14-1 ©2008 Prentice Hall, Inc.. 14-2 ©2008 Prentice Hall, Inc. SPECIAL TAX COMP METHODS, CREDITS & PAYMENT (1 of 2) Alternative minimum tax Self-employment

14-1©2008 Prentice Hall, Inc.

©2008 Prentice Hall, Inc. 14-2

SPECIAL TAX COMP SPECIAL TAX COMP METHODS, CREDITS & METHODS, CREDITS &

PAYMENTPAYMENT (1 of 2) (1 of 2)

Alternative minimum taxSelf-employment taxOverview of tax creditsPersonal tax creditsForeign tax creditGeneral business credits


SPECIAL TAX COMP SPECIAL TAX COMP METHODS, CREDITS & METHODS, CREDITS &

PAYMENTPAYMENT (2 of 2) (2 of 2)

Refundable creditsPayment of taxesTax planning considerationsCompliance and procedural

considerations


Alternative Minimum TaxAlternative Minimum Tax

Computational aspectsTax preference itemsAMT adjustments


Computational Aspects(1 of 3)

Taxable income before NOL+ Tax preference items+ Personal & dependency exemptions+ Standard deduction (if applicable)+/- Adjustments to taxable income

Alternative minimum taxable income



Alternative minimum taxable income- AMT exemption

Alternative minimum tax basex Tax rate 26% on 1st $175K, 28% on excess Tentative minimum tax- Nonrefundable personal credits- Regular tax AMT due (if any)



AMT exemption$62,550 MFJ, $42,500 single,

$31,275 MFSReduced by 25% of AMTI in excess

of threshold amount$150,000 MFJ, $112,500 single, &

$75,000 MFS


Tax Preference Items

Includes excess of accelerated depreciation over S/L depreciation

Tax-exempt interest on certain private activity bonds

Excess % depletion over adjusted basis of property

Exclusion of gain on sale of certain small business stock under §1202


AMT Adjustments(1 of 3)

AMI itemized deductionsCasualty & theft loss in excess 10% of AGICharitable contributionsMedical expenses in excess of 10% of AGIQualified housing interestEstate tax deduction on IRDGambling losses



AMT adj. due to timing differencesFor personal property placed in service

after 1998Difference between MACRS deduction and

amount determined by using 150% DBFor real property placed in service

after 1986 and before 1999



AMT CreditsAMT foreign tax creditChild and dependent care creditCredit for elderly and totally disabledAdoption expense creditChild tax creditHope and lifetime learning credits


Self-Employment (SE) TaxSelf-Employment (SE) Tax(1 of 3)(1 of 3)

Individuals subject to SE tax on amount of net earnings from self-employment

Computing the taxNet earnings self-employment earnings

≥$400 subject to SE taxMultiply SE income x 92.35% (100% -

7.65%) to determine net SE earnings



Computing SE tax (continued)SE tax 15.3%

Consist of 12.4% OASDI and 2.9% Medicare

OASDI for 2007 is $97,500No limit on the Medicare portion of SE

tax

½ of SE tax deductible for AGI



Self-employment incomeNet earnings from sole

proprietorshipDirector’s feesTaxable research grantDistributive share of partnership

income plus guaranteed payments


Overview of Tax CreditsOverview of Tax Credits

Use and importance of tax creditsUsed by Federal gov’t for tax policy

Value of a credit vs. a deductionCredit is $ for $ reduction of tax liabilityDeduction x MTR = tax savings

Classification of creditsRefundableNonrefundable


Personal Tax CreditsPersonal Tax Credits(1 of 6)(1 of 6)

Child tax credit$1,000 for each qualifying child <17Phased out at $50 per $1,000 over

threshold amount$110K MFJ; $75K single; $55K MFS

Child and dependent care credit20% - 35% of eligible care expenses to

enable taxpayer to be employedUp to $3K ($6K) expenses for 1 (2+) child



Tax credit for the elderly and disabledFor low-income individuals ≥ 65 who

retired due to permanent total disability15% of $5K ($7.5K if both spouses ≥ 65)

reduced by certain amountsAdoption credit

Up to $11,390 credit in adoption yearPhased out between $170,820 – 210,820



Hope scholarship creditUp to $1,650 credit for tuition and

related expenses per studentNot books or room and board

Available for 1st two years per student100% of 1st $1,100 plus 50% 2nd $1,100Must be half-time studentEligible expenses reduced by amounts

received under other Code sections



Hope scholarship credit (continued)Phase out between $94K-$114K MFJ;

