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C12-C12-11Comprehensive VolumeComprehensive Volume
Chapter 12Chapter 12
Tax Credits and PaymentsTax Credits and Payments
Copyright ©2010 Cengage Learning
Comprehensive Volume
C12-C12-22Comprehensive VolumeComprehensive Volume
Tax Credit VS. Tax DeductionTax Credit VS. Tax Deduction
• Tax benefit received from a tax deduction depends on the marginal tax rate of the taxpayer– Tax benefit received from a tax credit is not affected by
the taxpayer’s marginal tax rate
• Example: $1,000 expenditure: tax benefit of 25% credit compared to tax deduction at various marginal tax rates
MTR 0% 15% 35% Tax benefit if a 25% credit is allowed $250 $250 $250Tax benefit if tax deduction is allowed –0– $150 $350
• Tax benefit received from a tax deduction depends on the marginal tax rate of the taxpayer– Tax benefit received from a tax credit is not affected by
the taxpayer’s marginal tax rate
• Example: $1,000 expenditure: tax benefit of 25% credit compared to tax deduction at various marginal tax rates
MTR 0% 15% 35% Tax benefit if a 25% credit is allowed $250 $250 $250Tax benefit if tax deduction is allowed –0– $150 $350
C12-C12-33Comprehensive VolumeComprehensive Volume
Refundable vs Nonrefundable Credits (slide 1 of 2)
Refundable vs Nonrefundable Credits (slide 1 of 2)
• Refundable credits– Paid even if the tax liability is less than amount
of credit
• Refundable credits– Paid even if the tax liability is less than amount
of credit
C12-C12-44Comprehensive VolumeComprehensive Volume
Refundable vs Nonrefundable Credits (slide 2 of 2)
Refundable vs Nonrefundable Credits (slide 2 of 2)
• Nonrefundable credits– Credit can only be used to offset tax liability– If credit exceeds tax liability, excess is lost
• Exception: some nonrefundable credits have carryover provisions for excess
• Nonrefundable credits– Credit can only be used to offset tax liability– If credit exceeds tax liability, excess is lost
• Exception: some nonrefundable credits have carryover provisions for excess
C12-C12-55Comprehensive VolumeComprehensive Volume
General Business Credit (slide 1 of 2)General Business Credit (slide 1 of 2)
• Comprised of a number of business credits combined into one amount
• Limited to net income tax reduced by greater of:– Tentative minimum tax– 25% of net regular tax liability that exceeds
$25,000
• Unused credit is carried back 1 year, then forward 20 years
• Comprised of a number of business credits combined into one amount
• Limited to net income tax reduced by greater of:– Tentative minimum tax– 25% of net regular tax liability that exceeds
$25,000
• Unused credit is carried back 1 year, then forward 20 years
C12-C12-66Comprehensive VolumeComprehensive Volume
General Business Credit (slide 2 of 2)General Business Credit (slide 2 of 2)
• Includes the following:– Tax credit for rehabilitation expenditures– Work opportunity tax credit– Research activities credit– Low-income housing credit– Disabled access credit– Credit for small employer pension plan startup
costs– Credit for employer-provided child care
• Includes the following:– Tax credit for rehabilitation expenditures– Work opportunity tax credit– Research activities credit– Low-income housing credit– Disabled access credit– Credit for small employer pension plan startup
costs– Credit for employer-provided child care
C12-C12-77Comprehensive VolumeComprehensive Volume
Rehabilitation Expenditure Credit (slide 1 of 3)
Rehabilitation Expenditure Credit (slide 1 of 3)
• Credit is a percentage of expenditures made to substantially rehabilitate industrial and commercial buildings and certified historic structures
• Credit rate– 20% for nonresidential and residential certified
historic structures– 10% for other structures originally placed into
service before 1936
• Credit is a percentage of expenditures made to substantially rehabilitate industrial and commercial buildings and certified historic structures
• Credit rate– 20% for nonresidential and residential certified
historic structures– 10% for other structures originally placed into
service before 1936
C12-C12-88Comprehensive VolumeComprehensive Volume
Rehabilitation Expenditure Credit (slide 2 of 3)
Rehabilitation Expenditure Credit (slide 2 of 3)
• To qualify for credit, building must be substantially rehabilitated meaning qualified rehab expenditures exceed the greater of:– The adjusted basis of the property before the rehab
expenditures, or
– $5,000
• Qualified rehab expenditures do not include the cost of the building and related facilities or cost of enlarging existing building
• To qualify for credit, building must be substantially rehabilitated meaning qualified rehab expenditures exceed the greater of:– The adjusted basis of the property before the rehab
expenditures, or
– $5,000
• Qualified rehab expenditures do not include the cost of the building and related facilities or cost of enlarging existing building
C12-C12-99Comprehensive VolumeComprehensive Volume
Rehabilitation Expenditure Credit (slide 3 of 3)
Rehabilitation Expenditure Credit (slide 3 of 3)
• Basis in structure is reduced by the credit amount
• Subject to recapture if rehabilitated property held less than 5 years or ceases to be qualifying property
• Basis in structure is reduced by the credit amount
• Subject to recapture if rehabilitated property held less than 5 years or ceases to be qualifying property
C12-C12-1010Comprehensive VolumeComprehensive Volume
Work Opportunity Tax Credit(slide 1 of 3)
Work Opportunity Tax Credit(slide 1 of 3)
• Applies to first 12 months of wages paid to individuals falling within target groups – Credit limited to a percentage of first $6,000
