Chapter 12
Tax Credits and
Payments
Comprehensive Volume
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
1
The Big Picture
• Tom and Jennifer Snyder have two dependent children in
college.
– Lora is a freshman
• Her tuition and required fees in 2014 total $14,000.
• She has a scholarship amounting to $6,500, and the Snyders paid the
balance of her tuition ($7,500), plus room and board of $8,500.
– Sam is a junior, and the Snyders paid $8,100 for his tuition plus $7,200
for his room and board.
• The Snyders have AGI of $158,000.
• They would like to know what tax options are available to
them related to these educational expenses.
– They have heard about education tax credits, but they believe that their
income is too high for them to get any benefit.
– Are they correct?
• Read the chapter and formulate your response.
2
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
3
Refundable vs Nonrefundable Credits
(slide 1 of 2)
• Refundable credits
– Paid even if the tax liability is less than amount of
credit
4
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
5
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
6
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
7
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
8
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
9
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
10
Work Opportunity Tax Credit
(slide 1 of 2)
• 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
11
Work Opportunity Tax Credit
(slide 2 of 2)
• 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
12
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
13
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
14
Research Activities Credit
(slide 1 of 5)
• Comprised of three parts
– Incremental research activities credit
– Basic research credit
– Energy research credit
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)
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 research expenses 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
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 taxexempt 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
18
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
19
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 lowincome tenants
– Credit is allowed over a 10-year period
– Subject to potential recapture
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
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
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
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
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 through 2017, Congress has increased
• Credit percentage for families with three or more
children, and
• Phaseout threshold amounts for married taxpayers filing
joint returns
25
Earned Income Credit
(slide 2 of 3)
• Credit amount (2014 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 $23,260 for MFJ with qualifying child
($17,830 for other taxpayers)
• Use IRS tables to calculate exact credit amount
26
Earned Income Credit
(slide 3 of 3)
• Credit for taxpayers having no children
– Available to taxpayers aged 25 through 64
• Credit amount for couple filing jointly with no
qualifying children (2014 tax year)
– 7.65% × earned income (up to $6,480)
– Phase-out of credit begins when earned income (or
AGI) exceeds $13,540 for MFJ ($8,110 for others)
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
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
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
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 × 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
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 $13,190 (in 2014)
– Credit is phased-out ratably for modified AGI
between $197,880 and $237,880 (in 2014)
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
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
34
Child Tax Credit
(slide 2 of 2)
• Credit is phased out by $50 for each $1,000 (or
part thereof) of AGI above specified levels
– $110,000 for joint filers
– $55,000 for married filing separately
– $75,000 for single
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
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
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, physically or mentally incapacitated
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
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
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 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
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 2014)
• Cannot be claimed in same year the American
Opportunity credit is claimed
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
42
Education Tax Credits
(slide 4 of 5)
• Both education credits are subject to income
limitations, which differ for years after 2008
– 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 MFJ)
– The credit is completely eliminated when modified AGI
reaches $90,000 ($180,000 for MFJ)
43
Education Tax Credits
(slide 5 of 5)
• The lifetime learning credit amount is phased out when
modified AGI reaches $54,000 ($108,000 for MFJ)
– The credit is completely eliminated when AGI reaches $64,000
($128,000 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
44
The Big Picture - Example 32
American Opportunity Credit
• Return to the facts of The Big Picture on p. 13-1.
• Recall that Tom and Jennifer Snyder are married, file a joint
tax return, have modified AGI of $158,000.
– Both Lora (a freshman) and Sam (a junior) are full-time students and
are Tom and Jennifer’s dependents.
• The Snyders paid the following education expenses.
– $7,500 of tuition and $8,500 for room and board for Lora, and
– $8,100 of tuition plus $7,200 for room and board for Sam.
• Lora’s and Sam’s tuition are qualified expenses for the
American Opportunity credit.
– For 2014, Tom and Jennifer may claim a $2,500 American Opportunity
credit [(100% $2,000) + (25% $2,000)] for both Lora’s and Sam’s
expenses.
– In total, a $5,000 American Opportunity credit.
45
The Big Picture - Example 33
American Opportunity Credit Phaseout
• Return to the facts of The Big Picture on p. 13-1.
• Now assume that Tom and Jennifer’s modified AGI for 2014
is $172,000 instead of $158,000.
• Tom and Jennifer are eligible to claim a $2,000 American
Opportunity credit for 2014.
– Their $5,000 available American Opportunity credit must be reduced
because their AGI exceeds the $160,000 limit for married taxpayers.
– The percentage reduction is computed as the amount by which
modified AGI exceeds the limit, expressed as a percentage of the
phaseout range, or
– ($172,000 - $160,000)/$20,000) = 60% reduction.
– Therefore, the maximum available credit for 2014 is $2,000.
• $5,000 X 40% allowable portion.
46
The Big Picture - Example 34
Lifetime Learning Credit
•
Return to the facts of The Big Picture on p. 13-1.
