Income Tax Fundamentals 2019
Gerald E. Whittenburg
Martha Altus-Buller
Steven Gill
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1

 Calculate the child tax credit
 Determine earned income credit
 Compute child/dependent care credit
 Describe minimum essential coverage, individual shared responsibility provisions and calculate premium tax credit under Affordable Care Act
(ACA)
 Compute foreign tax credit
 Determine use and calculation of adoption credit
 Recognize basic individual credits for energy efficiency
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2


◦
Credits are used to target certain groups for tax benefit
◦
Provide equal benefit to all taxpayers

◦
Reduces tax liability in the amount of benefit
Deduction x tax rate = tax benefit
◦
Provides more benefit to higher income taxpayers
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3

 Credit to taxpayers with qualifying children
 Up to $2,000 credit for each child under age 17 claimed as a dependent who is “qualifying child” *
 Two parts – non-refundable and refundable
 Nonrefundable credit is claimed on Line 12 of Form 1040; Line 12 includes qualifying dependent credit of $500
 Refundable credit is claimed on Form 8812
 TCJA made three significant changes to child tax credit
1.
Increased the credit per child to $2,000
2.
Increased the threshold for when phase-outs start
3.
Increased the refundable amount of credit for certain taxpayers
*Note: additionally, TCJA added a new qualifying dependent credit of
$500 for certain dependents*
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 Credit is $2,000 per child; however, phases out when:
 AGI > $400,000 (MFJ)
 AGI > $200,000 (all others)
 Credit phased out $50 for each $1,000 (or part thereof) that
AGI exceeds threshold
 $500 “other dependent credit” for each qualifying dependent other than qualifying children . For example – dependent parent or dependent child older than 17
 Portion that is nonrefundable is limited to amount of tax liability prior to child tax credit
 For example: Dante and Sharon have a tax liability of $2,300 before any credits. They are eligible for an education credit of $600 and a child tax credit of $2,000. Their AGI = $30,000.
The two nonrefundable credits = $2,600 > tax liability = $2,300
Nonrefundable child tax credit limited to $2,300 - $600 = $1,700, and a $300 refundable child tax credit is created for balance
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5

 Form 8812 used for refundable portion called “additional child tax credit”
• Refundable amount = $1,400/qualifying child, but limited as follows:
• If <+2 qualifying children, additional credit is lesser of unused child tax credit due to tax liability or 15% of earned income over
$2,500. From prior slide – the $300 refundable credit is limited to 15% of earned income less $2,500, but not more than $1,400.
($30,000 - $2,500) x 15% = $4,125, so entire $300 is a refundable credit.
• If 3+ qualifying children, can only be used to offset FICA taxes
(note: cannot be used to refund FICA). Credit limited to greater of 15% of earned income over $2,500 or amount of FICA paid up to unclaimed child tax credit
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Kendra and Nguyen are taxpayers with children ages 25, 10, and 3 and they all have valid social security numbers. Their AGI is
$432,200 and they file jointly. What is their child tax credit, assuming all of their children are ‘qualifying children?’
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7

