s deduction for wages for the year is:

a. $140,000.

b. $164,000.

c. $166,000.

d. $180,000.

e. None of the above.