wages paid per eligible employee• 40% if employee has completed at least 400 hours
of service to employer
• 25% if at least 120 hours of service
– Deduction for wages is reduced by credit amount
• Applies to first 12 months of wages paid to individuals falling within target groups – Credit limited to a percentage of first $6,000
wages paid per eligible employee• 40% if employee has completed at least 400 hours
of service to employer
• 25% if at least 120 hours of service
– Deduction for wages is reduced by credit amount
C12-C12-1111Comprehensive VolumeComprehensive Volume
Work Opportunity Tax Credit(slide 2 of 3)
Work Opportunity Tax Credit(slide 2 of 3)
• Targeted individuals generally subject to high rates of unemployment, including– Qualified ex-felons, high-risk youths, food
stamp recipients, veterans, summer youth employees, and long-term family assistance recipients
• Summer youth employees: Only first $3,000 of wages paid for work during 90-day period between May 1 and September 15 qualify for credit
• Targeted individuals generally subject to high rates of unemployment, including– Qualified ex-felons, high-risk youths, food
stamp recipients, veterans, summer youth employees, and long-term family assistance recipients
• Summer youth employees: Only first $3,000 of wages paid for work during 90-day period between May 1 and September 15 qualify for credit
C12-C12-1212Comprehensive VolumeComprehensive Volume
Work Opportunity Tax Credit(slide 3 of 3)
Work Opportunity Tax Credit(slide 3 of 3)
• ARRTA of 2009 adds two additional targeted groups for 2009 and 2010– Unemployed veterans
• Discharged or released from active duty in 2008, 2009, and 2010, and
• Recipients of unemployment benefits for at least 4 weeks during the year prior to being hired
– Disconnected youth • Aged 16 to 25 when hired• Not attending school • Not employed for the six months prior to being hired, and • Not having sufficient skills to be employed
• ARRTA of 2009 adds two additional targeted groups for 2009 and 2010– Unemployed veterans
• Discharged or released from active duty in 2008, 2009, and 2010, and
• Recipients of unemployment benefits for at least 4 weeks during the year prior to being hired
– Disconnected youth • Aged 16 to 25 when hired• Not attending school • Not employed for the six months prior to being hired, and • Not having sufficient skills to be employed
C12-C12-1313Comprehensive VolumeComprehensive Volume
Work Opportunity Tax Credit: Long-Term Family Assistance Recipient
(slide 1 of 2)
Work Opportunity Tax Credit: Long-Term Family Assistance Recipient
(slide 1 of 2)
• Applies to first 24 months of wages paid to individuals who have been long-term recipients of family assistance welfare benefits– Long-term is at least an 18 month period
ending on hiring date
• Applies to first 24 months of wages paid to individuals who have been long-term recipients of family assistance welfare benefits– Long-term is at least an 18 month period
ending on hiring date
C12-C12-1414Comprehensive VolumeComprehensive Volume
Work Opportunity Tax Credit: Long-Term Family Assistance Recipient
(slide 2 of 2)
Work Opportunity Tax Credit: Long-Term Family Assistance Recipient
(slide 2 of 2)
• Maximum credit is a percentage of first $10,000 qualified wages paid in first and second year of employment– 40% in first year– 50% in second year
• Maximum credit per qualified employee is $9,000– Deduction for wages is reduced by credit amount
• Maximum credit is a percentage of first $10,000 qualified wages paid in first and second year of employment– 40% in first year– 50% in second year
• Maximum credit per qualified employee is $9,000– Deduction for wages is reduced by credit amount
C12-C12-1515Comprehensive VolumeComprehensive Volume
Research Activities Credit (slide 1 of 5)
Research Activities Credit (slide 1 of 5)
• Comprised of three parts– Incremental research activities credit– Basic research credit– Energy research credit
• Comprised of three parts– Incremental research activities credit– Basic research credit– Energy research credit
C12-C12-1616Comprehensive VolumeComprehensive Volume
Research Activities Credit (slide 2 of 5)
Research Activities Credit (slide 2 of 5)
• Incremental research activities credit– Credit amount = 20% × (qualified expenditures – base
amount)
• Expenditures qualify if research relates to discovery of technological info intended for use in developing a new or improved business component for taxpayer– Expenditures qualify fully if research done in-house– Only 65% qualifies if research conducted by outside
party (under contract)
• Incremental research activities credit– Credit amount = 20% × (qualified expenditures – base
amount)
• Expenditures qualify if research relates to discovery of technological info intended for use in developing a new or improved business component for taxpayer– Expenditures qualify fully if research done in-house– Only 65% qualifies if research conducted by outside
party (under contract)
C12-C12-1717Comprehensive VolumeComprehensive Volume
Research Activities Credit (slide 3 of 5)
Research Activities Credit (slide 3 of 5)
• Tax treatment of R&E expenditures– Full credit and reduce expense deduction by credit
amount
– Full expense deduction and reduce credit by (100% × credit × max. corp. tax rate)
– Full credit and capitalize and amortize over 60 months or more
• Amount capitalized is reduced by full amount of credit only if the credit exceeds the amount allowable as a deduction
• Tax treatment of R&E expenditures– Full credit and reduce expense deduction by credit
amount
– Full expense deduction and reduce credit by (100% × credit × max. corp. tax rate)
