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Chapter 9

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: Fo reign Tax Credit. Credit is available for taxpayers who paid foreign income taxes

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Chapter 9

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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: 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. Foreign-source taxable income U.S. income Foreign tax ------------------------------------- × tax liability = credit Worldwide taxable income before FTC limitation

  3. LO #1: Foreign Tax CreditConcept Check 9-1 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 for 2006. $2,240 ($8,000/$63,000 X 17,640)

  4. LO #2: Credit for Child and Dependent Care Expenses • Credit is available for working taxpayers with dependent care expenses (of qualifying individuals). • Credit is calculated as a percentage of the qualified expenses incurred to care for dependents.

  5. LO #2: Credit for Child and Dependent Care Expenses • For qualifying expenses and qualifying individuals, certain criteria must be met. • Percentage (20%–35%) used in the calculation is dependent on AGI. • Certain expense limitations exist.

  6. LO #2: Credit for Child and Dependent Care Expenses – Concept Check 9-2 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 for 2006. $600 ($3,000 X 20%)

  7. LO #2: Credit for Child and Dependent Care Expenses – Concept Check 9-2 • 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 #2: Credit for Child and Dependent Care Expenses – Concept Check 9-2 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 for 2006. $570 ([$2,900 - $1,000] X 30%)

  9. LO #3: 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 #3: Credit for the Elderly or the Disabled Concept Check 9-3 • 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 for 2006. $150 ([$7,500 - $1,000 - $5,500] X 15%)

  11. LO #4: Education Credits • Two credits available • Hope • Lifetime learning. • Both allow credit for higher educational expenses for the taxpayer, spouse, or dependent.

  12. LO #4: Education Credits • Hope has a maximum credit of $1,650 per student. • Lifetime learning has a maximum credit per taxpayer of $2,000.

  13. LO #4: Education Credits • Both credits are phased out at certain amounts of AGI. • Married filing jointly and single filers phaseout completely at AGI amounts of $110,000 and $55,000, respectively.

  14. LO #4: Education Credits Concept Check 9-4 • 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%)

  15. LO #4: Education CreditsConcept Check 9-4 2. Assume the same facts as in Question 1. Jewels has AGI of $48,000 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 [$55,000 - $48,000/$10,000])

  16. LO #4: Education CreditsConcept Check 9-4 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 $55,000)

  17. LO #4: Education CreditsConcept Check 9-4 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

  18. LO #5: Retirement Savings Contributions Credit • Credit is available for taxpayers who made contributions to certain qualified retirements accounts. • Credit is based on a percentage of the contributions made. • Maximum amount of contribution for credit purposes is $2,000.

  19. LO #5: Retirement Savings Contributions Credit • Percentage used depends on filing status and AGI. • Over certain amounts of AGI, no credit is available.

  20. LO #5: Retirement Savings Contributions Credit – Concept Check 9-5 • 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%)

  21. LO #5: Retirement Savings Contributions Credit – Concept Check 9-5 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%)

  22. LO #6: Residential Energy Credit • Credit is available for taxpayers who make energy-efficient changes to their home or purchase such products. • Certain items qualify as a percentage of the cost and for others items, credits are based on a set amount. • Total credit is limited to $500 for all years and $2,000 for solar panels.

  23. LO #6: Residential Energy CreditConcept Check 9-6 • Tabor and Karen replaced all of the old windows in their main residence during March 2006 with energy-efficient windows at the cost of $8,000. The new windows meet the 2000 International Energy Conservation Code. How much is their residential energy credit? $200

  24. LO #6: Residential Energy CreditConcept Check 9-6 2. Blanca installed circulating ceiling fans in her main home in August 2006. She installed four in all, one in each of her three bedrooms and one in her den. How much residential energy credit can Blanca claim? $200 ($50 X4)

  25. LO #7: 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.

  26. LO #7: Child Tax Credit • Phase-out begins at AGI of $110,000 and $75,000, for married filing joint and single, respectively. • Although generally nonrefundable, this credit could provide a refund at certain earned income levels.

  27. LO #7: Child Tax CreditConcept Check 9-7 • 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])

  28. LO #8: Adoption Credit • Credit is available up to $10,960 per child adopted. • Credit is phased out for AGI above $204,410. • Credit is allowed only for married taxpayers filing jointly.

  29. LO #8: Adoption Credit Concept Check 9-8 1. Adam and Michelle incurred the following adoption expenses in adopting their infant daughter. 2005 $2,900 2006 8,400 2007 3,950 If they did not claim any credits for adoption expenses in 2005 and their AGI is $120,000, how much can they claim in 2006? $10,960 (maximum)

  30. LO #8: Adoption CreditConcept Check 9-8 • Zhang and Umiko spent $16,000 in qualified adoption expenses in 2006 to adopt their son. Their modified AGI is $181,000. How much is their adoption credit for 2006? $6,414 ($10,960 x [$204,410-$181,000/$40,000])

  31. LO #9: Earned Income Credit • Credit is allowed for working taxpayers who are economically disadvantaged. • Only a refundable tax credit is allowed. • Credit is based on filing status, number of qualifying children (or none), and AGI.

  32. LO #9: Earned Income Credit • Credit can completely phase out at certain AGI levels. • Certain types of income (mostly unearned), in excess of $2,650 make taxpayer ineligible for the credit.

  33. 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 for 2006? $799 (2,747 – [($29,000 - $16,810) X 15.98%]

  34. 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 2006? $4,496 ($4,536 – [($15,000-$14,810) X 21.06%]) $3,696 refund ($4,496 - $800 )

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