1. Comprehensive Volume C12-1 Chapter 12 Tax Credits and Payments Copyright ©2010 Cengage Learning Comprehensive Volume

2. C12-2 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 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. Comprehensive Volume C12-3 Refundable vs Nonrefundable Credits (slide 1 of 2) Refundable credits –Paid even if the tax liability is less than amount of credit Refundable credits –Paid even if the tax liability is less than amount of credit

4. Comprehensive Volume C12-4 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 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. Comprehensive Volume C12-5 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 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. Comprehensive Volume C12-6 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 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. Comprehensive Volume C12-7 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 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. Comprehensive Volume C12-8 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 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. Comprehensive Volume C12-9 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 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. Comprehensive Volume C12-10 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 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. Comprehensive Volume C12-11 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 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

12. Comprehensive Volume C12-12 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 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

13. Comprehensive Volume C12-13 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 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

14. Comprehensive Volume C12-14 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 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

15. Comprehensive Volume C12-15 Research Activities Credit (slide 1 of 5) Comprised of three parts –Incremental research activities credit –Basic research credit –Energy research credit Comprised of three parts –Incremental research activities credit –Basic research credit –Energy research credit

16. Comprehensive Volume C12-16 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) 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)

17. Comprehensive Volume C12-17 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 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

18. Comprehensive Volume C12-18 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 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

19. Comprehensive Volume C12-19 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 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

20. Comprehensive Volume C12-20 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 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

21. Comprehensive Volume C12-21 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 –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

22. Comprehensive Volume C12-22 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 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

23. Comprehensive Volume C12-23 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 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

24. Comprehensive Volume C12-24 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 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

25. Comprehensive Volume C12-25 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 Increases the phaseout threshold amounts for married taxpayers filing joint returns 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 Increases the phaseout threshold amounts for married taxpayers filing joint returns

26. Comprehensive Volume C12-26 Earned Income Credit (slide 2 of 3) Credit amount (2009 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 $21,420 for MFJ with qualifying child ($16,420 for other taxpayers) Use IRS tables to calculate exact credit amount Credit amount (2009 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 $21,420 for MFJ with qualifying child ($16,420 for other taxpayers) Use IRS tables to calculate exact credit amount

27. Comprehensive Volume C12-27 Earned Income Credit (slide 3 of 3) Credit for taxpayers having no children –Taxpayers aged 25 through 64 Credit amount for couple filing jointly with no qualifying children (2009 tax year) –7.65% × earned income (up to $5,970) –Phase-out of credit begins when earned income (or AGI) exceeds $12,470 for MFJ ($7,470 for others) Credit for taxpayers having no children –Taxpayers aged 25 through 64 Credit amount for couple filing jointly with no qualifying children (2009 tax year) –7.65% × earned income (up to $5,970) –Phase-out of credit begins when earned income (or AGI) exceeds $12,470 for MFJ ($7,470 for others)

28. Comprehensive Volume C12-28 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 General qualifications –Age 65 or older, or –Under age 65 and permanently and totally disabled

29. Comprehensive Volume C12-29 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 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

30. Comprehensive Volume C12-30 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 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

31. Comprehensive Volume C12-31 Foreign Tax Credit (slide 2 of 2) 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 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

32. Comprehensive Volume C12-32 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 $12,150 (in 2009) –Credit is phased-out ratably for modified AGI between $182,180 and $222,180 Credit for qualified adoption expenses incurred in adoption of eligible child –Examples of expenses: adoption fees, court costs, attorney fees Maximum credit is $12,150 (in 2009) –Credit is phased-out ratably for modified AGI between $182,180 and $222,180

33. Comprehensive Volume C12-33 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 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

34. Comprehensive Volume C12-34 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 Credit amount is $1,000 per child Eligible children are: –Under age 17, –US citizen, and –Claimed as dependent on taxpayer’s tax return

35. Comprehensive Volume C12-35 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 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

36. Comprehensive Volume C12-36 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 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

37. Comprehensive Volume C12-37 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 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

38. Comprehensive Volume C12-38 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, handicapped 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 Eligible care costs defined –Costs for care of qualified individual within taxpayer’s home or outside home If outside home, handicapped 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

39. Comprehensive Volume C12-39 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 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

40. Comprehensive Volume C12-40 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 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

41. Comprehensive Volume C12-41 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 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

42. Comprehensive Volume C12-42 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 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

43. Comprehensive Volume C12-43 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) 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)

44. Comprehensive Volume C12-44 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 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

45. Comprehensive Volume C12-45 First-Time Homebuyer Credit (slide 1 of 4) For home purchases from January 1, 2009 through December 1, 2009, a credit of 10% of the purchase price is allowed –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 –For homes purchased from April 9, 2008 through December 31, 2008, the maximum credit was $7,500 ($3,750 for married filing separately) The credit is phased out for modified AGI between $75,000 and $95,000 for single taxpayers ($150,000 and $170,000 for MFJ) For home purchases from January 1, 2009 through December 1, 2009, a credit of 10% of the purchase price is allowed –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 –For homes purchased from April 9, 2008 through December 31, 2008, the maximum credit was $7,500 ($3,750 for married filing separately) The credit is phased out for modified AGI between $75,000 and $95,000 for single taxpayers ($150,000 and $170,000 for MFJ)

