Prior to the effect of the tax credits, Justin's regular income tax liability is $200,000 and his tentative AMT is $195,000. Justin has the following credits:
Child tax credit $1,000
Adoption expenses credit 5,000
Calculate Justin's tax liability after credits.
A) $190,000.
B) $194,000.
C) $195,000.
D) $200,000.
E) None of the above.

Question

Quizplus · Accepted Answer

Justin's regular income tax liability is $200,000 and his tentative AMT is $195,000. However, he has two tax credits: child tax credit of $1,000 and adoption expenses credit of $5,000. 
The child tax credit is a non-refundable credit, which means it can only reduce Justin's regular income tax liability and not his tentative AMT. Therefore, his regular income tax liability is reduced by $1,000 to $199,000. 
The adoption expenses credit is also a non-refundable credit, but it can be used to reduce both regular income tax and AMT. Therefore, Justin can use the full $5,000 to reduce his tentative AMT to $190,000. 
Now, comparing his regular income tax liability ($199,000) and his tentative AMT ($190,000), Justin's tax liability after credits is the higher of the two, which is $199,000.

Prior to the Effect of the Tax Credits, Justin's Regular