2013 cch basic principles ch09
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Chapter 9
Tax Credits, Prepayments, and AMT
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Chapter 9 Exhibits
1. Tax Credits2. Household and Dependent Care Credit3. Elderly and Disabled Persons Credit 4. Child Tax Credit5. American Opportunity Tax Credit6. Lifetime Learning Credit7. American Opportunity Tax and Lifetime Learning Credits8. American Opportunity Tax and Lifetime Learning Credits Phaseout Rules9. Adoption Assistance Credit
Chapter 9, Exhibit Contents A
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Chapter 9 Exhibits
10. Foreign Tax Credit11. Obtaining Credit for Excess Withholdings 12. Earned Income Credit13. Alternative Minimum Tax14. AMT Adjustments15. AMT Preferences16. AMT Exemptions
Chapter 9, Exhibit Contents B
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Tax Credits
A tax credit is a direct reduction of the tax due. It differs from a deduction, which is a reduction of income subject to tax. A tax credit is more valuable than a deduction of the same amount.
There are 2 types of credits:
Refundable credits generally represent prepayments of tax (with the exception of the earned income and child tax credits). The credit may be refunded to the taxpayer even if there is no tax liability.
Nonrefundable credits – there have been no prepayments, therefore the taxpayer cannot obtain a refund if the credit exceeds the gross tax.
Chapter 9, Exhibit 1
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Household and Dependent Care Credit
The household and dependent care credit is a nonrefundable tax credit.
A credit is allowed for up to 35% of employment related expenses for the care of a qualifying individual.
Expenses are limited to $3,000 for 1 qualifying individual ($6,000 for 2 or more qualifying individuals).
Phaseout The credit percentage is 35%, reduced by 1 percentage point for each $2,000 of adjusted gross income, or fraction thereof, above $15,000. The credit cannot be reduced below 20%.
Chapter 9, Exhibit 2a
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Qualifying individual can be a child under age 13, or a mentally or physically handicapped dependent or spouse.
“Gainful employment” expenses must be incurred to
enable the taxpayer to be employed or to seek employment.
Expenses may include household services such as babysitting and housekeeping. It also covers outside services, such as daycare, as long as the service is in a qualified facility.
Chapter 9, Exhibit 2b
Household and Dependent Care Credit
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35% x the lesser of (a), (b), or (c) a = actual gainful employment expenses
b = $3,000 per qualifying individual, not to exceed $6,000
c = earned income (if married, use income of the spouse with the lower income)
If one spouse is a full-time student or incapable of self-care, their earned income is $250 per month for 1 qualifying individual, or $500 per month for 2 or more qualifying individuals.
Chapter 9, Exhibit 2c
Household and Dependent Care Credit
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Eligible taxpayers must meet one of the following two conditions:
1. Reach age 65 before the end of the tax year 2. Retire under age 65 before the end of the tax year due to
total, permanent disability.
Married taxpayers. Married taxpayers must file jointly unless they have lived apart for the entire year.
Elderly and Disabled Persons Credit
Chapter 9, Exhibit 3a
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The credit is nonrefundable and is computed as follows:
[(a) – (b) – (c)] * 15% a = Base amount of $5,000 (or $7,500 for married filing joint return
with both spouses age 65 or older)
b = Tax-exempt pension benefits such as tax-exempt Social Security benefits
c = Income level adjustment: 50% x (AGI – $10,000) for married persons filing jointly 50% x (AGI – $ 7,500) for single persons 50% x (AGI – $5,000) for married persons filing separately
Chapter 9, Exhibit 3b
Elderly and Disabled Persons Credit
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Child Tax Credit
Taxpayers with one or more “qualifying children” are allowed a
credit of $1,000 per child.
The “qualifying child” must be:
A son or daughter for whom the taxpayer may claim a dependency exemption (i.e., natural, step, adopted, or foster pending adoption) and
Less than 17 years old at the close of the tax year.
Chapter 9, Exhibit 4a
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A portion of the child tax credit is a refundable credit. This means that a tax liability does not have to exist in order for the taxpayer to receive the credit.
The credit is refundable for 15% of earned income in excess of $3,000 (up to the maximum per child amount).