– Full credit and capitalize and amortize over 60 months or more
• Amount capitalized is reduced by full amount of credit only if the credit exceeds the amount allowable as a deduction
C12-C12-1818Comprehensive VolumeComprehensive Volume
Research Activities Credit (slide 4 of 5)
Research Activities Credit (slide 4 of 5)
• Basic research credit– Additional 20% credit is allowed on basic research
payments in excess of a base amount• Basic research payments - amounts paid in cash to a qualified
basic research organization, such as a college or university or a tax-exempt organization operated primarily to conduct scientific research
– Basic research is any original investigation for the advancement of scientific knowledge not having a specific commercial objective
• The definition excludes basic research conducted outside the United States and basic research in the social sciences, arts, or humanities
• Basic research credit– Additional 20% credit is allowed on basic research
payments in excess of a base amount• Basic research payments - amounts paid in cash to a qualified
basic research organization, such as a college or university or a tax-exempt organization operated primarily to conduct scientific research
– Basic research is any original investigation for the advancement of scientific knowledge not having a specific commercial objective
• The definition excludes basic research conducted outside the United States and basic research in the social sciences, arts, or humanities
C12-C12-1919Comprehensive VolumeComprehensive Volume
Research Activities Credit (slide 5 of 5)
Research Activities Credit (slide 5 of 5)
• Energy Research Credit –– This credit is intended to stimulate additional
energy research– Credit amount = 20% of amounts paid or
incurred by a taxpayer to an energy research consortium for energy research
• Energy Research Credit –– This credit is intended to stimulate additional
energy research– Credit amount = 20% of amounts paid or
incurred by a taxpayer to an energy research consortium for energy research
C12-C12-2020Comprehensive VolumeComprehensive Volume
Low-income Housing CreditLow-income Housing Credit
• Credit is issued on a nationwide allocation program
• Credit amount– Based on qualified basis of the property which
is dependent on the number of units rented to low-income tenants
– Credit is allowed over a 10-year period– Subject to potential recapture
• Credit is issued on a nationwide allocation program
• Credit amount– Based on qualified basis of the property which
is dependent on the number of units rented to low-income tenants
– Credit is allowed over a 10-year period– Subject to potential recapture
C12-C12-2121Comprehensive VolumeComprehensive Volume
Disabled Access CreditDisabled Access Credit
– Credit available for eligible access expenditures made by small businesses
• Includes amounts paid to remove barriers that would otherwise make a business inaccessible to disabled and handicapped individuals
• Facility qualifies if placed in service before November 6, 1990
– Credit amount• 50% × expenditures that exceed $250 but not in excess of
$10,250– Thus, max. credit is $5,000
• Basis in asset is reduced by credit amount
– Credit available for eligible access expenditures made by small businesses
• Includes amounts paid to remove barriers that would otherwise make a business inaccessible to disabled and handicapped individuals
• Facility qualifies if placed in service before November 6, 1990
– Credit amount• 50% × expenditures that exceed $250 but not in excess of
$10,250– Thus, max. credit is $5,000
• Basis in asset is reduced by credit amount
C12-C12-2222Comprehensive VolumeComprehensive Volume
Credit For Pension Plan Startup Costs
Credit For Pension Plan Startup Costs
• Small businesses can claim nonrefundable tax credit for admin costs of establishing and maintaining a qualified retirement plan– Small business has < 100 employees who have earned
at least $5,000 of compensation
• Credit amount = 50% of qualified startup costs limited to max credit of $500 per year for 3 years– Deduction for startup costs is reduced by amount of
credit
• Small businesses can claim nonrefundable tax credit for admin costs of establishing and maintaining a qualified retirement plan– Small business has < 100 employees who have earned
at least $5,000 of compensation
• Credit amount = 50% of qualified startup costs limited to max credit of $500 per year for 3 years– Deduction for startup costs is reduced by amount of
credit
C12-C12-2323Comprehensive VolumeComprehensive Volume
Credit For Employer-Provided Child Care (slide 1 of 2)
Credit For Employer-Provided Child Care (slide 1 of 2)
• Employers can claim a credit for providing child care facilities to their employees during normal working hours– Limited to $150,000 per year
• Credit amount:– 25% of qualified child care expenses
– 10% of qualified child care resource and referral services
• Employers can claim a credit for providing child care facilities to their employees during normal working hours– Limited to $150,000 per year
• Credit amount:– 25% of qualified child care expenses
– 10% of qualified child care resource and referral services
C12-C12-2424Comprehensive VolumeComprehensive Volume
Credit For Employer-Provided Child Care (slide 2 of 2)
Credit For Employer-Provided Child Care (slide 2 of 2)
• Deductible qualifying expenses must be reduced by the credit amount
• Basis of qualifying property must be reduced by credit amount
• Credit may be subject to recapture if child care facility ceases to be used for qualifying purpose within 10 years of being placed in service
