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14-1 ©2011 Pearson Education, Inc. Publishing as Prentice Hall.

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Presentation on theme: "14-1 ©2011 Pearson Education, Inc. Publishing as Prentice Hall."— Presentation transcript:

1 14-1 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

2 14-2 SPECIAL TAX COMP METHODS, CREDITS & PAYMENT (1 of 2)  Alternative minimum tax  Self-employment tax  Overview of tax credits  Nonrefundable personal tax credits  Foreign tax credit  General business credits ©2011 Pearson Education, Inc. Publishing as Prentice Hall

3 14-3 SPECIAL TAX COMP METHODS, CREDITS & PAYMENT (2 of 2)  Refundable credits  Payment of taxes  Tax planning considerations  Compliance and procedural considerations ©2011 Pearson Education, Inc. Publishing as Prentice Hall

4 14-4 Alternative Minimum Tax  AMT computation  AMT preference items  AMT adjustments  AMT credits ©2011 Pearson Education, Inc. Publishing as Prentice Hall

5 14-5 AMT Computation (1 of 3) Taxable income before NOL + Tax preference items + Personal & dependency exemptions + Standard deduction (if applicable) +/- Adjustments to taxable income Alternative minimum taxable income ©2011 Pearson Education, Inc. Publishing as Prentice Hall

6 14-6 AMT Computation (2 of 3) Alternative minimum taxable income - AMT exemption Alternative minimum tax base x Tax rate 26% on 1 st $175K, 28% on excess Tentative minimum tax - Nonrefundable personal credits - Regular tax AMT due (if any) ©2011 Pearson Education, Inc. Publishing as Prentice Hall

7 14-7 AMT Computation (3 of 3)  AMT exemption  $70,950 MFJ, $46,700 single, $35,475 MFS  Reduced by 25% of AMTI in excess of threshold amount  $150,000 MFJ, $112,500 single, & $75,000 MFS ©2011 Pearson Education, Inc. Publishing as Prentice Hall

8 14-8 AMT Preference Items  Includes excess of accelerated depreciation over S/L depreciation  Tax-exempt interest on certain private activity bonds  Before 2009 or after 2010  % depletion > adjusted basis of prop  Exclusion of gain on sale of certain small business stock under §1202 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

9 14-9 AMT Adjustments (1 of 3)  AMT itemized deductions  Casualty & theft loss in excess 10% of AGI  Charitable contributions  Medical expenses in excess of 10% of AGI  Qualified housing interest  Estate tax deduction on IRD  Gambling losses ©2011 Pearson Education, Inc. Publishing as Prentice Hall

10 14-10 AMT Adjustments (2 of 3)  Timing differences  For personal property placed in service after 1998  Difference between MACRS deduction and amount determined by using 150% DB  For real property placed in service after 1986 and before 1999  Difference between actual MACRS and SL using 40-yr useful life ©2011 Pearson Education, Inc. Publishing as Prentice Hall

11 14-11 AMT Adjustments (3 of 3)  Timing differences (continued)  Incentive Stock Options (ISOs)  Difference between FMV of stock and price paid for it  R&E expenditures  Difference between amount deducted and amount deduction if R&E capitalized and amortized over 10-years ©2011 Pearson Education, Inc. Publishing as Prentice Hall

12 14-12 AMT Credits  AMT foreign tax credit  Child and dependent care credit  Elderly and disabled credit  Child tax credit  American opp. & lifetime learning credits  Qual. retirement savings contrib. credit  Residential energy credits ©2011 Pearson Education, Inc. Publishing as Prentice Hall

13 14-13 Self-Employment (SE) Tax (1 of 3)  Individuals subject to SE tax on amount of net earnings from self-employment  Computing the tax  Net earnings self-employment earnings ≥$400 subject to SE tax  Multiply SE income x 92.35% (100% %) to determine net SE earnings ©2011 Pearson Education, Inc. Publishing as Prentice Hall

14 14-14 Self-Employment (SE) Tax (2 of 3)  Computing SE tax (continued)  SE tax 15.3%  Consist of 12.4% OASDI and 2.9% Medicare  OASDI for 2010 is $106,800  No limit on the Medicare portion of SE tax  ½ of SE tax deductible for AGI ©2011 Pearson Education, Inc. Publishing as Prentice Hall

15 14-15 Self-Employment (SE) Tax (3 of 3)  Self-employment income  Net earnings from sole proprietorship  Director’s fees  Taxable research grant  Distributive share of partnership income plus guaranteed payments ©2011 Pearson Education, Inc. Publishing as Prentice Hall

