1. 2010 Cengage Learning Income Tax Fundamentals 2010 Gerald E. Whittenburg Martha Altus-Buller Students Copy

2. 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 2010 Cengage Learning

3. Up to $8,000 credit for taxpayers buying principal residence for the first time For purchases between 1/1/09 – 11/30/09 Doesnt have to be paid back unless sell within three years May accelerate benefit by claiming on 2008 tax return Credit phases out at certain AGI levels 2010 Cengage Learning

4. 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) For 3+ kids complex credit calculation applies - see www.irs.gov 2010 Cengage Learning Phased out $50 for each $1000 [or part thereof] that AGI exceeds threshold

5. 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 taxpayers dependent Disqualified income (identified as certain type of investment income) must be less than $3,100 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 2010 Cengage Learning

6. 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 childs parents are divorced, child need not be dependent of taxpayer claiming credit if lives more than 50% of year with that parent Multiply qualifying care costs (see next screen) by a percentage based on AGI From 35% down to 20% based on AGI Credit percentages found on Table 1 on page 6-4 2010 Cengage Learning

7. Determine qualifying expenses In-home and out-of-home care Day camps qualify, but not overnight camps If camp is focused on fun/games, not education Limited to the lesser of Earned income of lowest earning spouse or $3,000 (1 dependent) or $6,000 (2+ dependents), reduced by any amounts reimbursed by employer 2010 Cengage Learning If spouse is full time student, count him/her as earning $250/month (1 dependent) or $500/month (2+ dependents)

8. 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 6-6) 40% of it is refundable Note: This credit is the expanded and renamed old HOPE credit 2010 Cengage Learning

9. 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 Not limited to first two years - undergraduate, graduate or professional courses qualify No limit on number of years you may claim LLC 2010 Cengage Learning

10. U.S. taxpayers are allowed foreign tax credit on income earned in foreign country and subject to income taxes in that country Mostly seen on dividends on foreign stock investments Reported on Form 1116 Provides relief from double taxation on money generated from foreign sources Credit is up to tax paid foreign governments But limited to maximum credit 2010 Cengage Learning Net foreign income x U.S. tax liability Net foreign income x U.S. tax liability Total US taxable income before credit

11. IRS provides a credit as relief to taxpayers who pay adoption expenses Credit is amount spent up to $12,150 per adoption (not an annual amount) Adoption credit phases out when AGI > $182,180 Different rules i f 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 2010 Cengage Learning

12. Credit for purchase of hybrid gas-electric vehicles °Amounts vary, based on combination of weight and fuel economy of vehicle °Phased out after manufacturer has sold 60,000 units In 2009, the Ford and Mercury hybrids will qualify for full or partial credits (based upon purchase date) °Detailed information found at www.irs.gov New credit beginning in 2009 for plug-in electric drive and electric drive low-speed vehicles Also, credit for converting motor vehicle to qualified plug-in electric drive 2010 Cengage Learning

13. For 2009-2010 a combined $1,500 credit is allowed for energy-efficient investments in primary residence For example - insulation, energy-efficient windows, doors and skylights, boilers, water heaters and certain roofs 30% of qualified property cost Improvements must meet efficiency standards Prior $500 lifetime energy efficient home improvement credit does not apply to new $1,500 limit 2010 Cengage Learning

14. Credit for alternative energy expenditures installed at taxpayers primary or secondary residence 30% credit for qualified installation of solar, wind or ground source geothermal heat pumps Cant get credit for heating swimming pool or hot tub Different credits allowed for fuel cell property Intent is to aid solar/wind industries while encouraging individuals to use alternative energy 2010 Cengage Learning

15. Tax was originally intended for high income taxpayers with sheltered income, it has evolved to impact many middle income people Separate (parallel) system for calculating taxes If AMT is higher than regular federal tax liability, must pay AMT amount AMT Rates 26% up to and equaling $175,000 ($87,500 MFS) AMT base 28% above $175,000 ($87,500 MFS) AMT base Long-term capital gains taxed at preferential rates See following screen for Alternative Minimum Taxable model 2010 Cengage Learning

16. Calculation of Alternative Minimum Tax Regular Taxable Income (before exemptions & standard deduction) +/- Adjustments and Tax Preferences Equals Alternative Minimum Taxable Income - AMT Exemption Equals Amount Subject to AMT x AMT rate(s) Equals Tentative Minimum Tax - Regular Tax = Equals AMT due with tax return (if positive amount) 2010 Cengage Learning

17. Provision designed to prevent parents from transferring income-producing assets to children in lower tax brackets Net unearned income [NUI] of child under age 18 is taxed at parents highest tax rate Applies to a child with at least one living parent, who is 18 or younger at end of tax year or students with ages 19-23 and has NUI NUI = Unearned income Less the greater of $950 or investment expenses Less statutory deduction ($950) 2010 Cengage Learning