• Deductible qualifying expenses must be reduced by the credit amount
• Basis of qualifying property must be reduced by credit amount
• Credit may be subject to recapture if child care facility ceases to be used for qualifying purpose within 10 years of being placed in service
C12-C12-2525Comprehensive VolumeComprehensive Volume
Earned Income Credit (slide 1 of 3)
Earned Income Credit (slide 1 of 3)
• General qualifications for credit– Must have earned income from being an
employee or self-employed – For 2009 and 2010, ARRTA of 2009 increases
• Credit percentage for families with three or more children, and
• Increases the phaseout threshold amounts for married taxpayers filing joint returns
• General qualifications for credit– Must have earned income from being an
employee or self-employed – For 2009 and 2010, ARRTA of 2009 increases
• Credit percentage for families with three or more children, and
• Increases the phaseout threshold amounts for married taxpayers filing joint returns
C12-C12-2626Comprehensive VolumeComprehensive Volume
Earned Income Credit (slide 2 of 3)
Earned Income Credit (slide 2 of 3)
• Credit amount (2009 tax year)– Applicable percentage rate × earned income
• Rate and maximum amount of earned income determined by number of qualifying children
• Phase-out of credit begins when earned income (or AGI) exceeds $21,420 for MFJ with qualifying child ($16,420 for other taxpayers)
• Use IRS tables to calculate exact credit amount
• Credit amount (2009 tax year)– Applicable percentage rate × earned income
• Rate and maximum amount of earned income determined by number of qualifying children
• Phase-out of credit begins when earned income (or AGI) exceeds $21,420 for MFJ with qualifying child ($16,420 for other taxpayers)
• Use IRS tables to calculate exact credit amount
C12-C12-2727Comprehensive VolumeComprehensive Volume
Earned Income Credit (slide 3 of 3)
Earned Income Credit (slide 3 of 3)
• Credit for taxpayers having no children– Taxpayers aged 25 through 64
• Credit amount for couple filing jointly with no qualifying children (2009 tax year)– 7.65% × earned income (up to $5,970)– Phase-out of credit begins when earned income
(or AGI) exceeds $12,470 for MFJ ($7,470 for others)
• Credit for taxpayers having no children– Taxpayers aged 25 through 64
• Credit amount for couple filing jointly with no qualifying children (2009 tax year)– 7.65% × earned income (up to $5,970)– Phase-out of credit begins when earned income
(or AGI) exceeds $12,470 for MFJ ($7,470 for others)
C12-C12-2828Comprehensive VolumeComprehensive Volume
Credit for Elderly or Disabled Taxpayers (slide 1 of 2)
Credit for Elderly or Disabled Taxpayers (slide 1 of 2)
• General qualifications– Age 65 or older, or– Under age 65 and permanently and totally
disabled
• General qualifications– Age 65 or older, or– Under age 65 and permanently and totally
disabled
C12-C12-2929Comprehensive VolumeComprehensive Volume
Credit for Elderly or Disabled Taxpayers (slide 2 of 2)
Credit for Elderly or Disabled Taxpayers (slide 2 of 2)
• Credit amount– Maximum credit = $1,125
• Amount reduced for taxpayers with Social Security benefits or AGI in excess of specified amounts
– IRS will calculate credit for taxpayer if necessary
• Credit amount– Maximum credit = $1,125
• Amount reduced for taxpayers with Social Security benefits or AGI in excess of specified amounts
– IRS will calculate credit for taxpayer if necessary
C12-C12-3030Comprehensive VolumeComprehensive Volume
Foreign Tax Credit(slide 1 of 2)
Foreign Tax Credit(slide 1 of 2)
• The purpose of the foreign tax credit (FTC) is to mitigate double taxation since income earned in a foreign country is subject to both U.S. and foreign taxes– Credit applies to both individuals and
corporations that pay foreign income taxes– Instead of claiming a credit, a deduction may be
claimed for the taxes paid
• The purpose of the foreign tax credit (FTC) is to mitigate double taxation since income earned in a foreign country is subject to both U.S. and foreign taxes– Credit applies to both individuals and
corporations that pay foreign income taxes– Instead of claiming a credit, a deduction may be
claimed for the taxes paid
C12-C12-3131Comprehensive VolumeComprehensive Volume
Foreign Tax Credit(slide 2 of 2)
Foreign Tax Credit(slide 2 of 2)
• Amount of the credit allowed is the lesser of:– The foreign taxes imposed, or– The overall limitation determined using the following formula:
Foreign-source TI × U.S. tax before credit
Worldwide TI = Overall FTC limitation
• For individual taxpayers, worldwide taxable income is determined before personal and dependency exemptions
• Unused FTCs can be carried back 1 year and forward 10 years
• Amount of the credit allowed is the lesser of:– The foreign taxes imposed, or– The overall limitation determined using the following formula:
Foreign-source TI × U.S. tax before credit
Worldwide TI = Overall FTC limitation
• For individual taxpayers, worldwide taxable income is determined before personal and dependency exemptions
• Unused FTCs can be carried back 1 year and forward 10 years
C12-C12-3232Comprehensive VolumeComprehensive Volume
Adoption Expenses Credit (slide 1 of 2)
Adoption Expenses Credit (slide 1 of 2)
• Credit for qualified adoption expenses incurred in adoption of eligible child– Examples of expenses: adoption fees, court
costs, attorney fees
• Maximum credit is $12,150 (in 2009) – Credit is phased-out ratably for modified AGI
between $182,180 and $222,180
• Credit for qualified adoption expenses incurred in adoption of eligible child– Examples of expenses: adoption fees, court
costs, attorney fees
• Maximum credit is $12,150 (in 2009) – Credit is phased-out ratably for modified AGI
