Question

Answer the following question based off the IRS website.

1A. What is the American Opportunity Tax Credit and where is it reported on your tax return? What is the lifetime maximum amount that can be claimed for this credit?

B. What is the Lifetime Learning Tax Credit? (2 points) What is the maximum amount that can be claimed for 1 year?

C. If you have your own business, how much of your self-employment tax can be deducted? Where do you report this amount?

D. Where is profit or loss from a farm calculated?

E. Where are Itemized Deductions listed? If you have medical and dental expenses, how much can you include in your itemized deductions if your Adjusted Gross Income is $65,250?

Answer 1

A. The American Opportunity Tax Credit (AOTC) refers to a tax credit for qualified education expenses for a student for the first four years of post-secondary education for American taxpayers. The American Opportunity Tax Credit (AOTC) is a partially refundable tax credit available to help pay for higher education costs among American taxpayers. The credit grants up to $2,500 in tax savings credited toward qualified tuition expenses, school supplies, or other related costs for up to four years of education.

This credit is reported on Form 8863 in the tax return. If you had claimed any amount of this credit in previous years, you'll see how much at the bottom of Form 8863, Page 2.

A tax deduction of up to $4,000 can be claimed for qualified tuition and fees paid. Eligible students can claim 100% of the first $2,000 spent on acquiring materials for school, and another 25% of the next $2,000 in expenses. This means the maximum amount a qualifying student can claim with the AOTC is (100% x $2,000) + (25% x $2,000) = $2,500. In other words, $2,500 worth of credit can be used to reduce the first $4,000 in educational costs.

B.  The lifetime learning credit (LLC) is a provision of the U.S. federal income tax code that allows parents and students lower their tax liability by up to $2,000 to help offset higher education expenses. The LLC is not refundable. So, you can use the credit to pay any taxes you owe, but you won’t receive any of the credit back as a refund.

The amount of the credit is 20% of the first $10,000 of qualified education expenses, or a maximum of $2,000 per tax return per year.

C. Self-employment tax is the imposed tax that a small business owner must pay to the federal government to fund Medicare and Social Security. Self-employment tax is due when an individual has net earnings of $400 or more in self-employment income over the course of the tax year.  Self-employed people who earn less than $400 a year don’t have to pay the tax.

When we start a small business and we do not incorporate or form a partnership, the results of those operations are reported on Schedule C and are filed with Form 1040.

We calculate self-employment tax on Schedule SE and report that amount in the "Other Taxes" section of Form 1040.

D. The profit or loss from a farm is calculated on the income statement prepared and submitted each yearto the Internal Revenue Service.  This is reported on Form 1040, Schedule F: Profit or Loss from Farming.

A farm income statement (sometimes called a profit and loss statement) is a summary of income and expenses that occurred during a specified accounting period, usually the calendar year for farmers. It is a measure of input and output in dollar values. It offers a complete view of the value of what your farm produced for the time period covered and what was theproduction costing like.

E. Itemized deductions are listed on Schedule A of Form 1040.

The list provides for itemizing deductions of Medical and dental expenses (over 10% of AGI).

Therefore, If Average Gross Income is $65250-

The amount that can be included in itemized deduction = 10% of AGI = 10% of $65250 = $6525