Basic Tax Credits to Know for the Tax Preparer Exam

The tax code contains a dizzying array of tax credits. Most of them are related to business activities, but there are several tax credits for individuals. Some of these are applicable to limited situations, such as taxpayers incurring costs for higher education or energy efficient home improvements. However, there are common credits that every paid tax preparer professional must consider for any tax return with dependent children.

In some cases a tax credit is only useful for applying to a tax liability. This increases a taxpayer's refund only to the extent that the credit covers the tax calculation; excess tax payment or withholding is refunded. But a Registered Tax Return Preparer course conveys credits that are refundable even when they exceed tax liability.

The Earned Income Tax Credit does not require dependent children, but taxpayers with higher income are entitled to the credit when they have a qualifying child. This credit has been troubling in the past for two opposing reasons. First, many taxpayers fail to obtain the credit despite qualifying for it. Because they lack the training from Registered Tax Return Preparer hours, they are not aware of eligibility for the EITC or how to complete the required forms.

The other issue with the EITC is that it has been a cause for abuse when claimed by ineligible taxpayers. Consequently, standards imposed by Registered Tax Return Preparer ethics demand great care in determining eligibility for the EITC. The amount of this credit is based upon earned income from wages or self-employment. Low-income earners are most likely to qualify. However, taxpayers with higher incomes are entitled to the credit if they have children who lived with them for at least half the year.

The EITC is a refundable credit even if it exceeds total tax liability. The Child Tax Credit is nonrefundable but lower-income taxpayers may qualify for the refundable Additional Child Tax Credit. Any taxpayer with income below a specified threshold – that is based upon filing status – is entitled to a maximum Child Tax Credit of $1,000 for any child claimed as a dependent who is under age 17.

The other common credit studied for the tax preparer exam is the Child and Dependent Care Credit. This is a nonrefundable credit available to taxpayers who work and have children under age 13. The credit comprises a percentage of the costs for childcare. Married taxpayers must both work outside the home in order to qualify for the Child and Dependent Care Credit.

Special tax forms listing specific information are required for claiming the Child and Dependent Care Credit. Childcare provider names, addresses, and tax ID numbers are reported. The IRS will deny the credit when these details are lacking.

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Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.