16 14-16 Overview of Tax Credits  Use and importance of tax credits  Used by Federal gov’t for tax policy  Value of a credit vs. a deduction  Credit is $ for $ reduction of tax liability  Deduction x MTR = tax savings  Classification of credits  Refundable  Nonrefundable ©2011 Pearson Education, Inc. Publishing as Prentice Hall

17 14-17 Nonrefundable Personal Tax Credits (1 of 2)  Child tax credit  Child and dependent care credit  Tax credit for the elderly and disabled  Adoption credit  American opportunity tax credit  Lifetime learning credit ©2011 Pearson Education, Inc. Publishing as Prentice Hall

18 14-18 Nonrefundable Personal Tax Credits (2 of 2)  Residential energy credits  Qualified retirement savings contributions credit  Alternative motor vehicle credit  Nonrefundable personal credit limits ©2011 Pearson Education, Inc. Publishing as Prentice Hall

19 14-19 Child Tax Credit  Child tax credit  $1,000 for each qualifying child <17  Phased out at $50 per $1,000 over threshold amount  $110K MFJ; $75K single; $55K MFS  A portion may be refundable in 2009 and 2010 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

20 14-20 Child and Dependent Care Credit  20% - 35% of eligible care expenses to enable taxpayer to be employed  Up to $3K ($6K) expenses for 1 (2+) child ©2011 Pearson Education, Inc. Publishing as Prentice Hall

21 14-21 Tax Credit for the Elderly and Disabled  For low-income individuals ≥ 65 who retired due to permanent total disability  15% of $5K ($7.5K if both spouses ≥ 65) reduced by certain amounts ©2011 Pearson Education, Inc. Publishing as Prentice Hall

22 14-22 Adoption Credit  Up to $12,170 credit in adoption year  Phased out between $182,520 – $222,520 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

23 14-23 American Opportunity Tax Credit (AOTC)  Up to $2,500 credit for tuition and related expenses per student  Available for 1 st two years per student  100% of 1 st $2,000 plus 25% 2 nd $2,000  Must be half-time student  Eligible expenses reduced by amounts received under other Code sections  Phase out between $160K-$200K MFJ; $80K-$100K for other taxpayers ©2011 Pearson Education, Inc. Publishing as Prentice Hall

24 14-24 Lifetime Learning Credit  Less restrictive than AOTC  20% of 1 st $10K of eligible expenses  NOT per student  Phase out between $100K-$120K MFJ; $50K-$70K for other taxpayers  Other rules same as AOTC ©2011 Pearson Education, Inc. Publishing as Prentice Hall

25 14-25 Residential Energy Credits  Nonbusiness energy property credit  $1,500 once in a lifetime credit ( )  30% of cost of qualified energy efficiency improvements plus  Residential energy efficiency credit  Expenditures on alternative energy sources for principal residence  30% of eligible property ©2011 Pearson Education, Inc. Publishing as Prentice Hall

26 14-26 Qualified Retirement Savings Contribution Credit  Credit for lower-income taxpayers  Credit in addition to exclusion or deduction otherwise allowable ©2011 Pearson Education, Inc. Publishing as Prentice Hall

27 14-27 Alternative Motor Vehicle Credit  Combines several credits  Qualified fuel cell credit  Advanced lean-burn technology credit  Qualified hybrid credit  Qualified alternative fuel refueling property credit  Plug-in conversion credit  Plug-in electric vehicle credit ©2011 Pearson Education, Inc. Publishing as Prentice Hall

28 14-28 Nonrefundable Personal Credits Limit  Nonrefundable credits cannot exceed regular tax liability plus TMT for year ©2011 Pearson Education, Inc. Publishing as Prentice Hall

29 14-29 Foreign Tax Credit (1 of 2)  U.S. citizens, resident aliens, and U.S. corps taxed on worldwide income  FTC permits U.S. citizens and residents to avoid double taxation  Directly reduces U.S. tax liability ©2011 Pearson Education, Inc. Publishing as Prentice Hall

30 14-30 Foreign Tax Credit (2 of 2)  FTC limited to lesser of Foreign tax actually paid OR foreign taxable income U.S. tax worldwide taxable income x liability  Unused credits  Carryback 1 year, then  Carryforward 10 years ©2011 Pearson Education, Inc. Publishing as Prentice Hall