Example
Kendra and Nguyen are taxpayers with children ages 25, 10, and 3, and they all have valid social security numbers. Their
AGI is $432,200 and they file jointly. What is their child tax credit, assuming all of their children are ‘qualifying children?’
(Clearly their tax liability greatly exceeds the amount of the nonrefundable credit).
Solution
AGI exceeds threshold, therefore must figure phase-out
($432,200 - $400,000) / $1,000 = 32.2
Round 32.2 up to 33
(33 x $50) = $1,650 reduction
Child tax credit = ($2,000 X 2) + $500 - $1,650 =
$2,850
Note: The two youngest qualify for the child credit, and the oldest child for the ‘other dependent’ credit
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 Each child claimed must have TIN# by due date of return
• Qualifying dependent need not have SS# if credit is nonrefundable
 If taxpayer erroneously claims child tax credit (due to reckless/intentional disregard), then loses ability to claims for two tax years
• Extended to 10 years if fraudulent
 Preparers must complete Form 8867 (due diligence checklist)
 Refunds due to child tax credit will not be issued before
February 15 of subsequent year to give IRS time to review required information
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 Refundable credit
◦ Serves as “negative” income tax
◦
Intended to assist working poor by reducing tax burden
Taxpayers can get a refund even if they have no tax liability
 Taxpayer(s) with children can receive EIC
◦
AGI limits (see page 7-8)
– based on no qualifying kids, 1, 2, or 3+
◦
Not eligible if married filing separate
◦
All parties must have valid Social Security numbers
◦
Foreign income exclusion not allowed
◦
U.S. citizenship required for entire year
◦
Earned income must meet certain guidelines (see p 7-8)
◦ “Disqualified income” (certain types of investment income) must be less than $3,500
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 Taxpayer may get EIC, even without a qualifying child
◦
Have to meet all the qualifications of prior slide plus
◦
Taxpayer must be between ages 25 and 65
◦
Taxpayer cannot be eligible to be claimed as another taxpayer’s dependent or be a qualifying child of another taxpayer
◦
Taxpayer must live in U.S. for more than one-half of the tax year
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 Taxpayer may get EIC with a qualifying child, with two exceptions to Chapter 1 definition
• Child need not meet support test and
• Child must live in a U.S. home for more than ½ year
Also, qualifying child cannot be claimed by more than one person and taxpayer cannot be a qualifying child of another taxpayer
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 Each child claimed must have TIN# by due date of return
 If taxpayer erroneously claims earned income credit (due to reckless/intentional disregard) – then loses ability to claims for two tax years (longer if fraudulent)
 If IRS rejects EIC for any reason other than math/clerical error, taxpayer must complete Form 8862 to claim EIC in a future year
 Refunds due to earned income credit will not be issued before February 15 of subsequent year to give IRS time to review required information
 Preparer must complete Form 8867, a due diligence checklist
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 Use EIC tables to calculate or ask IRS to figure for you on Schedule EIC
◦
Appendix B provides EIC
◦
Compare to results on Worksheet A (on p. 7-15) and take smaller of the two calculations
◦
Shows up on line 66a in payments section
◦
For taxpayers with qualifying child, Schedule EIC required
 EIC is reported on page 2 of 1040
◦
Question : What is different about how this credit is reported on the 1040 compared to other credits?
◦
Answer : It acts like a payment of tax and therefore taxpayer can receive refund, even if no tax is due
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 Gives tax relief to working parents who must provide childcare for dependents
◦
Dependent must be under age 13 or
◦
Spouse or dependent who cannot care for themselves
 If child’s parents are divorced, child need not be dependent of taxpayer claiming credit if he/she lives more than 50% of year with that parent
 Multiply qualifying care costs (see next slide) by an applicable percentage, based on AGI
◦
From 35% down to 20%
◦
Credit percentages found on first page of Form 2441
(page 7-19) “Child & Dependent Care Expenses”
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15

 Determine qualifying expenses
•
In-home and out-of-home care
•
Day camps qualify, but not overnight camps
•
Camp must be focused on fun/games, not education
 Limited to the lesser of
•
Earned income of lowest earning spouse* or
•
$3,000 (1 dependent) or $6,000 (2+ dependents), reduced by any amounts reimbursed by employer

*If spouse is full time student, count him/her as earning
$250/month (1 dependent) or $500/month (2+ dependents)
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16

Example
Joanne has salary of $58,400 and investment income of $2,100. Lou, her spouse, is a full-time student for 12 months/year. They have three children under 13 and total daycare costs of
$12,800.
What is their Child and Dependent Care
Credit?
How would this change if Lou is not a student and works part-time, earning
$3,000, and Joanne received $2,200 of employer-provided dependent care assistance?
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17

Solution
Qualifying costs are lesser of:
Her earned income $58,400 or his earned income $6,000
(imputed at $500 per month) or annual daycare bill of $12,800, but can only use $6,000
Multiply by % from table on Form 2441 (based on AGI)
$6,000 x 20% = $1,200 credit
If Lou works and Joanne receives assistance, qualifying costs are lesser of:
Her earned income $58,400 or his earned income $3,000 or annual net daycare bill $12,800 - $2,200 = $10,600
Multiply by % from table on Form 2441 (based on new AGI)
$3,000 x 20% = $600 credit
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18