between $182,180 and $222,180
C12-C12-3333Comprehensive VolumeComprehensive Volume
Adoption Expenses Credit (slide 2 of 2)
Adoption Expenses Credit (slide 2 of 2)
• Eligible child is one that is – Less than 18 years of age, or– Physically or mentally incapable of taking care
of himself or herself
• Nonrefundable credit– Excess may be carried forward for five years
• Married taxpayers must file jointly to claim
• Eligible child is one that is – Less than 18 years of age, or– Physically or mentally incapable of taking care
of himself or herself
• Nonrefundable credit– Excess may be carried forward for five years
• Married taxpayers must file jointly to claim
C12-C12-3434Comprehensive VolumeComprehensive Volume
Child Tax Credit (slide 1 of 2)
Child Tax Credit (slide 1 of 2)
• Credit amount is $1,000 per child
• Eligible children are:– Under age 17,– US citizen, and– Claimed as dependent on taxpayer’s tax return
• Credit amount is $1,000 per child
• Eligible children are:– Under age 17,– US citizen, and– Claimed as dependent on taxpayer’s tax return
C12-C12-3535Comprehensive VolumeComprehensive Volume
Child Tax Credit (slide 2 of 2)
Child Tax Credit (slide 2 of 2)
• Credit is phased out by $50 for each $1,000 of AGI above specified levels– $110,000 for joint filers– $55,000 for married filing separately– $75,000 for single
• Credit is phased out by $50 for each $1,000 of AGI above specified levels– $110,000 for joint filers– $55,000 for married filing separately– $75,000 for single
C12-C12-3636Comprehensive VolumeComprehensive Volume
Child and Dependent Care Credit
(slide 1 of 4)
Child and Dependent Care Credit
(slide 1 of 4)
• General qualifications for credit– Must have employment related care costs for a
• Dependent under age 13, or
• Dependent or spouse who is physically or mentally incapacitated and who lives with the taxpayer for more than one-half of the year
• General qualifications for credit– Must have employment related care costs for a
• Dependent under age 13, or
• Dependent or spouse who is physically or mentally incapacitated and who lives with the taxpayer for more than one-half of the year
C12-C12-3737Comprehensive VolumeComprehensive Volume
Child and Dependent Care Credit
(slide 2 of 4)
Child and Dependent Care Credit
(slide 2 of 4)
• Credit amount– Eligible care costs × applicable percentage– Applicable percentage ranges from 20% to 35%
depending on AGI
• Married taxpayers must file a joint return to obtain credit
• Credit amount– Eligible care costs × applicable percentage– Applicable percentage ranges from 20% to 35%
depending on AGI
• Married taxpayers must file a joint return to obtain credit
C12-C12-3838Comprehensive VolumeComprehensive Volume
Child and Dependent Care Credit
(slide 3 of 4)
Child and Dependent Care Credit
(slide 3 of 4)
• Eligible care costs defined– Costs for care of qualified individual within taxpayer’s
home or outside home• If outside home, handicapped dependent or spouse must spend
at least 8 hours a day within taxpayer’s home
– Amount of costs that qualify is the lesser of actual costs or $3,000 for one qualified individual, and $6,000 for two or more qualified individuals
• Eligible care costs defined– Costs for care of qualified individual within taxpayer’s
home or outside home• If outside home, handicapped dependent or spouse must spend
at least 8 hours a day within taxpayer’s home
– Amount of costs that qualify is the lesser of actual costs or $3,000 for one qualified individual, and $6,000 for two or more qualified individuals
C12-C12-3939Comprehensive VolumeComprehensive Volume
Child and Dependent Care Credit
(slide 4 of 4)
Child and Dependent Care Credit
(slide 4 of 4)
• Earned income limitation– Amount of eligible care costs cannot exceed
lower of taxpayer’s or spouse’s earned income– Full-time student or disabled taxpayer or
spouse are deemed to have earned income up to maximum per month limits
• Earned income limitation– Amount of eligible care costs cannot exceed
lower of taxpayer’s or spouse’s earned income– Full-time student or disabled taxpayer or
spouse are deemed to have earned income up to maximum per month limits
C12-C12-4040Comprehensive VolumeComprehensive Volume
Education Tax Credits(slide 1 of 5)
Education Tax Credits(slide 1 of 5)
• 2 education tax credits are available– American Opportunity credit (previously known as the
Hope scholarship credit)– Lifetime learning credit
• Both nonrefundable credits are available for qualifying tuition and related expenses– Books and other course materials are eligible for the
American Opportunity credit (but not the lifetime learning credit)
– Room and board are ineligible for both credits
• 2 education tax credits are available– American Opportunity credit (previously known as the
Hope scholarship credit)– Lifetime learning credit
• Both nonrefundable credits are available for qualifying tuition and related expenses– Books and other course materials are eligible for the
American Opportunity credit (but not the lifetime learning credit)
– Room and board are ineligible for both credits
C12-C12-4141Comprehensive VolumeComprehensive Volume
Education Tax Credits(slide 2 of 5)
Education Tax Credits(slide 2 of 5)
• Maximum credits– American Opportunity credit maximum per eligible
student is $2,500 per year for first 4 years of postsecondary education
• 100% of the first $2,000 of tuition expenses plus 25% of the next $2,000 of tuition expenses
– Lifetime learning credit maximum per taxpayer is 20% of qualifying expenses (up to $10,000 per year in 2009)
• Cannot be claimed in same year the American Opportunity credit is claimed
