CHAPTER TWELVE

HOMEWORK SOLUTIONS

32. a. Thomas is not eligible for the earned income credit because he does not have a
qualifying child and is not between the ages of 25 and 64.
b. Shannon is eligible for the earned income credit because she has a qualifying child. As
her earned income and AGI are below the income level where the earned income credit
begins to phase out ($17,530 in 2013), Shannon will qualify for the maximum earned
income credit.
c. Keith and Susan are not eligible for the earned income credit because they do not have
a qualifying child, and their income exceeds the disqualifying threshold for the credit
that is available when there is not a qualifying child ($19,680 in 2013).
d. Even though Colin does not have a qualifying child, he is eligible for the earned income
credit because he is between 25 and 64 years of age, cannot be claimed as a dependent
on another taxpayers return, and has earnings below the level at which the credit is
completely phased out ($14,340 in 2013).

34. The Jimenez foreign tax credit (FTC) for the year is computed as follows.
FTC = Lesser of:
Foreign tax imposed on $1 million, or
FTC overall limitation = U.S. Federal income tax paid on the overseas profits = 35% x $5
million = $1,750,000
Thus, a current $1 million FTC is allowed. All of the foreign tax payments have been recovered
by Jimenez, so no FTC carryover is created. p. 12-7


36. a. Ann and Bill must claim the adoption expenses credit in 2013 ($4,000 + $11,000, limited
to $12,970), since they paid or incurred qualified adoption expenses prior to the year in
which the adoption was finalized and in the year finalized. In their particular case, they
may take the credit in 2013 for $12,970. The amount of expenses paid in excess of
$12,970 is a nondeductible personal expense. Further, because their modified AGI is less
than $194,580, the amount of the credit otherwise available is not reduced.
b. $11,213 = $12,970 {$12,970 [($200,000 $194,580) $40,000]}.

37. a. Durell and Earline may only claim the child tax credit for their two children, ages 5 years
and 6 months. The full amount of the child tax credit is available for qualifying children
born during the tax year. Although Earlines son from a previous marriage is claimed as a
dependent, he is not eligible for the child tax credit since he is not under age 17. Since
Durell and Earlines combined AGI is below $110,000, their child tax credit is $2,000
($1,000 2).
b. Since Durell and Earlines combined AGI exceeds $110,000, the maximum child tax
credit of $2,000 must be reduced. The credit reduction is computed as $50 for each
$1,000 of AGI or fraction thereof exceeding the threshold amount.
AGI $122,000
Threshold amount (110,000)
Excess $ 12,000

$12,000
$50 = $600 reduction.
$1,000

Durell and Earlines child tax credit is $1,400 ($2,000 maximum credit $600 reduction)
for the year.
39. For two or more children, the maximum expense allowed for purposes of the credit for child and
dependent care expenses is $6,000. However, since the qualifying expenditures are limited to
the earnings of the lesser paid spouse (i.e., $5,200), this amount is used in calculating the credit.
Using the combined AGI of $21,200 ($16,000 + $5,200), the applicable rate for the credit is 31%.
Thus, the credit is $1,612 (31% $5,200).

The fact that the care was provided by Jims mother is of no consequence as she is not Jim or
Mary Jeans child.