CHAPTER 6 Credits & Special Taxes

1. CHAPTER 6Credits & Special Taxes Income Tax Fundamentals 2013 Student Slides Gerald E. Whittenburg Martha Altus-Buller Steven Gill 2013 Cengage Learning

2. Credits and Deductions • A credit is a direct reduction in tax liability • Credits are used to target certain groups for tax benefit • Provide equal benefit to all taxpayers • A deduction is a reduction of taxable income • Reduces tax liability in the amount of (deduction x tax rate) • Provides more benefit to higher income taxpayers 2013 Cengage Learning

3. Child Tax Credit • Provides tax relief through a credit to taxpayers with children • Credit for each child under age 17 claimed as a dependent and meeting definition of “qualifying child” • Credit is $1,000 per child • Credit begins phasing out when • AGI > $110,000 (MFJ) • AGI > $ 75,000 (HH, S) • AGI > $ 55,000 (MFS) Phased out $50 for each $1,000 (or part thereof) that AGI exceeds threshold 2013 Cengage Learning

4. Earned Income Credit (EIC) • Refundable credit • Serves as “negative” income tax • Can get refund even if have no tax liability • Taxpayer may get EIC, even without kids • Taxpayer must be between ages 25 and 65 and not claimed as another taxpayer’s dependent • “Disqualified income” (identified as certain type of investment income) must be less than $3,200 • Taxpayer(s) with children can receive EIC • If child meets definition of “qualifying child” • Single or married taxpayers (MFJ only) • Earned income meets certain guidelines 2013 Cengage Learning

5. Child & Dependent Care Credit • Gives tax relief to working parents who must provide childcare for dependents • Dependent must be under age 13 or • Spouse or dependent who cannot care for themselves • If child’s parents are divorced, child need not be dependent of taxpayer claiming credit if he/she lives more than 50% of year with that parent • Multiply qualifying care costs (see next slide) by an applicable percentage, based on AGI • From 35% down to 20% • Credit percentages found on Table 6.1 on page 6-5 2013 Cengage Learning

6. American Opportunity Credit • Provides tax relief for qualified higher education expenses • Tuition, fees, books and course materials • Available for each eligible student in first four years of college • Eligible students are taxpayer, spouse or dependent • Student must be at least 1/2 time for one term during tax year • Student must not have felony drug conviction • Credit = 100% of first $2,000 + (25% of the next $2,000) • Maximum credit = $2,500 • Phased out when AGI > certain levels (see page 6-9) • 40% of it is refundable Note: This credit is the expanded and renamed ‘old’ HOPE credit 2013 Cengage Learning

7. Lifetime Learning Credit (LLC) • Provides tax relief for education expenses - encourages taxpayers to take courses to acquire or improve job skills • Tuition and fees only (not books) • Can be used for less than ½ time attendance • Not disqualified for felony drug conviction • Credit = 20% of first $10,000 • Maximum credit = $2,000 per year • Lower AGI phase-outs than American Opportunity Credit • May take credit in relation to undergraduate, graduate or professional courses • No limit on number of years you may claim LLC 2013 Cengage Learning

8. Adoption Credit • IRS provides a credit as relief to taxpayers who pay adoption expenses • Credit is amount spent up to $12,650 per adoption (not an annual amount) • Adoption credit begins to phase out when AGI > $189,710 • Different rules if pay expenses over more than one year or if foreign adoption or special needs child • Qualified adoption expenses include court costs, legal fees, travel, etc. • Unused credits can be carried over for up to five years 2013 Cengage Learning

9. Overview of Major Energy Credits • In 2012, two major credits designed to encourage individuals to utilize energy-efficient products • Plug-in Electric Vehicle Credit • Credit for Residential Energy-Efficient Property (REEP) 2013 Cengage Learning

10. Energy-Efficient Vehicles Credit • Credit for purchase of hybrid gas-electric vehicles • Amounts vary, based on combination of weight and kilowatt hour of traction battery capacity (between $2,500 - $7,500) • Credit phases out for each car manufacturer when they hit 200,000 cars sold • 10% credit up to $4,000 is allowed for cost of converting any motor vehicle into a qualified plug-in electric drive vehicle • 10% credit up to $2,500 for electric drive low-speed vehicles, motorcycles and three-wheeled vehicles (except golf carts) Note: 10% credit set to expire 12/31/12, but may be extended by Congress 2013 Cengage Learning