• Assume that Tom and Jennifer’s modified AGI is $122,000 and that Tom is
going to school part-time to complete a graduate degree
– He pays qualifying tuition and fees of $4,000 during 2014.
• As Tom and Jennifer’s modified AGI is below $160,000, a $5,000
American Opportunity credit is available to them for Lora and Sam’s
tuition .
• In addition, Tom’s qualifying expenses are eligible for the lifetime learning
credit.
– The available lifetime learning credit of $800 ($4,000 X 20%) must be reduced
because their modified AGI exceeds the $108,000 limit for married taxpayers.
– As their modified AGI exceeds the $108,000 limit by $14,000 and the phaseout
range is $20,000, their lifetime learning credit is reduced by 70%.
– Therefore, their lifetime learning credit for 2014 is $240 ($800 X 30%)
• Their total education credits amount to $5,240
– $5,000 American Opportunity credit and $240 lifetime learning credit.
47
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
48
Small Employer Health
Insurance Credit
• Health Care Act of 2010 provides a tax credit for a
qualified small employer for nonelective
contributions to purchase health insurance for its
employees
– To qualify for credit, employer must
• Have no more than 25 full-time equivalent employees whose
annual full-time wages average no more than $50,800
• Pay at least half the cost of the health insurance premiums
– The credit is 50% of the health insurance premiums paid
(35% in years 2010 through 2013)
• It is subject to a phaseout if the employer has more than 10 fulltime equivalent employees and/or has annual full-time wages that
average more than $25,400
49
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)
50
Payment Procedures
(slide 2 of 8)
• Social Security & Medicare
– 2014 rates
• Social Security: 6.2% of first $117,000 wages
• Medicare: 1.45% of all wages
– If employee is overwithheld for Social Security, excess is
refundable credit
51
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
52
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
53
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)
54
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
55
Payment Procedures
(slide 7 of 8)
• Self-employment tax
– Taxpayers with net self-employment earnings of at
least $400 must pay self-employment tax
• 2014 rates
– Social Security: 12.4% of first $117,000 net self-employment
income
– Medicare: 2.9% of all net self-employment income
• These rates are twice what an employee pays on wages
56
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 selfemployment tax, and
– Taxpayer receives a for AGI deduction for 50% of the selfemployment tax paid
57
Additional Medicare Taxes on
High-Income Individuals
• The Health Care Act of 2010 and the Health
Care Reconciliation Act of 2010 include 2
provisions that increase Medicare taxes for
high-income individuals beginning in 2013:
– An additional .9% tax on wages received in excess
of specified amounts, and
– An additional 3.8% tax on unearned income
58
Additional Tax on Wages
• For tax years beginning after 12/31/2012 an
additional .9% Medicare tax is imposed on wages
received in excess of
– $250,000 for married taxpayers filing jointly,
– $125,000 for married filing separately, and
– $200,000 for all other taxpayers
• The additional tax on a joint return is on the
combined wages of the employee and the employee’s
spouse
• Also applies to self-employed individuals
– Net earnings from self-employment is used for the
threshold computations
59
Additional Tax on Unearned Income
(slide 1 of 2)
• For tax years beginning after 12/31/2012 an
additional 3.8% Medicare tax is imposed on the
unearned income of individuals, estates, and trusts
– For individuals, the tax is 3.8% of the lesser of:
• Net investment income, or
• The excess of modified adjusted gross income (MAGI) over
– $250,000 for married taxpayers filing a joint return
– $125,000 if married filing separately, and
– $200,000 for all other taxpayers
• This is in addition to the additional .9% Medicare tax
on wages or self-employment income.
60
Additional Tax on Unearned Income
(slide 2 of 2)
• In general, net investment income includes
interest, dividends, annuities, royalties, rents,
and net gains from the sale of investment
property less related deductions
• MAGI = AGI + any foreign earned income
exclusion
– Thus, for individuals who don’t have any excluded
foreign earned income, MAGI is the same as AGI
61
Refocus On The Big Picture (slide 1 of 2)
• Recent tax legislation made significant changes in education
tax credits.
• The American Opportunity tax credit provides some relief for
Tom and Jennifer Snyder.
– Both Lora and Sam qualify for a $2,500 American Opportunity credit
in 2014.
• 100% of the first $2,000 and 25% of the next $2,000 of qualified expenses.
• These credits are phased out for married taxpayers’ as AGI
exceeds $160,000.
– Since the Snyders’ AGI is only $158,000, the total education credits
available to them on their 2014 income tax return is $5,000.
– Further, this credit may be used to offset any AMT liability.
– 40% ($2,000) is refundable to the Snyders.
62
Refocus On The Big Picture (slide 2 of 2)
• What If?
• What if the Snyders’ AGI is $188,000?
– In 2014, the Snyders would not qualify for any education
credits
• Their income exceeds the limits for both the American Opportunity
and the lifetime learning credits.
– A deduction for AGI is allowed for qualified tuition and
related expenses involving higher education.
• However, their AGI exceeds the $160,000 maximum allowed for a
deduction (see Chapter 9 for additional details).
63
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
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
64