Ch13 Tax Credits and Payment Procedures
Amount of Income Tax Withholding
1. have the employee complete Form W-4 2. determine the employee's payroll period 3. compute the amount to be withheld, usually using either the wage-bracket tables or the percentage method
American Opportunity limitations and refundability
40% of the American Opportunity credit is refundable and it can offset the taxpayer's alternative minimum tax (AMT) liability phased out beginning when the taxpayer's AGO reaches $80,000 single / $160,000 for married filing jointly phased out proportionally over a $10,000/$20,000 phaseout range the credit is eliminated when AGI reaches $90,000 / $180,000
Education tax credits
American Opportunity credit and Lifetime Learning credit are available to help qualifying low- and middle-income individuals defray the cost of higher education available for qualifying tuition and related expenses incurred by students pursuing undergraduate or graduate degrees or vocational training books and other course materials are eligible for Am. Opp. credit, but not Lifetime Learn room and board are ineligible for both credits taxpayers who are married must file a joint return to claim either education credits
Maximum credit
American Opportunity: maximum credit of $2,500 per year (100% of first $2,000 tuition expenses plus 25% of next $2000 of tuition expenses) for the FIRST FOUR YEARS of postsecondary education Lifetime Learning: permits a credit for 20% of qualifying expenses (up to $10,000 per year) incurred in a year in which the American Opportunity credit is not claimed -generally is used for individuals who are beyond the first four years of postsecondary education
What is the use of tax credits?
Congress uses tax credits to achieve social or economic objectives or to promote equity among different types of taxpayers Ex. Disabled access credit -enacted to accomplish a social objective -to encourage taxpayers to renovate older buildings so that they would be in compliance with ADA Ex. Foreign tax credit -economic and equity objectives -mitigating the the burden of multiple taxation on a single stream of income that is generated in more than one country
Example for Earned Income credit
Grace and Bob have wages of 26,000 and have no other earned income. They have one qualifying child. Maximum credit = $3,400 (see chart) Earned income exceeds 23,930 by 2,070 Phaseout % = 15.98 (see chart) 2,070 x 15.98% = 331 So earned income credit of 3,400 is reduced by 331--as a result, their earned income credit is $3,069
Refundable vs. Nonrefundable credits
Refundable credit-paid to the taxpayer even if the amount of the credit(s) exceeds the taxpayer's tax liability Nonrefundable credit-not paid if they exceed the taxpayer's tax liability -some can be "carried over" to other tax years if the exceed the credit allowed in a given year like the foreign tax credit
Dependent Care Assistance program
a taxpayer is allowed an exclusion from gross income for a limited amount of employer-reimbursed child or dependent expenses if this occurs, the $3,000 or $6,000 ceilings for allowable child and dependent care expenses are reduced dollar for dollar by the amount of reimbursement Ex. Nancy has AGI of 22,000 and is reimbursed amount of 2,5000 by employer 1. AGI is reduced by for AGI deduction = 22,000-2,500 = 19,5000 2. ceiling of 6,000 is also reduced by the amount, 6,000-2,500 = 3,500 3. 3,500 x 32%(based on AGI) = 1,120 available tax credit
Eligible child care and dependent expenses
amounts paid for household services and care of qualifying individual that are incurred to enable the taxpayer to be employed care can be provided in the home or outside the home out of the home expenses for older dependent/spouse qualify if that person regularly spends at least eight hours in the taxpayer's household payments to a relative are eligible for the credit unless the relative is a child (under age 19)
Adoption expenses credit
assists taxpayers who incur nonrecurring costs directly associated with the adoption process, such as adoption fees, attorney fees, court costs, social service review costs, and transportation costs 2017-$13,570 of costs incurred to adopt an eligible child qualify for the credit An eligible child is either: (1) under 18 years of age at the time of the adoption, or (2) physically or mentally incapable of taking care of him/herself in general, claim in the year the adoption is completed--if not completed, the credit can be claimed in the following year a married couple must file a joint return to receive the credit it is nonrefundable--however, any unused adoption expenses credit ay be carried forward for up to five years, being utilized on a first in, first out basis
Eligible individuals
available for qualified expense incurred by a taxpayer, taxpayer's spouse, or taxpayer's dependent AO: available per eligible student -student must take at least one-half the full-time course load for at least one academic term at a qualifying educational institution LL: calculated per taxpayer -no comparable requirement for this credit -taxpayers who are seeking new job skills or maintaining existing skills through graduate training or continuing education are eligible
Excess FICA taxes withheld
can occur if a taxpayer has multiple jobs at the same time or change job during the year
Tax credit vs. tax deduction
deduction-reduce a taxpayer's tax base, therefore tax benefit depends on the tax rate credit-reduce a taxpayer's tax liability, not affected by the tax rate of the taxpayer
Eligibility requirements
depends not only on the taxpayer meeting the earned income and AGI thresholds but also on whether he or she has a qualifying child the term qualifying child generally has the same meaning here as it does for purposes of determining who qualifies as a dependent (pg. 3-4a) also available for certain workers without children-only to taxpayers ages 25 through 64 who cannot be claimed as dependent on another taxpayer's return
Backup withholding
designed to ensure that income tax is collected on interest income and other payments reported on a Form 1099 required if the taxpayer does not give his or her Social Security number to the business or bank when required if backup withholding applies, the payor withholds 28 percent of the gross amount
Calculating earned income credit
determined by multiplying a maximum amount of earned income by the appropriate credit percentage generally, earned income includes employee compensation and net earnings from self-employment it excludes items such as interest, dividends, pension benefits, nontaxable employee compensation, and alimony if a taxpayer has children, the credit percentage used in the calculation depends on the number of qualifying children if AGI or earned income exceed $23,930 married / $18,340 single, the difference x the percentage is subtracted from the maximum earned income credit see chart on pg. 13-13
