7090888-Solutions - 12-4 2006 Comprehensive Volume/Solutions CHAPTER 12 DISCUSSION QUESTIONS 1 A taxpayer whose marginal tax rate is less than 25

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12-4 2006 Comprehensive Volume/Solutions CHAPTER 12 DISCUSSION QUESTIONS 1. A taxpayer whose marginal tax rate is less than 25% would be better off taking a credit of 25%. However, if the marginal rate is greater than 25%, a taxpayer would benefit more from taking a deduction. Alternatively, if the item were deductible from AGI (i.e., as an itemized deduction), a benefit would result only if the taxpayer itemized his or her deductions. p. 12-3 and Example 4 2. Refundable credits are payable to the taxpayer even if the amount of the credit (or credits) exceeds the taxpayer’s tax liability. Examples of refundable credits include taxes withheld on wages and the earned income credit. Nonrefundable credits are not refunded if they exceed the taxpayer’s tax liability. Examples of such credits are the general business credit and the tax credit for the elderly or disabled. Some nonrefundable credits, such as the general business credit, are subject to carryover rules if they exceed the amount allowable as a credit in a given year. pp. 12-4, 12-5, and Exhibit 12-1 3. a. Net income tax is the sum of the regular tax liability and the alternative minimum tax reduced by certain nonrefundable tax credits. Tentative minimum tax for this purpose is the tentative minimum tax reduced by the foreign tax credit allowed. Regular tax liability is determined from the appropriate tax table or tax rate schedule, based on taxable income. However, this term does not include certain taxes, such as the alternative minimum tax. Net regular tax liability is the regular tax liability reduced by certain nonrefundable credits, such as the credit for child and dependent care expenses and the foreign tax credit. b. The general business credit is limited to the taxpayer’s net income tax reduced by the greater of: The tentative minimum tax. 25% of net regular tax liability that exceeds $25,000. p. 12-6 4. Unused general business credits are initially carried back one year and are applied to reduce the income tax during that year. Any remaining unused credits are then carried forward for up to 20 years. A FIFO method is applied to the carryback, carryovers, and utilization of credits earned during a particular year. p. 12-6 5. Among the relevant tax issues are the following: Ability to use tax credits currently and the use of suspended credits. pp. 12-4 to 12-7 The impact of the at-risk and passive activity loss rules on the deductibility of the losses and the ability to benefit from the tax credits. Chapter 11
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Tax Credits 12-5 The at-risk amount (how the loan guarantee affects the calculation of the at-risk amount). Chapter 11 Interaction between the at-risk and passive activity loss rules. Chapter 11 Applicability of net operating loss rules that would allow John to benefit from an NOL carryback or carryforward. Chapter 7 6. The tax liability in the year of the premature disposition is increased by the difference
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This note was uploaded on 03/08/2010 for the course ACCT 3500 taught by Professor Smith during the Spring '10 term at Kwantlen Polytechnic University.

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7090888-Solutions - 12-4 2006 Comprehensive Volume/Solutions CHAPTER 12 DISCUSSION QUESTIONS 1 A taxpayer whose marginal tax rate is less than 25

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