• 3.8% net investment income tax and .9% Medicare surtax impact high income taxpayers

• Can be for things like general hardship, religious opposition, unaffordability based on projected household income, etc. (table on p. 7-21)
• Report on Form 8965 (p. 7-23)
• Taxpayer issued an ECN “Exemption Certificate #”
Some provisions of ACA beyond scope of textbook (for example, the employer’s shared responsibility provision)
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19

 Need to show minimum essential coverage (MEC) or pay a ‘penalty tax’ for failure to meet these levels

This will not apply after 2018
MEC is level of health coverage that ensures essential
 benefits are provided
Taxpayer can purchase from
•
Insurance company
•
•
Through his/her employer
From health insurance exchange
Note: all plans must meet MEC, but coverage options vary and include bronze, silver, gold and platinum

Health insurance companies, self-insured employers, insurance exchanges, etc. that provide MEC issue yearend forms to taxpayer (Form 1095-A, 1095-B or 1095-C)
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20


Individual shared responsibility is calculated as an annual number, then divided by 1/12 for monthly use o
Applied to each household member without coverage or an exemption

MEC = greater of
(AGI taxpayer’s filing threshold) x 2.5% or
$695/adult plus $347.50/child
(family maximum of $2085)
Capped by national average annual bronze premium on federal exchange; for 2018 = $3,396 per person
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
Eligible taxpayers (requirements on pages 7-26 – 7-27) may receive tax credit to lower the cost of health care o o o
Income eligibility is 400% of poverty level
Taxpayers below poverty level are eligible for
Medicaid and not the credit
Use specific tables to compute allowable credit; lesser of o o
Actual health care premiums paid or
Silver plan premiums less the taxpayer’s expected contribution healthcare premiums
See pages 7-29 – 7-31 for
Form 8962 Premium Tax Credit (PTC)
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Tax law contains number of provisions intended to reduce cost of higher education – threaded throughout book
Benefit
Exclusion from gross income for scholarships
Employer-provided education assistance plans
Tuition reduction for school employees
Deduction of educational expenses
Student loan interest deduction
Qualified tuition programs
Coverdell ESAs
Tuition deduction (currently expired)
American Opportunity tax credit
Lifetime Learning credit
Learning
Objective
2.12
2.5
2.5
3.6
5.8
2.14
2.14
2.14
7.5
7.5
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 Provides tax relief for qualified higher ed expenses – p. 7-34
 Calculated on Form 8863 (pp. 7-35 – 7-36)
 Available for each eligible student ( taxpayer, spouse or dependent) in first 4 years of college. To be eligible, student
◦
Pursue a degree/recognized credential
◦
Attend at least 1/2 time for one term during tax year
◦
Have no prior felony drug conviction
◦
Receive Form 1098-T from higher education institution
 Credit = 100% of first $2,000 + (25% of the next $2,000)
◦
Maximum credit = $2,500
◦
Phased out when AGI > certain levels (page 7-37)
◦
40% of it is refundable
 Preparer must complete Form 8867 (due diligence)
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 Provides tax relief for education expenses - encourages taxpayers to take courses to acquire or improve job skills
◦
Tuition and fees only (not books)
◦ Can be used for less than ½ time attendance
◦
Credit is not subject to felony drug offense restrictions
 Calculated on Form 8863 -- Credit = 20% of first $10,000
◦
Maximum credit = $2,000 per year
◦
Lower AGI phase-outs than American Opportunity Credit
◦
May take credit in relation to undergraduate, graduate or professional courses
◦
No limit on number of years you may claim LLC
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 For each student, taxpayer can get only one of the credits
 May take LLC for one student and AOTC for another student
 Only the person claiming the dependency exemption can claim a credit
 Cannot claim for sports, games and hobbies, unless the course is part of a degree program
 Must reduce expenses by tax-free scholarships or employer reimbursements
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Example
Dave and Val (MFJ) have 2 dependent children and have AGI of $72,000. Sean is taking 4 credits (parttime enrollment) at City College of Newark. His tuition and fees are $4,200. Corey is a freshman at
Tulane. Her tuition and fees are $39,200. Neither child has a felony drug conviction. What amounts may Dave and Val claim as education credits?
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27

