Copyright ©2010 Cengage Learning
C13-1

Tax 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 $250
Tax benefit if tax deduction is allowed –0– $150 $350
C13-2

Refundable vs Nonrefundable
Credits
(slide 1 of 2)
• Refundable credits
– Paid even if the tax liability is less than amount of credit
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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
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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
C13-5

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
C13-6

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
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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
C13-8

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
C13-9

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
C13-10

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
C13-11

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
C13-12

(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
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(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
C13-14

Research Activities Credit
(slide 1 of 5)
• Comprised of three parts
– Incremental research activities credit
– Basic research credit
– Energy research credit
C13-15

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)
C13-16

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
C13-17

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
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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
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Low-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
C13-20

Disabled 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
C13-21

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
C13-22

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
C13-23

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
C13-24

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
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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
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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)
C13-27

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
C13-28

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
C13-29

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
C13-30

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
Worldwide TI
× U.S. tax before credit
= 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
C13-31

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
C13-32

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
C13-33

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
C13-34

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
C13-35

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
C13-36

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
C13-37

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
C13-38

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
C13-39

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
C13-40

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
C13-41

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 fulltime course load
– No such requirement for lifetime learning credit
C13-42

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)
C13-43

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
C13-44

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)
C13-45

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
C13-46

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
C13-47

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
C13-48

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
C13-49

Making 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
C13-50

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
C13-51

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)
C13-52

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)
C13-53

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
C13-54

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
C13-55

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
C13-56

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)
C13-57

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
C13-58

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 selfemployment income
– Medicare: 2.9% of all net self-employment income
• These rates are twice what an employee pays on wages
C13-59

Payment Procedures
(slide 8 of 8)
• Self-employment tax
– Taxpayer receives a deduction from net selfemployment 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
C13-60

If you have any comments or suggestions concerning this
PowerPoint Presentation for South-Western Federal
Taxation, please contact:
Dr. Donald R. Trippeer, CPA trippedr@oneonta.edu
SUNY Oneonta
C13-61