$47K-$57K for other taxpayersLifetime learning credit

Less restrictive than Hope credit20% of 1st $10K of eligible expenses

NOT per studentOther rules same as Hope credit



Residential energy credits$500 lifetime credit

10% of cost of qualified energy efficiency improvements plus

Residential energy property expenditures for principal residence

Residential energy efficiency credit



Qualified retirement savings contributions creditCredit for lower-income taxpayersCredit in addition to exclusion or

deduction otherwise allowableNonrefundable personal credits limit

Nonrefundable credits cannot exceed regular tax liability plus TMT for year


Foreign Tax CreditForeign Tax Credit(1 of 2)(1 of 2)

U.S. citizens, resident aliens, and U.S. corps taxed on worldwide income

FTC permits U.S. citizens and residents to avoid double taxation

Directly reduces U.S. tax liability


Foreign Tax CreditForeign Tax Credit(2 of 2)(2 of 2)

FTC limited to lesser of Foreign tax actually paid OR

foreign taxable income U.S. tax

worldwide taxable income x liability


General Business CreditsGeneral Business Credits(1 of 5)(1 of 5)

Combined for purposes of computing overall dollar limitationExcess credits carried back 1 year and

forward 20 years applied on FIFO methodLimited to net income tax less greater of

TMT or 25% of net regular tax liability in excess of

$25K



Tax credit for rehabilitation expenditures10% for structures placed in service before

1936 and 20% if certified historic structures

Business energy credits10% of energy-conserving properties30% for solar and fuel cell property



Credit for employer-provided child care25% of qualified child care expenses plus10% of child care resources and referral

expendituresMax $150K credit

Cannot claim both credit and deduction



Work opportunity credit40% of 1st $6K of qualified wages paid to

employees hired from 1 of 9 targeted groups

Disabled access creditFor small businesses

Gross receipts < $1M or have < 30 employees50% of eligible expenses in excess of $250

up to $10,250



Credit for research activities20% of incremental expenditures plus20% of basic research expenditures20% of energy research expensesNo deduction for creditable

expenditures


Refundable CreditsRefundable CreditsEarned Income CreditEarned Income Credit

Eligibility rules:Earned income and AGI thresholds

metPrincipal place of abode in U.S. for >

½ of tax yearIndividual between 25-64 years oldIndividual not a dependent of another

taxpayer for tax year


Payment of TaxesPayment of TaxesWithholding of Taxes (1 of 2)Withholding of Taxes (1 of 2)

Withholding of taxesEmployers required to withhold

federal income taxes and FICA tax from employee compensation

Special rules provided for more than one employer during same year

Exemptions for certain employment activities such as ministers


Payment of TaxesPayment of TaxesWithholding of Taxes (2 of 2)Withholding of Taxes (2 of 2)

Withholding allowances and methodsEvery employee must file an Employee’s

Withholding Allowance Certificate Form W-4Estimated tax payments

Calendar year taxpayers quarterly payments due April 15, June 15, Sept 15 of the current year, and January 15 of following year


Payment of TaxesPayment of TaxesEstimated Tax Payments (1 of 2)Estimated Tax Payments (1 of 2)

Estimated tax paymentsCalendar year taxpayers quarterly

payments due April 15, June 15, Sept 15 of the current year, and January 15 of following year


Payment of TaxesPayment of TaxesEstimated Tax Payments (2 of 2)Estimated Tax Payments (2 of 2)

Required estimated tax paymentsAvoid underpmt of estimated tax penalty90% of current tax liability, or 100% of last year’s liability

150% if AGI > $150KNo penalty if underwitheld by <$1K or

individual had $0 tax liability in prior year


Tax Planning Tax Planning ConsiderationsConsiderations

Avoiding Alternative Minimum TaxAvoiding the underpayment

penalty for estimated taxCash-flow considerationsUse of general business creditForeign tax credits and foreign

earned income exclusion


Compliance and Compliance and Procedural Procedural

ConsiderationsConsiderationsAMT filing procedures

Form 6251 or 4626Withholding and estimated

payments Form W-2 and 1040ES

General Business Credit Form 3800

Personal tax creditsSchedules EIC, Schedule R, Form 1116,

Form 2441, Form 8863

Comments or questions about PowerPoint Slides?Contact Dr. Richard Newmark atUniversity of Northern Colorado’s

Kenneth W. Monfort College of [email protected]

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14-1 ©2008 Prentice Hall, Inc.. 14-2 ©2008 Prentice Hall, Inc. SPECIAL TAX COMP METHODS, CREDITS & PAYMENT (1 of 2) Alternative minimum tax Self-employment