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Tax Credits (Lines 47 through 55 and Line 66, Form 1040)

Chapter 9. Tax Credits (Lines 47 through 55 and Line 66, Form 1040) “ We have a tax code that favors those with the best accountants.” — Shane Keats. LO #1: Credit for Child and Dependent Care Expenses.

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Tax Credits (Lines 47 through 55 and Line 66, Form 1040)

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  1. Chapter 9 Tax Credits (Lines 47 through 55 and Line 66, Form 1040) “We have a tax code that favors those with the best accountants.” — Shane Keats

  2. LO #1: Credit for Child and Dependent Care Expenses Credit is available for working taxpayers with dependent care expenses (of qualifying individuals). Qualifying expenses include those paid for household services and expenses for qualified individuals so that the taxpayer can be gainfully employed.

  3. LO #1: Credit for Child and Dependent Care Expenses A qualifying individual includes: (1) a person under the age of 13 for whom the taxpayer is entitled to a dependency deduction or (2) a dependent or spouse of the taxpayer who is incapable of caring for himself or herself.

  4. LO #1: Credit for Child and Dependent Care Expenses The credit is calculated as a percentage of the qualified expenses incurred to care for dependents. Percentage (20%–35%) used in the calculation is dependent on AGI. The amount of expense used for the calculation is limited to $3,000 for one child and $6,000 for two or more children.

  5. LO #1: Credit for Child and Dependent Care Expenses The expense amount is further limited by the earned income of either the taxpayer or the spouse, whichever is smaller. In case of a spouse incapable of working or a full-time student, the non-working spouse is treated as having earned $250 per month with one qualifying person or $500 per month with two or more qualifying persons.

  6. LO #1: Credit for Child and Dependent Care Expenses – Concept Check 9-1 1. Rebecca is a single mom with one dependent child, Joey, age 7. She has an AGI of $75,000 and paid $4,500 to a qualified day care center for after school care for Joey. Calculate Rebecca’s child and dependent care credit. $600 ($3,000 X 20%)

  7. LO #1: Credit for Child and Dependent Care Expenses – Concept Check 9-1 Tom and Katie are married, file a joint return, and have two dependent children; Jack, age 11 and Jill, age 5. Tom has earned income of $41,000; Katie was a full-time student (for nine months) with no income. They paid a qualified day care/after school care center $6,000. Calculate the amount of qualified employment related expenses that can be used to calculate the child and dependent care credit for Tom and Katie. $4,500 ($500 X 9 months)

  8. LO #1: Credit for Child and Dependent Care Expenses – Concept Check 9-1 3. Antonio is a widower and cares for his son Elio, age 4. Antonio has AGI of $24,000 and paid qualified child care expenses for Elio of $2,900. In addition, Antonio’s employer paid him an additional $1,000 under a qualified dependent care benefit plan. Calculate Antonio’s child and dependent care credit. $570 ([$2,900 - $1,000] X 30%)

  9. LO #2: Credit for the Elderly or the Disabled Credit is available for taxpayers over 65 years of age or permanently and totally disabled. Credit is equal to 15% of allowable base amounts. Base amount is reduced by certain amounts of social security benefits and excess AGI.

  10. LO #2: Credit for the Elderly or the Disabled The allowable base amounts are as follows: $5,000 for single taxpayers (or only one spouse qualifies) $7,500 for joint returns when both spouses qualify $3,750 for married person filing separately

  11. LO #2: Credit for the Elderly or the Disabled Concept Check 9-2 Vincent and Maria are age 70 and 67, respectively and file a joint return. They have AGI of $21,000 and received $1,000 in nontaxable social security benefits. Calculate Vincent and Maria’s credit for the elderly or the disabled . $150 ([$7,500 - $1,000 - $5,500] X 15%)

  12. LO #3: Education Credits Two credits available Hope Lifetime learning. Both allow credit for higher educational expenses for the taxpayer, spouse, or dependent.

  13. LO #3: Education Credits Qualifying expenses are amounts paid for tuition, fees, and other related expenses to an eligible educational institution. An eligible institution is a postsecondary institution that is eligible to participate in a student aid program administered by the US Dept of Education.

