# SM06 - Solutions for Questions and Problems Chapter 6 137...

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Solutions for Questions and Problems – Chapter 6 137 CHAPTER 6 CREDITS AND SPECIAL TAXES Group 1 - Multiple Choice Questions 1. D (Section 6.1) 11. C (Section 6.4) 2. C (Section 6.1) 12. C (\$100,000/300,000 3. C (Section 6.2) x \$90,000) (Section 6.5) 4. D (Section 6.3) 13. C (Section 6.6) 5. C (Section 6.4) 14. A (Section 6.6) 6. D (Section 6.4) 15. C (Section 6.6) 7. E (Section 6.4) 16. C (Section 6.6) 8. A (Section 6.4) 17. E (Section 6.8) 9. C (Section 6.4) 18. E \$35,000 each (Section 6.10) 10. D (Section 6.4) 19. B (Section 6.10) Group 2 - Problems 1. The earned income credit is designed to provide financial relief to low income taxpayers. Taxpayers may receive a refund for the credit even though they owed no tax to the government. (Section 6.2) 2. Earned income credit: Amount from Earned Income Table for earned income of \$15,100 \$4,470 Amount from Earned Income Table for AGI of \$15,200 4,449 Lesser of two amounts \$4,449 Diane must compute the credit using both earned income and AGI because her AGI exceeds the threshhold amount of \$14,810. 3. Earned income credit See Schedule EIC on page 139. (Section 6.2) 4. a. \$653 = \$2,250 (student income limitation) x 29%. b. \$1,320 = \$6,000 (income limitation) x 22%. c. \$1,800 = \$6,000 x 30%. (Section 6.3) 5. Qualified expenses \$3,000 For two dependents, lesser of \$6,000 maximum or actual \$3,000 Credit percentage from table 33% Credit allowed \$ 990 (Section 6.3) 6. a. \$5,429 b. \$13,715 = 26% x (\$80,300 + 67,500 – 25,000 – 7,500 – 62,550) c. \$13,715 , the larger of the regular tax or the alternative minimum tax. (Section 6.8) 7. The provision is designed to prevent taxpayers from transferring income earning assets to a minor child in order to take advantage of the child’s lower tax rate. Assuming the child has a relatively small amount of taxable income, the child’s tax rate will be lower due to the progressive tax rate structure. (Section 6.9) 8. a. \$2,800 = \$4,500 – 850 (greater of standard deduction of \$850 or investment expenses of \$250) – 850. b. \$420 = \$7,469 (tax on \$52,000 + 2,800) – \$7,049 (tax on \$52,000) c. \$505 = \$420 + 85 (tax at an assumed rate on regular taxable income of \$850). Regular taxable income is \$850 (\$4,500 – 850 (standard deduction) – 2,800 (net unearned income)). (Section 6.9) 137

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138 Chapter 6 – Credits and Special Taxes 9. a. \$1,440 = \$6,000/10,000 x \$2,400. b. \$960 = \$4,000/10,000 x \$2,400. (Section 6.9) 10. a. Paul Cindy Paul’s salary (50% each) \$22,500 \$22,500 Dividends on Paul’s stock 4,000 0 Cindy’s salary (50% each) 13,500 13,500 Interest income (50% each) 750 750 Total income \$40,750 \$36,750 b. Paul Cindy Paul’s salary (50% each) \$22,500 \$22,500 Dividends on Paul’s stock (50% each) 2,000 2,000 Cindy’s salary (50% each) 13,500 13,500 Interest income (50% each) 750 750 Total income \$38,750 \$38,750 (Section 6.6) 11. When 60,000 units have been sold, the credit begins to be phased out. The Prius credit is cut in half at the beginning of October, 2006 by this phase out. 12. a. Mike’s credit would be \$250, 10% of the cost. b. 13. a. 10%, up to a lifetime credit of \$500. b. c. \$100 . At that time, he has reached his lifetime credit limit of \$500. d. \$50 , the limit for credits for this type of energy efficient equipment. 14. Publication 555, Community Property, is the source the student should find. 15. See the answer to Problem 5. The purpose of this problem is to familiarize the students with the “Fill-in Forms” available from the IRS on the Internet. As of the date of this book, the forms do not do calculations, so students should be told to have a calculator handy. After the form is filled in, it can be saved to a computer by using the “document rights” feature.
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## This note was uploaded on 09/13/2010 for the course ACCOUNTING 45089 taught by Professor Kenn during the Spring '10 term at University of Phoenix.

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SM06 - Solutions for Questions and Problems Chapter 6 137...

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