• Maximum credits– American Opportunity credit maximum per eligible
student is $2,500 per year for first 4 years of postsecondary education
• 100% of the first $2,000 of tuition expenses plus 25% of the next $2,000 of tuition expenses
– Lifetime learning credit maximum per taxpayer is 20% of qualifying expenses (up to $10,000 per year in 2009)
• Cannot be claimed in same year the American Opportunity credit is claimed
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Education Tax Credits(slide 3 of 5)
Education Tax Credits(slide 3 of 5)
• Eligible individuals include taxpayer, spouse, and taxpayer’s dependents
• To be eligible for American Opportunity credit, student must take at least 1/2 of full-time course load– No such requirement for lifetime learning credit
• Eligible individuals include taxpayer, spouse, and taxpayer’s dependents
• To be eligible for American Opportunity credit, student must take at least 1/2 of full-time course load– No such requirement for lifetime learning credit
C12-C12-4343Comprehensive VolumeComprehensive Volume
Education Tax Credits(slide 4 of 5)
Education Tax Credits(slide 4 of 5)
• Both education credits are subject to income limitations, which differ for 2009 and 2010– In addition, 40% of the American Opportunity credit is refundable
and the entire credit allowed may be used to offset a taxpayer’s AMT liability
• The lifetime learning credit is neither refundable nor an AMT liability offset
• The American Opportunity credit is phased out, beginning when the taxpayer’s modified AGI reaches $80,000 ($160,000 for married taxpayers filing jointly)– The credit is completely eliminated when modified AGI reaches
$90,000 ($180,000 for married taxpayers filing jointly)
• Both education credits are subject to income limitations, which differ for 2009 and 2010– In addition, 40% of the American Opportunity credit is refundable
and the entire credit allowed may be used to offset a taxpayer’s AMT liability
• The lifetime learning credit is neither refundable nor an AMT liability offset
• The American Opportunity credit is phased out, beginning when the taxpayer’s modified AGI reaches $80,000 ($160,000 for married taxpayers filing jointly)– The credit is completely eliminated when modified AGI reaches
$90,000 ($180,000 for married taxpayers filing jointly)
C12-C12-4444Comprehensive VolumeComprehensive Volume
Education Tax Credits(slide 5 of 5)
Education Tax Credits(slide 5 of 5)
• The lifetime learning credit amount is phased out when modified AGI reaches $50,000 ($100,000 for MFJ)– The credit is completely eliminated when AGI reaches
$60,000($120,000 for MFJ)
• Taxpayers are prohibited from receiving a double tax benefit associated with qualifying educational expenses– Can’t claim education credit and deduct the same expenses– Can’t claim the credit for amounts that are excluded from income
• e.g., scholarships, employer-paid educational assistance
– May claim an education tax credit and exclude from gross income amounts distributed from a Coverdell Education Savings Account as long as the distribution is not used for the same expenses for which the credit is claimed
• The lifetime learning credit amount is phased out when modified AGI reaches $50,000 ($100,000 for MFJ)– The credit is completely eliminated when AGI reaches
$60,000($120,000 for MFJ)
• Taxpayers are prohibited from receiving a double tax benefit associated with qualifying educational expenses– Can’t claim education credit and deduct the same expenses– Can’t claim the credit for amounts that are excluded from income
• e.g., scholarships, employer-paid educational assistance
– May claim an education tax credit and exclude from gross income amounts distributed from a Coverdell Education Savings Account as long as the distribution is not used for the same expenses for which the credit is claimed
C12-C12-4545Comprehensive VolumeComprehensive Volume
First-Time Homebuyer Credit (slide 1 of 4)
First-Time Homebuyer Credit (slide 1 of 4)
• For home purchases from January 1, 2009 through December 1, 2009, a credit of 10% of the purchase price is allowed– Max credit is $8,000 ($4,000 for married filing separately)
• Single and married persons filing jointly are treated alike– Each is subject to the same $8,000 maximum
– For homes purchased from April 9, 2008 through December 31, 2008, the maximum credit was $7,500 ($3,750 for married filing separately)
• The credit is phased out for modified AGI between $75,000 and $95,000 for single taxpayers ($150,000 and $170,000 for MFJ)
• For home purchases from January 1, 2009 through December 1, 2009, a credit of 10% of the purchase price is allowed– Max credit is $8,000 ($4,000 for married filing separately)
• Single and married persons filing jointly are treated alike– Each is subject to the same $8,000 maximum
– For homes purchased from April 9, 2008 through December 31, 2008, the maximum credit was $7,500 ($3,750 for married filing separately)
• The credit is phased out for modified AGI between $75,000 and $95,000 for single taxpayers ($150,000 and $170,000 for MFJ)
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First-Time Homebuyer Credit (slide 2 of 4)
First-Time Homebuyer Credit (slide 2 of 4)
• The credit is available only to first-time buyers – Taxpayer has not owned a principal residence
during the 3 year period before the purchase
• As long as the time limitations for the purchase are met, the credit may be claimed in either 2008 or 2009
• The credit is available only to first-time buyers – Taxpayer has not owned a principal residence
during the 3 year period before the purchase
• As long as the time limitations for the purchase are met, the credit may be claimed in either 2008 or 2009