  14. LO #3: Education Credits Hope Credit is calculated as 100% of the first $1,100 of qualifying expenses and 50% of the next $1,100. Lifetime Learning Credit is calculated as 20% of qualifying expenses.

  15. LO #3: Education Credits Hope has a maximum credit of $1,650 per student. Lifetime learning has a maximum credit per taxpayer of $2,000. A taxpayer may not use both credits in the same year or for the same expenses.

  16. LO #3: Education Credits Both credits are phased out at certain amounts of AGI. Phase out begins at $47,000 AGI for single filers and $94,000 for married filing jointly. Married filing jointly and single filers phase out completely at AGI amounts of $114,000 and $57,000, respectively.

  17. LO #3: Education Credits Concept Check 9-3 Jewels is a single tax payer and paid $2,900 in qualifying expenses for her daughter who attended University of Arizona full time as a freshman. How much is Jewels’ lifetime learning credit without regard to AGI limitations or other credits? $580 ($2,900 X 20%)

  18. LO #3: Education CreditsConcept Check 9-3 2. Assume the same facts as in Question 1. Jewels has AGI of $50,000 and wants to claim the Hope Credit. What is her allowable Hope credit after the credit phaseout based on AGI is taken into account? $1,155 ($1,650 X [$57,000 - $50,000/$10,000])

  19. LO #3: Education CreditsConcept Check 9- 3. Assume the same facts as Question 1. Jewels has AGI of $58,000 and wants to claim the Hope credit. What is her Hope credit after the credit phaseout based on AGI is taken into account? $0 (AGI exceeds $57,000)

  20. LO #3: Education CreditsConcept Check 9-3 4. Vern and Whitney paid $1,600 and $2,100 in qualifying expenses for their twin daughters Kimberly and Janet, respectively, to attend the nursing program at the community college. Without regard to AGI limitations or other credits, how much is their Hope credit? $2,950 ($1,350 +$1,600) $1,350 = $1,100 + $250 $1,600 = $1,100 + $500

  21. LO #4: Residential Energy Credits Residential Energy Credits are available for taxpayers who make energy-efficient changes to their home or purchase such products. There are actually two residential energy credits: (a) Nonbusiness Energy Property Credit and (b) Residential Energy Efficient Property Credit

  22. LO #4: Residential Energy Credits Nonbusiness Energy Property Credit Credit is calculated as 10% of the cost of replacement products, including installation, to improve energy efficiency of the home. The credit is limited to a maximum amount of $500. Certain items are further limited. Windows for example are allowed a maximum of $200.

  23. LO #4: Residential Energy Credits Residential Energy Efficient Property Credit Credit is calculated as 30% of the cost of installing solar or other alternative power source to be more energy efficient. The amount is limited to $2,000 maximum and does not include heating systems for pools or hot tubs.

  24. LO #4: Residential Energy CreditsConcept Check 9-4 Tabor and Karen replaced all of the old windows in their main residence during March 2007 with energy-efficient windows at the cost of $8,000. The new windows meet the 2000 International Energy Conservation Code. How much is their nonbusiness energy property credit? $200

  25. LO #4: Residential Energy CreditConcept Check 9-6 2. Blanca installed a solar water heater for her main home in August 2007 for $4,500. How much residential energy efficient property credit can Blanca claim? $1,350

  26. LO #5: Foreign Tax Credit Credit is available for taxpayers who paid foreign income taxes Credit is equal to the lesser of the amount of foreign taxes paid or portion of U.S. income tax attributable to foreign income.

  27. LO #5: Foreign Tax Credit The formula for FTC is: Foreign-source taxable income U.S. income Foreign tax ------------------------------------- × tax liability = credit Worldwide taxable income before FTC limitation Note: a taxpayer may choose to deduct foreign taxes as itemized deductions.

  28. LO #5: Foreign Tax CreditConcept Check 9-5 1. Lisa has $63,000 worldwide taxable income, which includes $8,000 of taxable income from New Zealand. She paid $2,500 in foreign income taxes and her U.S. tax liability is $17,640. Calculate Lisa’s foreign tax credit . $2,240 ($8,000/$63,000 X 17,640)

  29. LO #6: Child Tax Credit Credit is provided for taxpayers with children under age 17. Credit for each child is $1,000. Credit is phased out for AGI over certain amounts.

