comprehensive volume c12-1 chapter 12 tax credits and payments copyright ©2010 cengage learning...

C12-C12-11Comprehensive VolumeComprehensive Volume

Chapter 12Chapter 12

Tax Credits and PaymentsTax Credits and Payments

Copyright ©2010 Cengage Learning

Comprehensive Volume


Tax Credit VS. Tax DeductionTax 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 $250Tax benefit if tax deduction is allowed –0– $150 $350

• 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 $250Tax benefit if tax deduction is allowed –0– $150 $350


Refundable vs Nonrefundable Credits (slide 1 of 2)


• Refundable credits– Paid even if the tax liability is less than amount

of credit

• Refundable credits– Paid even if the tax liability is less than amount

of credit




• 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

• 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


General Business Credit (slide 1 of 2)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

• 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


General Business Credit (slide 2 of 2)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

• 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


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

• 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




• 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

• 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




• 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

• 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


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

• 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




• 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

• 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




• 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

• 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


Work Opportunity Tax Credit: Long-Term Family Assistance Recipient

(slide 1 of 2)


(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

• 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



(slide 2 of 2)


(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

• 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


Research Activities Credit (slide 1 of 5)


• Comprised of three parts– Incremental research activities credit– Basic research credit– Energy research credit

• Comprised of three parts– Incremental research activities credit– Basic research credit– Energy research credit




• 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)

• 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)




• 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

• 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




• 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

• 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




• 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

• 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


Low-income Housing CreditLow-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

• 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


Disabled Access CreditDisabled 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

– 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


Credit For Pension Plan Startup Costs

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

• 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


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

• 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




• 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

• 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


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

• 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




• 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

• 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




• 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)

• 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)


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

• General qualifications– Age 65 or older, or– Under age 65 and permanently and totally

disabled




• 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

• 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


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

• 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




• 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

• 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


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

• 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




• 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

• 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


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

• Credit amount is $1,000 per child

• Eligible children are:– Under age 17,– US citizen, and– Claimed as dependent on taxpayer’s tax return




• 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

• 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


Child and Dependent Care Credit

(slide 1 of 4)


(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

• 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



(slide 2 of 4)


(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

• 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



(slide 3 of 4)


(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

• 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



(slide 4 of 4)


(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

• 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


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

• 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




• 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

• 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




• Eligible individuals include taxpayer, spouse, and taxpayer’s dependents

• To be eligible for American Opportunity credit, student must take at least 1/2 of full-time course load– No such requirement for lifetime learning credit

• Eligible individuals include taxpayer, spouse, and taxpayer’s dependents

• To be eligible for American Opportunity credit, student must take at least 1/2 of full-time course load– No such requirement for lifetime learning credit




• 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)

• 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)




• 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

• 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


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)

• 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)




• 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

• 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




• 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

• 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




• 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

• 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


Credit For Certain Retirement Plan Contributions

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

• 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


Making Work Pay CreditMaking 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

• 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


Recovery Rebate Credit (slide 1 of 2)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

• 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


Recovery Rebate Credit (slide 2 of 2)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)

• 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)


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)

• 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)




• 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

• 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




• 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

• 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




• 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

• 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




• 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)

• 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)




• 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

• 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




• 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 self-employment income

– Medicare: 2.9% of all net self-employment income

• These rates are twice what an employee pays on wages

• 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 self-employment income

– Medicare: 2.9% of all net self-employment income

• These rates are twice what an employee pays on wages




• Self-employment tax– Taxpayer receives a deduction from net self-

employment 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

• Self-employment tax– Taxpayer receives a deduction from net self-

employment 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


If you have any comments or suggestions concerning this PowerPoint Presentation for South-Western Federal Taxation, please contact:

Dr. Donald R. Trippeer, CPA [email protected]

SUNY Oneonta

If you have any comments or suggestions concerning this PowerPoint Presentation for South-Western Federal Taxation, please contact:

Dr. Donald R. Trippeer, CPA [email protected]

SUNY Oneonta

comprehensive volume c12-1 chapter 12 tax credits and payments copyright ©2010 cengage learning...

Documents

tax credits

tax deduction tax benefit

unused credit

taxpayer tax benefit

credit refundable credits

net income tax

tentative minimum tax

net regular tax liability