The nonrefundable credit must be reduced by the amount of the refundable credit.
Chapter 9, Exhibit 4b
Child Tax Credit
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Phaseout of child tax credit. The total amount of credits is reduced $50 for each $1,000, or fraction thereof, of modified AGI above the following threshold levels:
Filing Status Threshold for Modified AGI:
Single, head of household,surviving spouse
$ 75,000
Married filing jointly $110,000
Married filing separately $ 55,000
Chapter 9, Exhibit 4c
Child Tax Credit
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American Opportunity Tax Credit
The American Opportunity Tax Credit provides a maximum nonrefundable tax credit of $2,500 per student for the first four completed years of undergraduate education.
The $2,500 per student limitation is computed as follows:
100% of the first $2,000 of qualified expenses plus
25% of the next $2,000 of qualified expenses.
Chapter 9, Exhibit 5
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The Lifetime Learning Credit allows a maximum nonrefundable tax credit of $2,000 per taxpayer for an unlimited number of years if qualified tuition expenses are paid:
after June 30, 1998, and in a year in which the Hope Scholarship Credit is not
claimed for a given student.
The $2,000 limitation is computed as 20% of the first $10,000 of qualified expenses.
Lifetime Learning Credit
Chapter 9, Exhibit 6
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Qualified Students. Qualified students consist of the taxpayer, the taxpayer’s spouse, or the taxpayer’s dependents.
American Opportunity Tax Credit. To qualify, a student must carry at least one-half the normal full-time workload for the course of study the student is pursuing.
Lifetime Learning Credit. A student qualifies even if he or she carries less than one-half the normal full-time workload.
The American Opportunity Tax credit is denied if a student has been convicted of a federal or state felony drug offense.
American Opportunity Tax and Lifetime Learning Credits
Chapter 9, Exhibit 7a
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Qualified expenses. Qualified expenses include tuition and fees but NOT books, room and board, student activity fees, insurance expenses, or athletic fees.
Qualified programs. The American Opportunity Tax Credit is not allowed for the expenses of any graduate or advanced degree programs. However, the Lifetime Learning Credit is allowed for the expenses of any undergraduate, graduate, or vocational program.
Chapter 9, Exhibit 7b
American Opportunity Tax and Lifetime Learning Credits
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American Opportunity Tax and Lifetime Learning Credits Phaseout Rules
Phaseout of American Opportunity Tax and Lifetime Learning Credits. The sum of American Opportunity Tax Credits and Lifetime Learning Credits phase out at the following thresholds for modified AGI.
Filing Status Threshold for Modified AGI
Floor Ceiling Phaseout Range
Single, head of household, surviving spouse
$80,000 $90,000 $10,000
Married filing jointly $160,000 $180,000 $20,000
Married filing separately N/A N/A N/A
Chapter 9, Exhibit 8
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Adoption Assistance Credit
Taxpayers who adopt an eligible adoptee may claim a nonrefundable tax credit for qualified adoption expenses of up to $12,650 for each eligible adoptee.
If adoption expenses are paid through an employer adoption assistance program, the expenses paid by the employer may be excluded up to the limits stated above.
The credit will begin to phase out when a taxpayer’s AGI exceeds $189,710.
Chapter 9, Exhibit 9
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Foreign Tax Credit
U.S. citizens are taxed on world-wide income.
U.S. citizens working in other countries are possibly subject to foreign taxes.
To avoid possible double taxation, a U.S. citizen a allowed a nonrefundable credit on their U.S. tax return for foreign taxes paid.
Chapter 9, Exhibit 10a
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The credit is equal to the lesser of actual foreign taxes paid or a limitation.
The formula for computing the credit limitation is:
Foreign Income × U.S. Tax liability U.S. Income
* U.S. income is AGI less itemized deductions or the standard deduction.
Chapter 9, Exhibit 10b
Foreign Tax Credit
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Excess federal income tax withholdings. Withholdings from employee wages for income tax are treated as refundable credits reported on page 2 of Form 1040.