  30. LO #6: Child Tax Credit Phase-out begins at AGI of $110,000 and $75,000, for married filing joint and single taxpayers, respectively. The credit is reduced $50 for each $1,000, or fraction thereof, of AGI in excess of the above amounts.

  31. LO #6: Child Tax Credit Although generally nonrefundable, this credit could provide a refund at certain earned income levels. The income level for tax year 2007 that may allow a refund is $11,750.

  32. LO #6: Child Tax CreditConcept Check 9-6 Pat and Lisa have two qualifying children, ages 11, and 8. Their AGI is $112,000. What amount of child tax credit can they claim after their AGI limitation is considered? $1,900 ($2,000-[($112,000 - $110,000/$1,000)X$50])

  33. LO #7: Retirement Savings Contributions Credit Credit is available for taxpayers who made contributions to certain qualified retirements accounts. Contributions can be made to IRA’s, Roth IRA’s, 401(k), SIMPLE or SEP plans or other qualified retirement plans.

  34. LO #7: Retirement Savings Contributions Credit Credit is based on a percentage of the contributions made. Maximum amount of contributions for credit purposes is $2,000. Percentage used depends on the filing status of the taxpayer and AGI. Example: Single filer with AGI of $17,000 uses 10% to calculate credit

  35. LO #7: Retirement Savings Contributions Credit If a taxpayer’s AGI exceeds the amounts listed below, no credit is available. Joint returns: $50,000 Head of Household: $37,500 All other filers: $25,000

  36. LO #7: Retirement Savings Contributions Credit – Concept Check 9-7 Enrique and Lupe have AGI of $35,000, are married, filing jointly and contributed $2,500 during the year to a qualified retirement plan. How much is their retirement savings contributions credit? $200 ($2,000 x 10%)

  37. LO #7: Retirement Savings Contributions Credit – Concept Check 9-7 2. Roger is a head of household taxpayer with AGI of $36,000. He made $1,800 contribution to a qualified retirement plan. How much is his retirement savings contributions credit? $180 ($1,800 x 10%)

  38. LO #8: Adoption Credit Credit is available for 100% of qualified adoption expenses paid or incurred Credit is available up to $11,390 per child adopted. Credit is allowed only for married taxpayers filing jointly.

  39. LO #8: Adoption Credit Credit is phased out for AGI above $170,820. Credit is completely phased out for AGI above $210,820. For AGI within the phase out range, the tentative credit is multiplied by: $210,820 - modified AGI $40,000

  40. LO #8: Adoption Credit Concept Check 9-8 1. Adam and Michelle incurred the following adoption expenses in adopting their infant daughter. 2006 $2,900 2007 8,400 2008 3,950 If they did not claim any credits for adoption expenses in 2006 and their AGI is $120,000, how much can they claim in 2007? $11,390 (maximum)

  41. LO #8: Adoption CreditConcept Check 9-8 Zhang and Umiko spent $16,000 in qualified adoption expenses in 2007 to adopt their son. Their modified AGI is $181,000. How much is their adoption credit for 2007? $8,491 ($11,390 x [$210,820-$181,000/$40,000])

  42. LO #9: Earned Income Credit Credit is available for working taxpayers who are economically disadvantaged. EIC is a refundable tax credit. Credit is based on filing status, number of qualifying children (including none), and AGI.

  43. LO #9: Earned Income Credit Earned income includes wages, salaries, tips and earnings from self-employment. To be eligible for the credit, a taxpayer either must have a qualifying child or meet certain criteria.

  44. LO #9: Earned Income Credit Credit can completely phase out at certain AGI levels. Certain types of income (mostly unearned), in excess of $2,900 make taxpayer ineligible for the credit.

  45. LO #9: Earned Income CreditConcept Check 9-9 Josh and Danielle both work and have one qualifying child. They had AGI of $29,000. What is their EIC? $1,003 (2,858 – [($29,000 - $17,390) X 15.98%]

  46. LO #9: Earned Income CreditConcept Check 9-9 2. Tiffany is a head of household taxpayer with two qualifying children. She had AGI of $15,000. If she qualifies for EIC, how much is her credit? If her tax liability is $800 for the tax year, what is the amount of her refund or tax owed for the current year? $4,716 (maximum) $3,916 refund ($4,716 - $800)

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