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Chapter 13

Chapter 13. Tax Credits and Payment Procedures. 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

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Chapter 13

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  1. Chapter 13 Tax Credits and Payment Procedures

  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. Jobs Credit • A new $1,000 Jobs Credit is allowed for every unemployed individual hired from Feb. 4 through Dec. 31, 2010 • Must work for employer for at least 52 consecutive weeks • Wages during last 26 weeks of employment must equal at least 80% of wages for first 26 weeks • The credit applies to any tax year ending after the 2010 date of enactment.

  11. 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 11

  12. Work Opportunity Tax Credit(slide 2 of 3) • 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

  13. Work Opportunity Tax Credit(slide 3 of 3) • 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

  14. 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

  15. 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

  16. Research Activities Credit (slide 1 of 5) • Comprised of three parts • Incremental research activities credit • Basic research credit • Energy research credit

  17. 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)

  18. 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 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

  19. 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 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

  20. 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

  21. 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 low-income tenants • Credit is allowed over a 10-year period • Subject to potential recapture

  22. 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

  23. 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

  24. 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

  25. 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

  26. 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 • Phaseout threshold amounts for married taxpayers filing joint returns

  27. Earned Income Credit (slide 2 of 3) • Credit amount (2010 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 $21,460 for MFJ with qualifying child ($16,450 for other taxpayers) • Use IRS tables to calculate exact credit amount

  28. 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 (2010 tax year) • 7.65% × earned income (up to $5,980) • Phase-out of credit begins when earned income (or AGI) exceeds $12,490 for MFJ ($7,480 for others)

  29. 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

  30. 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

  31. 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

  32. 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 Foreign Tax Credit(slide 2 of 2)

  33. 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 $12,170 (in 2010) • Credit is phased-out ratably for modified AGI between $182,520 and $222,520

  34. 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

  35. 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

  36. Child Tax Credit (slide 2 of 2) • 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

  37. 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

  38. 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

  39. 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

  40. 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

  41. 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

  42. 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 2009) • Cannot be claimed in same year the American Opportunity credit is claimed

  43. 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 full-time course load • No such requirement for lifetime learning credit

  44. Education Tax Credits(slide 4 of 5) • 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)

  45. Education Tax Credits(slide 5 of 5) • 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

  46. First-Time Homebuyer Credit (slide 1 of 5) • For home purchases from January 1, 2009 through April 30, 2010, a credit of 10% of the purchase price is allowed for first-time buyers • 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 • Only available if purchase price of home is $800,000 or less • The credit is phased out for modified AGI between $125,000 and $145,000 for single taxpayers ($225,000 and $245,000 for MFJ)

  47. First-Time Homebuyer Credit (slide 2 of 5) • Taxpayer qualifies as first-time buyer if 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

  48. First-Time Homebuyer Credit (slide 3 of 5) For homes purchasedafter 11-06-09, credit is available to existing homeowners who are long-term residents Must have maintained the same principal residence for 5 of the last 8 years Max credit is limited to $6,500 ($3,250 for married individuals filing separately) 48

  49. First-Time Homebuyer Credit (slide 4 of 5) • The homebuyer credit contains a recapture provision • Provision is waived for homes purchased after December 31, 2008 (even if the credit is claimed in 2008) • For homes purchased in 2008, credit must be repaid beginning 2 years after home is purchased • Repaid in equal installments over 15 years • If disposed of before the 15-year period is up, recapture of the unpaid balance occurs

  50. First-Time Homebuyer Credit (slide 5 of 5) • Homes purchased after December 31, 2008 are also subject to an accelerated recapture rule • If disposed of within 36 months from the date of purchase or if the property ceases to be taxpayer’s principal residence, the entire credit must be recaptured • Recapture cannot exceed any gain from the sale • No recapture upon the death of taxpayer, involuntary conversion, or transfer between spouses incident to a divorce • The Homebuyer Credit is a refundable credit • Thus, in certain situations, it could generate a payment from the IRS in excess of any tax liability

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