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First-Time Homebuyer Credit (slide 3 of 4)
First-Time Homebuyer Credit (slide 3 of 4)
• The homebuyer credit contains a recapture provision– Provision is waived for homes purchased after
December 31, 2008 and through December 1, 2009 (even if the credit is claimed in 2008)
• For homes purchased in 2008, credit must be repaid beginning 2 years after home purchased– Repaid in equal installments over 15 years
– If disposed of before the 15-year period is up, recapture of the unpaid balance occurs
• The homebuyer credit contains a recapture provision– Provision is waived for homes purchased after
December 31, 2008 and through December 1, 2009 (even if the credit is claimed in 2008)
• For homes purchased in 2008, credit must be repaid beginning 2 years after home purchased– Repaid in equal installments over 15 years
– If disposed of before the 15-year period is up, recapture of the unpaid balance occurs
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First-Time Homebuyer Credit (slide 4 of 4)
First-Time Homebuyer Credit (slide 4 of 4)
• Homes purchased after December 31, 2008 and through December 1, 2009 are also subject to an accelerated recapture rule– If disposed of within 36 months from the date of purchase
• Recapture cannot exceed any gain from the sale
– If property ceases to be taxpayer’s principal residence
• No recapture upon the death of taxpayer, involuntary conversion, or transfer between spouses incident to a divorce
• The home purchase credit is a refundable credit– Thus, in certain situations, it could generate a payment from the
IRS in excess of any tax liability
• Homes purchased after December 31, 2008 and through December 1, 2009 are also subject to an accelerated recapture rule– If disposed of within 36 months from the date of purchase
• Recapture cannot exceed any gain from the sale
– If property ceases to be taxpayer’s principal residence
• No recapture upon the death of taxpayer, involuntary conversion, or transfer between spouses incident to a divorce
• The home purchase credit is a refundable credit– Thus, in certain situations, it could generate a payment from the
IRS in excess of any tax liability
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Credit For Certain Retirement Plan Contributions
Credit For Certain Retirement Plan Contributions
• Credit was enacted to encourage low and middle income taxpayers to contribute to qualified retirement plans
• Eligible contributions of up to $2,000 qualify• Credit rate depends on level of AGI and filing
status– Maximum credit is $1,000 ($2,000 × 50%)
• To qualify, must be at least 18 years old and not a dependent of another taxpayer or a full-time student
• Credit was enacted to encourage low and middle income taxpayers to contribute to qualified retirement plans
• Eligible contributions of up to $2,000 qualify• Credit rate depends on level of AGI and filing
status– Maximum credit is $1,000 ($2,000 × 50%)
• To qualify, must be at least 18 years old and not a dependent of another taxpayer or a full-time student
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Making Work Pay CreditMaking Work Pay Credit
• In 2009 and 2010, the ARRTA of 2009 includes a refundable income tax credit of up to $400 ($800 for MFJ)– Calculated at a rate of 6.2% of earned income– Phases out at a rate of 2% of modified AGI
above $75,000 ($150,000 for MFJ)
• Most receive this refundable credit in their paychecks as a reduction in withholding
• In 2009 and 2010, the ARRTA of 2009 includes a refundable income tax credit of up to $400 ($800 for MFJ)– Calculated at a rate of 6.2% of earned income– Phases out at a rate of 2% of modified AGI
above $75,000 ($150,000 for MFJ)
• Most receive this refundable credit in their paychecks as a reduction in withholding
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Recovery Rebate Credit (slide 1 of 2)Recovery Rebate Credit (slide 1 of 2)
• The Economic Stimulus Act of 2008 provides a refundable tax credit for certain taxpayers– The Treasury Department issued rebate checks
to taxpayers in the spring of 2008 to help stimulate the economy
• The credit includes two components—a basic credit and a qualifying child credit
• The Economic Stimulus Act of 2008 provides a refundable tax credit for certain taxpayers– The Treasury Department issued rebate checks
to taxpayers in the spring of 2008 to help stimulate the economy
• The credit includes two components—a basic credit and a qualifying child credit
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Recovery Rebate Credit (slide 2 of 2)Recovery Rebate Credit (slide 2 of 2)
• Eligible individuals received a basic credit equal to the greater of:– The taxpayer’s net income tax liability up to a maximum of $600
($1,200 in the case of a joint return), or– $300 ($600 for joint returns) if the individual had:
• At least $3,000 of earned income (plus Social Security benefits), or• Net income tax liability of at least $1 and gross income greater than
the sum of the applicable basic standard deduction amount and one personal exemption (two personal exemptions for a joint return)
• If an individual is eligible for any amount of the basic credit, the individual also may have received a qualifying child credit of $300 for each qualifying child (defined in the same manner as for the child tax credit)
• Eligible individuals received a basic credit equal to the greater of:– The taxpayer’s net income tax liability up to a maximum of $600
($1,200 in the case of a joint return), or– $300 ($600 for joint returns) if the individual had:
