14-1 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

14-2 SPECIAL TAX COMP METHODS, CREDITS, & PAYMENT (1 of 2)  Alternative minimum tax  Self-employment tax  Overview of tax credits  Personal tax credits  Foreign tax credit  General business credits ©2009 Pearson Education, Inc. Publishing as Prentice Hall

14-3 SPECIAL TAX COMP METHODS, CREDITS, & PAYMENT (2 of 2)  Refundable credits  Payment of taxes  Tax planning considerations  Compliance and procedural considerations ©2009 Pearson Education, Inc. Publishing as Prentice Hall

14-4 Alternative Minimum Tax  AMT computation  AMT preference items  AMT adjustments  AMT credits ©2009 Pearson Education, Inc. Publishing as Prentice Hall

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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

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) ©2009 Pearson Education, Inc. Publishing as Prentice Hall

14-7 AMT Computation (3 of 3)  AMT exemption  $66,250 MFJ, $44,350 single, $33,125 MFS  Reduced by 25% of AMTI in excess of threshold amount  $150,000 MFJ, $112,500 single, & $75,000 MFS ©2009 Pearson Education, Inc. Publishing as Prentice Hall

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

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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

14-12 AMT Credits  AMT foreign tax credit  Child and dependent care credit  Credit for elderly and totally disabled  Adoption expense credit  Child tax credit  Hope and lifetime learning credits ©2009 Pearson Education, Inc. Publishing as Prentice Hall

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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

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 2008 is $102,000  No limit on the Medicare portion of SE tax  ½ of SE tax deductible for AGI ©2009 Pearson Education, Inc. Publishing as Prentice Hall

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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

14-17 Nonrefundable Personal Tax Credits (1 of 6)  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  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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

14-18 Nonrefundable Personal Tax Credits (2 of 6)  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  Adoption credit  Up to $11,650 credit in adoption year  Phased out between $174,730 – 214,730 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

14-19 Nonrefundable Personal Tax Credits (3 of 6)  Hope scholarship credit  Up to $1,800 credit for tuition and related expenses per student  Not books or room and board  Available for 1 st two years per student  100% of 1 st $1,200 plus 50% 2 nd $1,200  Must be half-time student  Eligible expenses reduced by amounts received under other Code sections ©2009 Pearson Education, Inc. Publishing as Prentice Hall

14-20 Nonrefundable Personal Tax Credits (4 of 6)  Hope scholarship credit (continued)  Phase out between $96K-$116K MFJ; $48K-$58K for other taxpayers  Lifetime learning credit  Less restrictive than Hope credit  20% of 1 st $10K of eligible expenses  NOT per student  Other rules same as Hope credit ©2009 Pearson Education, Inc. Publishing as Prentice Hall

14-21 Nonrefundable Personal Tax Credits (5 of 6)  Residential energy credits  $500 lifetime credit  10% of cost of qualified energy efficiency improvements plus  Residential energy property expenditures for principal residence  Residential energy efficiency credit  Only for 2006 and 2007  30% up to $2,000 on solar water heaters, photovoltaic property, and fuel cell property ©2009 Pearson Education, Inc. Publishing as Prentice Hall

14-22 Nonrefundable Personal Tax Credits (6 of 6)  Qualified retirement savings contributions credit  Credit for lower-income taxpayers  Credit in addition to exclusion or deduction otherwise allowable  Nonrefundable personal credits limit  Nonrefundable credits cannot exceed regular tax liability plus TMT for year ©2009 Pearson Education, Inc. Publishing as Prentice Hall

14-23 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

14-24 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

14-25 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

14-26 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

14-27 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

14-28 General Business Credits (4 of 5)  Work opportunity credit  40% of 1 st $6K of qualified wages paid to employees hired from 1 of 9 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

14-29 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

14-30 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 ages 25 and 64  Individual not a dependent of another taxpayer for tax year ©2009 Pearson Education, Inc. Publishing as Prentice Hall

14-31 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 1 employer during same year  Exemptions for certain employment activities such as ministers ©2009 Pearson Education, Inc. Publishing as Prentice Hall

14-32 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

14-33 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

14-34 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

14-35 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

14-36 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

Comments or questions about PowerPoint Slides? Contact Dr. Richard Newmark at University of Northern Colorado’s Kenneth W. Monfort College of Business ©2009 Pearson Education, Inc. Publishing as Prentice Hall