46. Comprehensive Volume C12-46 First-Time Homebuyer Credit (slide 2 of 4) The credit is available only to first-time buyers –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 The credit is available only to first-time buyers –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

47. Comprehensive Volume C12-47 First-Time Homebuyer Credit (slide 3 of 4) The homebuyer credit contains a recapture provision –Provision is waived for homes purchased after December 31, 2008 and through December 1, 2009 (even if the credit is claimed in 2008) For homes purchased in 2008, credit must be repaid beginning 2 years after home purchased –Repaid in equal installments over 15 years –If disposed of before the 15-year period is up, recapture of the unpaid balance occurs The homebuyer credit contains a recapture provision –Provision is waived for homes purchased after December 31, 2008 and through December 1, 2009 (even if the credit is claimed in 2008) For homes purchased in 2008, credit must be repaid beginning 2 years after home purchased –Repaid in equal installments over 15 years –If disposed of before the 15-year period is up, recapture of the unpaid balance occurs

48. Comprehensive Volume C12-48 First-Time Homebuyer Credit (slide 4 of 4) Homes purchased after December 31, 2008 and through December 1, 2009 are also subject to an accelerated recapture rule –If disposed of within 36 months from the date of purchase Recapture cannot exceed any gain from the sale –If property ceases to be taxpayer’s principal residence No recapture upon the death of taxpayer, involuntary conversion, or transfer between spouses incident to a divorce The home purchase credit is a refundable credit –Thus, in certain situations, it could generate a payment from the IRS in excess of any tax liability Homes purchased after December 31, 2008 and through December 1, 2009 are also subject to an accelerated recapture rule –If disposed of within 36 months from the date of purchase Recapture cannot exceed any gain from the sale –If property ceases to be taxpayer’s principal residence No recapture upon the death of taxpayer, involuntary conversion, or transfer between spouses incident to a divorce The home purchase credit is a refundable credit –Thus, in certain situations, it could generate a payment from the IRS in excess of any tax liability

49. Comprehensive Volume C12-49 Credit For Certain Retirement Plan Contributions Credit was enacted to encourage low and middle income taxpayers to contribute to qualified retirement plans Eligible contributions of up to $2,000 qualify Credit rate depends on level of AGI and filing status –Maximum credit is $1,000 ($2,000 × 50%) To qualify, must be at least 18 years old and not a dependent of another taxpayer or a full-time student Credit was enacted to encourage low and middle income taxpayers to contribute to qualified retirement plans Eligible contributions of up to $2,000 qualify Credit rate depends on level of AGI and filing status –Maximum credit is $1,000 ($2,000 × 50%) To qualify, must be at least 18 years old and not a dependent of another taxpayer or a full-time student

50. Comprehensive Volume C12-50 Making Work Pay Credit In 2009 and 2010, the ARRTA of 2009 includes a refundable income tax credit of up to $400 ($800 for MFJ) –Calculated at a rate of 6.2% of earned income –Phases out at a rate of 2% of modified AGI above $75,000 ($150,000 for MFJ) Most receive this refundable credit in their paychecks as a reduction in withholding In 2009 and 2010, the ARRTA of 2009 includes a refundable income tax credit of up to $400 ($800 for MFJ) –Calculated at a rate of 6.2% of earned income –Phases out at a rate of 2% of modified AGI above $75,000 ($150,000 for MFJ) Most receive this refundable credit in their paychecks as a reduction in withholding

51. Comprehensive Volume C12-51 Recovery Rebate Credit (slide 1 of 2) The Economic Stimulus Act of 2008 provides a refundable tax credit for certain taxpayers –The Treasury Department issued rebate checks to taxpayers in the spring of 2008 to help stimulate the economy The credit includes two components—a basic credit and a qualifying child credit The Economic Stimulus Act of 2008 provides a refundable tax credit for certain taxpayers –The Treasury Department issued rebate checks to taxpayers in the spring of 2008 to help stimulate the economy The credit includes two components—a basic credit and a qualifying child credit

52. Comprehensive Volume C12-52 Recovery Rebate Credit (slide 2 of 2) Eligible individuals received a basic credit equal to the greater of: –The taxpayer’s net income tax liability up to a maximum of $600 ($1,200 in the case of a joint return), or –$300 ($600 for joint returns) if the individual had: At least $3,000 of earned income (plus Social Security benefits), or Net income tax liability of at least $1 and gross income greater than the sum of the applicable basic standard deduction amount and one personal exemption (two personal exemptions for a joint return) If an individual is eligible for any amount of the basic credit, the individual also may have received a qualifying child credit of $300 for each qualifying child (defined in the same manner as for the child tax credit) Eligible individuals received a basic credit equal to the greater of: –The taxpayer’s net income tax liability up to a maximum of $600 ($1,200 in the case of a joint return), or –$300 ($600 for joint returns) if the individual had: At least $3,000 of earned income (plus Social Security benefits), or Net income tax liability of at least $1 and gross income greater than the sum of the applicable basic standard deduction amount and one personal exemption (two personal exemptions for a joint return) If an individual is eligible for any amount of the basic credit, the individual also may have received a qualifying child credit of $300 for each qualifying child (defined in the same manner as for the child tax credit)