Chapter 9, Exhibit 11a
Obtaining Credit for Excess Withholdings
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Obtaining Credit for Excess Withholdings
Excess FICA withholdings: 2 or more employers. Withholdings from wages for FICA tax are also refundable, but only if the aggregate withheld by two or more employers is in excess of the maximum. The refundable amount is reported as a credit on page 2 of Form 1040. (Employers are not entitled to this same credit)
Chapter 9, Exhibit 11b
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Excess FICA withholdings: 1 employer.
If the FICA tax withheld by only one employer exceeds the maximum limit, the employee must seek a refund from the employer, not the IRS.
Chapter 9, Exhibit 11c
Obtaining Credit for Excess Withholdings
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Earned Income Credit
The earned income credit is provided for low income workers. The credit is refundable even if no tax liability exists.
The credit is computed as follows:
No Child – 7.65% of the first $6,210 of earned income.1 Child – 34% of the first $9,320 of earned income.2 Children – 40% of the first $13,090 of earned income.
Phase-outs apply.
Chapter 9, Exhibit 12a
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Any taxpayer without qualifying children must meet the following requirements:
Principal residence requirement. The taxpayer has a principal residence in the U.S. for over half the tax year.
Age requirement. The individual or his/her spouse (if married) is at least age 25 but not over age 64 by the end of the tax year.
Nondependent requirement. The taxpayer cannot be claimed as a dependent for the tax year in which the credit is claimed.
Limits on earned income. Phaseout ranges apply.
Chapter 9, Exhibit 12b
Earned Income Credit
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Any taxpayer with qualifying children must meet the following requirements:
Principal abode of child. The taxpayer must maintain a household in the U.S. that is the principal abode for over half a year of a dependent child under age 19 or a student, dependent disabled child, or married child for whom the taxpayer may claim a dependency exemption.
Head of household or surviving spouse taxpayers. For individuals qualifying as head of household or surviving spouse, a child who is under age 19 or a student need not be a dependent.
Married taxpayers. Married taxpayers must file jointly to receive the credit.
Limits on earned and unearned income. Phaseout ranges apply.
Chapter 9, Exhibit 12c
Earned Income Credit
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Alternative Minimum Tax
Start with Taxable Income
Add or subtract Adjustments
Add Tax Preferences
= Alternative Minimum Taxable Income (AMTI)
Subtract Exemption Amount
= Net Alternative Minimum Taxable Income
Multiply by the Tax Rate
= Tax
Chapter 9, Exhibit 13a
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Tax (from previous slide)
Minus the Alternative Minimum Foreign Tax Credit
= Tentative Minimum Tax (TMT)
Minus regular tax for the year
= Alternative Minimum Tax
Chapter 9, Exhibit 13b
Alternative Minimum Tax
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AMT Adjustments
Adjustments for Depreciation
Taxpayers must re-compute depreciation for real property acquired prior to 1999 using 40 year straight line depreciation.
Depreciation on personal property must be re-computed using 150% declining balance method.
Chapter 9, Exhibit 14a
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Personal Exemption & Standard and Itemized Deductions
The personal exemption amount must be added back. The standard deduction amount must be added back, if taken
when computing regular tax liability. Medical expenses allowed to the extent they exceed 10% of
AGI. No deductions allowed for state and local property and income
taxes, must be added back. No deductions allowed for miscellaneous itemized deductions,
must be added back.
Chapter 9, Exhibit 14b
AMT Adjustments
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AMT Preferences
The following preferences must be added back to taxable income in order to compute AMTI.
The amount by which the percentage depletion deduction exceeds the adjusted basis of the property at year end.
Tax exempt interest on private activity bonds. Does not apply to bonds issued for tax-exempt charities or to bonds issued for public purposes, such as schools.
7% of the excluded portion of gains from the sale of small business stock (50% of gains are excluded if the stock was held more than 5 years). Thus, 3.5% of the gain will be treated as an AMT preference.
Chapter 9, Exhibit 15
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AMT Exemptions
2011 rates (The 2012 amounts have not been published.)
$74,450 Married filing jointly
$48,450 Single
$37,225 Married filing separately
The exemption is reduced by 25% by the amount which AMTI exceeds the following amounts:
$150,000 Married filing jointly
$112,500 Single
$75,000 Married filing separately.Chapter 9, Exhibit 16