31 14-31 General Business Credits (1 of 5)  Combined for purposes of computing overall dollar limitation  Excess credits carried back 1 year and forward 20 years applied on FIFO method  Limited to net income tax less greater of  TMT or  25% of net regular tax liability in excess of $25K ©2011 Pearson Education, Inc. Publishing as Prentice Hall

32 14-32 General Business Credits (2 of 5)  Tax credit for rehabilitation expenditures  10% for structures placed in service before 1936 and 20% if certified historic structures  Business energy credits  10% of energy-conserving properties  30% for solar and fuel cell property  Several new energy credits added in 2009 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

33 14-33 General Business Credits (3 of 5)  Credit for employer-provided child care  25% of qualified child care expenses plus  10% of child care resources and referral expenditures  Max $150K credit  Cannot claim both credit and deduction ©2011 Pearson Education, Inc. Publishing as Prentice Hall

34 14-34 General Business Credits (4 of 5)  Work opportunity credit  40% of 1 st $6K of qualified wages paid to employees hired from 1 of 10 targeted groups  Disabled access credit  For small businesses  Gross receipts < $1M or have < 30 employees  50% of eligible expenses in excess of $250 up to $10,250 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

35 14-35 General Business Credits (5 of 5)  Credit for research activities  20% of incremental expenditures plus  20% of basic research expenditures  20% of energy research expenses  No deduction for creditable expenditures ©2011 Pearson Education, Inc. Publishing as Prentice Hall

36 14-36 Refundable Credits Earned Income Credit  Eligibility rules:  Earned income and AGI thresholds met  Principal place of abode in U.S. for > ½ of tax year  Individual between years old  Individual not a dependent of another taxpayer for tax year ©2011 Pearson Education, Inc. Publishing as Prentice Hall

37 14-37 Refundable Credits Homebuyers Tax Credit  Purchase principal residence between 11/7/2009 – 4/30/2010  Must be first-time homebuyer  Did not own a principal residence for 3 yrs.  Credit lesser of 10% of purch or $8K  Phaseout begins at $225K MFJ  $125K for others  Credit recaptured ratably over 15 yrs ©2011 Pearson Education, Inc. Publishing as Prentice Hall

38 14-38 Refundable Credits Making Work Pay Credit  Intended to offset employees’ Social Security taxes  Lesser of 6.2% of wages or $400 ($800 MFJ)  Phaseout begins at $75K ($150K MFJ)  Economic Recovery Payments in 2009 reduces MWP by $250 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

39 14-39 Payment of Taxes Withholding of Taxes (1 of 2)  Withholding of taxes  Employers required to withhold federal income taxes and FICA tax from employee compensation  Special rules provided for more than one employer during same year  Exemptions for certain employment activities such as ministers ©2011 Pearson Education, Inc. Publishing as Prentice Hall

40 14-40 Payment of Taxes Withholding of Taxes (2 of 2)  Withholding allowances and methods  Every employee must file an Employee’s Withholding Allowance Certificate Form W-4 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

41 14-41 Payment of Taxes Estimated Tax Payments (1 of 2)  Estimated tax payments  Calendar year taxpayers quarterly payments due April 15, June 15, Sept 15 of the current year, and January 15 of following year ©2011 Pearson Education, Inc. Publishing as Prentice Hall

42 14-42 Payment of Taxes Estimated Tax Payments (2 of 2)  Required estimated tax payments  Avoid underpmt of estimated tax penalty  90% of current tax liability, or  100% of last year’s liability  110% if AGI > $150K  No penalty if underwitheld by <$1K or individual had $0 tax liability in prior year ©2011 Pearson Education, Inc. Publishing as Prentice Hall

43 14-43 Tax Planning Considerations  Avoiding Alternative Minimum Tax  Avoiding the underpayment penalty for estimated tax  Cash-flow considerations  Use of general business credit  Foreign tax credits and foreign earned income exclusion ©2011 Pearson Education, Inc. Publishing as Prentice Hall

44 14-44 Compliance and Procedural Considerations  AMT filing procedures  Form 6251 or 4626  Withholding and estimated payments  Form W-2 and 1040ES  General Business Credit  Form 3800  Personal tax credits  Schedules EIC, Schedule R, Form 1116, Form 2441, Form 8863 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

45 Comments or questions about PowerPoint Slides? Contact Dr. Richard Newmark at University of Northern Colorado’s Kenneth W. Monfort College of Business ©2011 Pearson Education, Inc. Publishing as Prentice Hall


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