• At least $3,000 of earned income (plus Social Security benefits), or• Net income tax liability of at least $1 and gross income greater than
the sum of the applicable basic standard deduction amount and one personal exemption (two personal exemptions for a joint return)
• If an individual is eligible for any amount of the basic credit, the individual also may have received a qualifying child credit of $300 for each qualifying child (defined in the same manner as for the child tax credit)
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Payment Procedures(slide 1 of 8)
Payment Procedures(slide 1 of 8)
• Employer is responsible for withholding income taxes and employees’ share of FICA employment taxes (Social Security and Medicare)
• Also, employer must match FICA and pay full cost of FUTA (unemployment taxes)
• Employer is responsible for withholding income taxes and employees’ share of FICA employment taxes (Social Security and Medicare)
• Also, employer must match FICA and pay full cost of FUTA (unemployment taxes)
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Payment Procedures(slide 2 of 8)
Payment Procedures(slide 2 of 8)
• Social Security & Medicare– 2009 rates
• Social Security: 6.2% of first $106,800 wages
• Medicare: 1.45% of all wages
• Employee and employer both pay at these rates
– If employee is overwithheld for Social Security, excess is refundable credit
• Social Security & Medicare– 2009 rates
• Social Security: 6.2% of first $106,800 wages
• Medicare: 1.45% of all wages
• Employee and employer both pay at these rates
– If employee is overwithheld for Social Security, excess is refundable credit
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Payment Procedures(slide 3 of 8)
Payment Procedures(slide 3 of 8)
• Federal withholding– Employee files Form W-4 with employer
indicating marital status and withholding allowances
– Form W-2 issued by employer summarizes employee’s wages, income tax withholding, and FICA
• Must be issued to employee by January 31 following year-end
• Federal withholding– Employee files Form W-4 with employer
indicating marital status and withholding allowances
– Form W-2 issued by employer summarizes employee’s wages, income tax withholding, and FICA
• Must be issued to employee by January 31 following year-end
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Payment Procedures(slide 4 of 8)
Payment Procedures(slide 4 of 8)
• Estimated payments (ES payments)– Any taxpayer (employee or self-employed) who
will owe at least $1,000 in taxes for the year (and meets none of the exceptions) must make ES payments
• Estimated payments (ES payments)– Any taxpayer (employee or self-employed) who
will owe at least $1,000 in taxes for the year (and meets none of the exceptions) must make ES payments
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Payment Procedures(slide 5 of 8)
Payment Procedures(slide 5 of 8)
• ES payments– To avoid penalties for underpayment, must
annually pay the smaller of:• 90% of the current year’s tax, or
• 100% of last year’s tax– Exception: Increased to 110% of last year’s tax if AGI last
year exceeded $150,000 ($75,000 if married filing separately)
• ES payments– To avoid penalties for underpayment, must
annually pay the smaller of:• 90% of the current year’s tax, or
• 100% of last year’s tax– Exception: Increased to 110% of last year’s tax if AGI last
year exceeded $150,000 ($75,000 if married filing separately)
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Payment Procedures(slide 6 of 8)
Payment Procedures(slide 6 of 8)
• ES payments– For calendar year individual taxpayer, ES
payments of 1/4 of annual amount are due• April 15, June 15, and September 15 of the tax year,
and January 15 of the following year
• ES payments– For calendar year individual taxpayer, ES
payments of 1/4 of annual amount are due• April 15, June 15, and September 15 of the tax year,
and January 15 of the following year
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Payment Procedures(slide 7 of 8)
Payment Procedures(slide 7 of 8)
• Self-employment tax– Taxpayers with net self-employment earnings
of at least $400 must pay self-employment tax• 2009 rates
– Social Security: 12.4% of first $106,800 net self-employment income
– Medicare: 2.9% of all net self-employment income
• These rates are twice what an employee pays on wages
• Self-employment tax– Taxpayers with net self-employment earnings
of at least $400 must pay self-employment tax• 2009 rates
– Social Security: 12.4% of first $106,800 net self-employment income
– Medicare: 2.9% of all net self-employment income
• These rates are twice what an employee pays on wages
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Payment Procedures(slide 8 of 8)
Payment Procedures(slide 8 of 8)
• Self-employment tax– Taxpayer receives a deduction from net self-
employment income of 7.65% for purposes of calculating the actual self-employment tax
– Taxpayer receives a for AGI deduction for 50% of the self-employment tax paid
• Self-employment tax– Taxpayer receives a deduction from net self-
employment income of 7.65% for purposes of calculating the actual self-employment tax
– Taxpayer receives a for AGI deduction for 50% of the self-employment tax paid
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If you have any comments or suggestions concerning this PowerPoint Presentation for South-Western Federal Taxation, please contact:
Dr. Donald R. Trippeer, CPA [email protected]
SUNY Oneonta
If you have any comments or suggestions concerning this PowerPoint Presentation for South-Western Federal Taxation, please contact:
Dr. Donald R. Trippeer, CPA [email protected]
SUNY Oneonta