Tax Chapter 12 Credits

Refundable credits

Taxes withheld on wages, Earned income credit, First-time homebuyer credit (40% of the American Opportunity credit, child tax credit is partially refundable)

Education tax credits-restrictions on double tax benefits

Taxpayers who claim an education credit may not deduct the esp, nor may they claim the credit for amounts that are otherwise excluded from gross income (e.g. scholarship, employer-paid educational assistant)

Net earnings from self-employment

+Gross income from a trade/business -allowable trade/business deductions -distributive share of any partnership income -loss derived from a business activity -net income from rendering personal services as an independent contract Gain/loss from the disposition of property is excluded unless the property involved is inventory.

Education tax credit

1. American opportunity credit (40% refundable, may be used to offset AMT liability) 2. Lifetime learning credit are available to help qualifying low and middle income individuals defray the cost of higher education. The credits are available for qualifying tuition and related exp incurred by students pursing undergraduate or graduate degrees or vocational trainings.

Education tax credit-maximum credit and calculation

1. American opportunity credit max: 2,500 per year (100% of the first 2,000 of tuition exp + 25% of the next 2,000 of tuition exp) for the first four years of postsecondary education. 2. Lifetime learning credit permits a credits of 20% of qualifying exp ( up to 10,000 per year) incurred in a year which the American Opportunity credit is not claimed with respect to a given student. Generally, lifetime learning credit is used for individuals who are beyond the first four years of postsecondary education.

General business credit: two specific rule

1. Any unused credit is carried back 1 year, then forward 20 years. 2. For any tax year, the general business credit is limited to the taxpayer's net income reduced by the greater of: a. The tentative minimum tax b. 25% of the net regular tax liability that exceeds 25,000

Child care exp credit-eligible employment related exp

1. Eligible expenses include amounts paid for: household services to enable the taxpayer to be employed 2. Child care exp incurred in the home 3. Out-of-the-home exp incurred for the care of a dependent underage age 13 or an older dependent/spouse who is physically or mentally incapacitated also qualify. 4. Child care payments to a relative are eligible for the credit unless the relative is a child (under age 19) of the taxpayer.

Education tax credits-phase out

1. The American Opportunity credit: 160,000-180,000 when AGI reaches 80,000 (160,000 for married). The reduction is equal to the extent to which AGI exceeds 80,000/160,000 as a percentage of a 10,000 phaseout range (20,000 for married) 2. Lifetime learning credit: 102,000-122,000 When AGI reaches 51,000(102,000 for married). The reduction is equal to the extent to which AGI exceeds 51,000/102,000 as a percentage of a 10,000 phaseout (20,000 for married) (See example 32,33)

Earned income tax credits purpose

1. The earned income credit has been consistently justified as a means of providing tax equity to the working poor. 2. The credit has been designed to reimburse the taxpayer for certain other Federal taxes, such as the gasoline and Social security taxes. 3. Encourage economically disadvantaged individuals to work.

Earned income credits eligibility requirement

1. meet the earned income and AGI thresholds 2. whether he or she has a qualifying child (the earned income credit is available to certain workers without children) 3. this provision is available only to taxpayers aged 25 through 64 who cannot be claimed as a dependent on another taxpayer's return

Maximum earned income credit

3,094 for a taxpayer with one qualifying child 5,112 for a taxpayer with two qualifying children 5,751 for a taxpayer with three or more qualifying children. 464 for a taxpayer with no qualifying child.

Earned income credit advance payment

An eligible individual may elect to receive advance payments of the earned income credit from employer. The amount that can be received in advance is limited to 60% of the credit that is available to a taxpayer with only one qualifying child. If this election is made, the taxpayer files W-5 with employer.

Education tax credit-books, room and board

Books and other course material are eligible for the American Opportunity credit (not lifetime learning credit) Room and board are INELIGIBLE for both credits.

Education tax credits-eligible individuals

Both available for qualified exp incurred by a taxpayer, taxpayer's spouse, or taxpayer's dependent. 1. The American Opportunity credit: available for each eligible student. Must take at least one and half of the full-time course load for at least one academic term at a qualifying educational institution. No comparable requirement exists. 2. Lifetime learning credit is calculated per taxpayer. Taxpayers seeking new job skills or maintaining existing skills through graduate training or continuing education.

Tax credit V.S. income tax deduction

Certain expenditures of individuals (business exp.) are permitted as deductions from gross income in arriving at AGI. Individuals are allowed to deduct certain nonbusiness and investment related expenses from AGI. While the tax benefit received from a tax deduction depends on the tax rate, a tax credit is not affected by the tax rate of the tax payer.