Example
Dave and Val (MFJ) have 2 dependent children and have AGI of $72,000.
Sean is taking 4 credits (part time enrollment) at City College of
Newark. His tuition and fees are $4,200. Corey is a freshman at
Tulane. Her tuition and fees are $39,200. Neither child have felony drug convictions. What amounts may Dave and Val claim as education credits, assuming no scholarships?
Solution
Val and Dave may take $3,340 in total education credits . Their AGI is below the phase-out limits for both credits, so they get the full amount.
Sean may not take the AOTC because he is not enrolled half time.
Therefore (20%)($4,200) = $840 lifetime learning credit
Corey, as a freshman, qualifies for the AOTC
(100%)($2,000) + (25%)($2,000) = $2,500 AOTC
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28

 U.S. taxpayers are allowed foreign tax credit on income earned in foreign country and subject to income taxes in that country
◦
Mostly seen on dividends on foreign stock investments
◦
Reported on Form 1116 (or if attributable to small amounts of withholding ($300/$600 S/M) then don’t need Form 1116
◦
Can be carried back 1 year and forward 10 years
 Provides relief from double taxation on money generated from foreign sources
◦
Maximum credit is amount paid to foreign governments
◦
But limited to:
Net foreign income x U.S. tax liability
U.S. taxable income before credit
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29

Example
Joe Steele had $200,000 income from U.S. and
$100,000 income from employment in Lithuania.
He paid $40,000 in Lithuanian taxes. Assume his
U.S. tax liability is $85,069; what is Joe’s foreign tax credit for the current year?
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30

Example
Joe Steele had $200,000 income from U.S. and $100,000 income from employment in Lithuania. He paid $40,000 in
Lithuanian taxes. Assume his U.S. tax liability is $85,069; what is Joe’s foreign tax credit for the current year?
Solution
Maximum Foreign Tax Credit is the $40,000 paid; limited to:
($100,000/$300,000) x $85,069 = $28,356 credit
Carry back (one year) or forward (ten years) the unused portion:
($40,000 - $28,356) = $11,644
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31

 IRS provides a credit as relief to taxpayers who pay adoption expenses and are married filing jointly
 Credit is amount spent up to $13,810 per adoption o
Adoption credit begins to phase out when AGI > $207,140 o
Different rules if pay expenses over more than one year or if foreign adoption or special needs child
 Qualified adoption expenses include court costs, legal fees, travel, etc.
 Unused credits can be carried over for up to 5 years
 Calculated on Form 8839
 Special rules for domestic and foreign multiyear adoptions
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32

 If an employer pays qualified adoption expenses on behalf of a taxpayer o
Employee may exclude amounts paid by employer o
Must occur under adoption assistance program
 Taxpayer may claim adoption credit and adoption exclusion for same adoption o
But cannot claim both credit and exclusion for the same expenses
 The total amount excludable per child is limited to
$13,810 (subject to phase out)
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33

Credit
Electric vehicle
Nonbusiness energy property
Residential energy efficient property (REEP)
Qualified fuel cell motor vehicle
Qualified alternative fuel vehicle refueling property
IRC Section
30D
25C
25D
30B
30C
Status
Active
Expired 2017
Active
Expired 2017
Expired 2017
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
° Amounts vary, based on combination of weight and kilowatt hour of traction battery capacity (between $2,500 -
$7,500)
° Credit phases out for each car manufacturer when they hit
200,000 cars sold
° Allowed for Chevy Volt, Nissan Leaf, Honda Clarityand numerous other electric vehicles
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 Credit for alternative energy expenditures installed at taxpayer’s primary or secondary residence
◦
30% credit for qualified installation of solar, wind or ground source geothermal heat pumps
◦
Reduced to 26% for property placed in service starting in 2020, further reduced to 22% in 2021
◦ Can’t get credit for heating swimming pool or hot tub
 Intent is to aid solar/wind industries, while encouraging use of renewables
 Reported on Form 5695
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My head hurts!
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