53. Comprehensive Volume C12-53 Payment Procedures (slide 1 of 8) Employer is responsible for withholding income taxes and employees’ share of FICA employment taxes (Social Security and Medicare) Also, employer must match FICA and pay full cost of FUTA (unemployment taxes) Employer is responsible for withholding income taxes and employees’ share of FICA employment taxes (Social Security and Medicare) Also, employer must match FICA and pay full cost of FUTA (unemployment taxes)

54. Comprehensive Volume C12-54 Payment Procedures (slide 2 of 8) Social Security & Medicare –2009 rates Social Security: 6.2% of first $106,800 wages Medicare: 1.45% of all wages Employee and employer both pay at these rates –If employee is overwithheld for Social Security, excess is refundable credit Social Security & Medicare –2009 rates Social Security: 6.2% of first $106,800 wages Medicare: 1.45% of all wages Employee and employer both pay at these rates –If employee is overwithheld for Social Security, excess is refundable credit

55. Comprehensive Volume C12-55 Payment Procedures (slide 3 of 8) Federal withholding –Employee files Form W-4 with employer indicating marital status and withholding allowances –Form W-2 issued by employer summarizes employee’s wages, income tax withholding, and FICA Must be issued to employee by January 31 following year-end Federal withholding –Employee files Form W-4 with employer indicating marital status and withholding allowances –Form W-2 issued by employer summarizes employee’s wages, income tax withholding, and FICA Must be issued to employee by January 31 following year-end

56. Comprehensive Volume C12-56 Payment Procedures (slide 4 of 8) Estimated payments (ES payments) –Any taxpayer (employee or self-employed) who will owe at least $1,000 in taxes for the year (and meets none of the exceptions) must make ES payments Estimated payments (ES payments) –Any taxpayer (employee or self-employed) who will owe at least $1,000 in taxes for the year (and meets none of the exceptions) must make ES payments

57. Comprehensive Volume C12-57 Payment Procedures (slide 5 of 8) ES payments –To avoid penalties for underpayment, must annually pay the smaller of: 90% of the current year’s tax, or 100% of last year’s tax –Exception: Increased to 110% of last year’s tax if AGI last year exceeded $150,000 ($75,000 if married filing separately) ES payments –To avoid penalties for underpayment, must annually pay the smaller of: 90% of the current year’s tax, or 100% of last year’s tax –Exception: Increased to 110% of last year’s tax if AGI last year exceeded $150,000 ($75,000 if married filing separately)

58. Comprehensive Volume C12-58 Payment Procedures (slide 6 of 8) ES payments –For calendar year individual taxpayer, ES payments of 1/4 of annual amount are due April 15, June 15, and September 15 of the tax year, and January 15 of the following year ES payments –For calendar year individual taxpayer, ES payments of 1/4 of annual amount are due April 15, June 15, and September 15 of the tax year, and January 15 of the following year

59. Comprehensive Volume C12-59 Payment Procedures (slide 7 of 8) Self-employment tax –Taxpayers with net self-employment earnings of at least $400 must pay self-employment tax 2009 rates –Social Security: 12.4% of first $106,800 net self- employment income –Medicare: 2.9% of all net self-employment income These rates are twice what an employee pays on wages Self-employment tax –Taxpayers with net self-employment earnings of at least $400 must pay self-employment tax 2009 rates –Social Security: 12.4% of first $106,800 net self- employment income –Medicare: 2.9% of all net self-employment income These rates are twice what an employee pays on wages

60. Comprehensive Volume C12-60 Payment Procedures (slide 8 of 8) Self-employment tax –Taxpayer receives a deduction from net self- employment income of 7.65% for purposes of calculating the actual self-employment tax –Taxpayer receives a for AGI deduction for 50% of the self-employment tax paid Self-employment tax –Taxpayer receives a deduction from net self- employment income of 7.65% for purposes of calculating the actual self-employment tax –Taxpayer receives a for AGI deduction for 50% of the self-employment tax paid

61. Comprehensive Volume C12-61 If you have any comments or suggestions concerning this PowerPoint Presentation for South-Western Federal Taxation, please contact: Dr. Donald R. Trippeer, CPA trippedr@oneonta.edu SUNY Oneonta If you have any comments or suggestions concerning this PowerPoint Presentation for South-Western Federal Taxation, please contact: Dr. Donald R. Trippeer, CPA trippedr@oneonta.edu SUNY Oneonta