Form 940
employer's annual accounting of its FUTA liability generally, it is due one month after the end of the calendar year and must include any remaining FUTA due
Form 941
employers make deposits of employment taxes, usually weekly or monthly, and they pay any outstanding amounts at the end of every quarter
Nonrefundable credit
general business credit credit for elderly and disabled foreign tax credit adoption expenses credit child tax credit** (partially refundable) credit for child and dependent care expenses education tax credits** (American Opportunity credit is partially refundable) energy credits credit for certain retirement plan contributions small employer health insurance credit
W-2
gives information to employees about wages paid, FICA, and income tax withholdings must be furnished to the employee no later than January 31st box 1 - line 7 on 1040 box 2 - line 64 on 1040 box 17 (state) - line 5 of Schedule A **how W-4 allowances apply to W-2 withholdings
Employment taxes
include FICA (Federal Insurance Contributions Act aka Social Security) and FUTA (Federal Unemployment Tax Act) the employer usually is responsible for withholding the employee's share of FICA and the appropriate amounts for income taxes the employer must match the FICA portion withheld and fully absorb the cost of FUTA employers are required to pay these amounts to the IRS on a regular basis
Credit for child and dependent care expenses
mitigates the inequality felt by working taxpayers who must pay for child care services to work outside the home a specified percentage of child and dependent care expenses - varies based on the taxpayer's AGI and expenses are capped at a maximum of $6,000 to be eligible, an individual must have either: (1) a dependent under the age of 13 or (2) a dependent or spouse who is physically or mentally incapacitated and who lives with them for more than half of the year generally, married taxpayers must file jointly to receive the credit
FICA exceptions
no tax is collected for children under the age of 18 who are employed in a parent's trade or business MUST be paid for an individual employed by his or her spouse
Federal tax law
often serves purposes besides merely raising revenue for the government evidence of equity, social, and economic considerations are found throughout it, which include tax credits
Lifetime Learning limitations
phased out beginning when a taxpayer's AGI reaches $56,000 single / $112,000 married phased out proportionally over a $10,000 / $20,000 range so it is eliminated at AGI of $66,000 / $132,000
Adoption expenses credit phaseout
phased out for taxpayer's whose AGI exceeds $203,540 in 2017 completely eliminated when AGI reaches $243, 540 the resulting credit is calculated by reducing the allowable credit by the allowable credit x the ratio of the excess of the taxpayer's AGI over $203,540 to $40,000 Ex. Sam and Martha spent $14,000 in adoption expenses, and their AGI is $228,540 in 2017 1. {13,570 (the allowable credit) x [(228,540-203,540)/40,000] = 8,481} 2. 13,570 - {8,481} = 5,089 3. 5,089 is the available credit that they are allowed to take
Child tax credit phaseout
phased out when ADI reaches $110,000 for joint filers and $75,000 for single filers phased out by $50 for each $1,000 (or part thereof) of AGI above the $110,000/$75,000 amounts because the maximum credit amount depends on the number of qualifying children, the income level at which the credit is phased out completely also depends on the number of qualifying children Ex. Juanita and Alberto have two children and are filing jointly. Their AGI is $122,400 and their maximum child tax credit is $2,000 (2 children x 1,000) 1. [(122,400-110,000)/1,000]} = 12.4 = 13 when rounded up 2. 50 x 13 = $650 3. 2,000-650 = $1,350 is the available credit
Child tax credit
provided to individual taxpayers on the number of their qualifying children this credit is one of several "family-friendly" provisions in the Federal income tax law to be eligible, the child must be under the age 17, must be a U.S. citizen, and must be claimed as a dependent on the taxpayer's return the credit available is $1,000 per child
Earned income credit
provides income tax equity to the working poor the credit helps to offset other Federal taxes, such as the gasoline tax, that impose a relatively larger burden on low-income taxpayers the credit encourages economically disadvantaged individuals to become contributing members of the workforce Because it is refundable, it is sometimes referred to as a negative income tax.
Earned income ceiling
qualifying expenses are limited to an individual's earned income for married taxpayers, this limitation applies to the spouse with the lessor amount of earned income special rules are provided for tax payers with non-working spouses who are disabled or full-time students the non-working spouse is deemed to have earned income of $250 per month is there is one qualifying individual in the household or $500 per month is there are two or more in the case of student-spouse, only months when the student is enrolled on a full-time basis are counted if student-spouse is the case, the amount of income of the student is the cap of the expenses Ex. Ron was student for 9 months with 3 qualifying kids so his deemed income is 4,500 so the $4,500 is the max that the expense is allowed rather than the normal 6,000 maximum
Refundable credits
taxes withheld on wages earned income credit Affordable Care Act premium tax credit
Restrictions on Double Tax Benefit
taxpayers who claim an education credit may not deduct the expenses, not any they claim the credit for amounts that are otherwise excluded from gross income (scholarships and employer-paid education assistance)
Calculation of the credit
the credit is equal to a percentage of unreimbursed expenses up to $3,000 for one qualifying individual and $6,000 for two or more individuals the credit rate varies between 20% and 35% depending on the taxpayer's AGI pg. 13-17 Ex. Nancy makes $22,000 and Ron, a full-time student makes $5,000. They incurred $6,200 in child care expenses. 1. AGI = $22,000 so credit rate is 31% 2. so take maximum credit and multiply by percentage
Amount of FICA taxes
two components: Social Security tax and Medicare tax tax rates and based under FICA have increased substantially over the years employer must match the employee's portion SS 12.4% and Medicare 2.9% - EE and ER combined employee withholdings continue until maximum base amount is reached SS portion (6.2%) ends when the employee has earned $127,200 of wages there is not limit for Medicare - always taxed