Nonrefundable credits

Credit for child and dependent care exp, Credit for elderly or disabled, adoption exp credit, Child tax credit, Education tax credits, Credit for certain retirement plan contributions, Foreign tax credit, General business credit -including tax credit for rehabilitation exp, jobs credit, work opportunity credit, research activities credit, low-income housing credit, disabled access credit, credit for small employer pension plan start up costs, credit for employer-provided child care)

What is earned income

Earned income: 1. Includes employee compensation and net earnings from self-employment. 2. Excludes items such as interest, dividends, pension benefits, nontaxable employee compensation and alimony.

Child care expenses credit eligibility

Either of the following: 1. A dependent under age 13 2. A dependent or spouse who is physically or mentally incapacitated and who lives with the taxpayer for more than one-half of the year

Payment by employers

Employer is responsible for withholding: 1. the employee's share of FICA 2. appropriate amounts of income taxes In addition, employer pays: 1. matches the FICA portion withheld 2. FULL cost of FUTA

Estimated tax

Estimiated tax is the amount of tax an individual expects to owe for the year after subtracting tax credits and income tax withheld. 1,000 or more in excess of withholding must take quarterly estimated tax payments

Amounts of FICA taxes

FICA has two components: 1. Social Security tax (old age, survivors and disability insurance) Rate: 4.2% for employee and 6.2% for employer; 10.4% for self-employers Ceiling: FICA withholding ceases for the Social Security portion (4.2%) once the employee has earned FICA wages of 106,800 2. Medicare tax (hospital insurance) Rate: 1.45% No limit

Self employment limitation

If an individual also receives wages subject to FICA, the ceiling amt of the Social Security portion (106,800) is reduced. The self-employment tax may be reduced to zero if a self-employed individual also receives FICA wages in excess of the ceiling amount. See example 37

Withholdings: two employment taxes

In addition to the withholding wages, the employer withhold a portion of wage payment that relates to employment taxes: 1. FICA 2. FUTA Self employed tax payers do not have employers, so no withholding occurs, but income and employment taxes are prepaid nonetheless.

Self-employment tax

Individuals with net earnings of 400 or more from self employment are subject to the self employment tax. In 2011, the self-employment tax is: 1. 10.4% of self-employment earnings up to 106,800 (for Social Security portion) PLUS 2. 2.9% of the total amount of self-employment earnings (the Medicare portion) Self employment taxpayers deduct a portion of the self-employment tax in determining the self-employment tax and in computing AGI.

Child care exp credit-earned income ceiling

Qualifying employment-related exp are limited to an individual's earned income. If a nonworking spouse is physically or mentally disabled or a full time student, s/he is deemed to have earned income for the purpose of this limitation. The deemed amount is 250 per month if there is one qualifying individual in the household or 500 for two in the household.

Refundable credits definition

Refundable credits are paid to the taxpayer even if the amount of the credit exceeds the taxpayer's tax liability.

Child credit phase out (not on test)

The available credit is phased out for higher income taxpayers beginning when AGI reaches 110,000 for joint filers (55,000 for married taxpayers filing separately) and 75,000 for single tax payers. The credit is phased out by 50 for each 1000.

Credit for child and dependent care expenses

The credit for child and dependent care expenses is a specified percentage of expenses incurred to enable to the taxpayer to work or to seek employment.

Child care credit calculation

The credit is equal to a percentage of reimbursed employment-related exp lesser of: 1. lower income spouse 2. 3000 or 6000 3. the amt you spent The credit varies between 20% to 35% (See example 30, 31)

Earned income credit phase out

The credit phases out to 0 as earned income increases from about 22,000 to about 50,000.

Child credit maximum

The maximum credit available is 1,000 per child.

Adoption expenses credit eligibility

Up to 13,360 of costs incurred to adopt an eligible child who is: 1. under 18 years at the time of the adoption or 2. physically or mentally incapable of taking care of himself or herself A taxpayer may claim the credit during or after the tax year. Phase out start 185,210. credit is completely eliminated when AGI reaches 225,210.

Foreign tax credit computation

lesser of: 1. the foreign taxes imposed 2. FTC overall limitation, which equal to the Federal income tax paid on the double taxed income Unused FTCs are carried back 1 year and forward 10 years. (See example 24, 25)

Foreign tax credit purpose

mitigate double taxation since income earned in a foreign country by a U.S. person is subject to both U.S. and foreign taxes.

Credit for certain Retirement plan contributions-saver's credit

taxpayers may claim a nonrefundable credit for certain retirement plan contributions based on eligible contributions of up to 2,000 certain qualified retirement plans (ROTH IRAs and 401K) Has to be > 18yrs and not a dependent nor full time student

Child credit eligibility

the child must be under age 17, a U.S. citizen, and claimed as a dependent on the taxpayer's return. A portion of the credit is refundable.