14-1 ©2008 Prentice Hall, Inc.

14-2 ©2008 Prentice Hall, Inc. 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

14-3 ©2008 Prentice Hall, Inc. SPECIAL TAX COMP METHODS, CREDITS & PAYMENT (2 of 2)  Refundable credits  Payment of taxes  Tax planning considerations  Compliance and procedural considerations

14-4 ©2008 Prentice Hall, Inc. Alternative Minimum Tax  Computational aspects  Tax preference items  AMT adjustments

14-5 ©2008 Prentice Hall, Inc. Computational Aspects (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

14-6 ©2008 Prentice Hall, Inc. Computational Aspects (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)

14-7 ©2008 Prentice Hall, Inc. Computational Aspects (3 of 3)  AMT exemption  $62,550 MFJ, $42,500 single, $31,275 MFS  Reduced by 25% of AMTI in excess of threshold amount  $150,000 MFJ, $112,500 single, & $75,000 MFS

14-8 ©2008 Prentice Hall, Inc. Tax 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

14-9 ©2008 Prentice Hall, Inc. AMT Adjustments (1 of 3)  AMI 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

14-10 ©2008 Prentice Hall, Inc. AMT Adjustments (2 of 3)  AMT adj. due to 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

14-11 ©2008 Prentice Hall, Inc. AMT Adjustments (3 of 3)  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

14-12 ©2008 Prentice Hall, Inc. 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

14-13 ©2008 Prentice Hall, Inc. 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 2007 is $97,500  No limit on the Medicare portion of SE tax  ½ of SE tax deductible for AGI

14-14 ©2008 Prentice Hall, Inc. 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

14-15 ©2008 Prentice Hall, Inc. 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

14-16 ©2008 Prentice Hall, Inc. 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

14-17 ©2008 Prentice Hall, Inc. 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 $11,390 credit in adoption year  Phased out between $170,820 – 210,820

14-18 ©2008 Prentice Hall, Inc. Personal Tax Credits (3 of 6)  Hope scholarship credit  Up to $1,650 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 $1,100 plus 50% 2 nd $1,100  Must be half-time student  Eligible expenses reduced by amounts received under other Code sections

14-19 ©2008 Prentice Hall, Inc. Personal Tax Credits (4 of 6)  Hope scholarship credit (continued)  Phase out between $94K-$114K MFJ; $47K-$57K 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

14-20 ©2008 Prentice Hall, Inc. 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

14-21 ©2008 Prentice Hall, Inc. 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

14-22 ©2008 Prentice Hall, Inc. 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

14-23 ©2008 Prentice Hall, Inc. 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

14-24 ©2008 Prentice Hall, Inc. 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

14-25 ©2008 Prentice Hall, Inc. 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

14-26 ©2008 Prentice Hall, Inc. 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

14-27 ©2008 Prentice Hall, Inc. 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

14-28 ©2008 Prentice Hall, Inc. 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

14-29 ©2008 Prentice Hall, Inc. 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

14-30 ©2008 Prentice Hall, Inc. 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

14-31 ©2008 Prentice Hall, Inc. 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  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

14-32 ©2008 Prentice Hall, Inc. 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

14-33 ©2008 Prentice Hall, Inc. 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  150% if AGI > $150K  No penalty if underwitheld by <$1K or individual had $0 tax liability in prior year

14-34 ©2008 Prentice Hall, Inc. 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

14-35 ©2008 Prentice Hall, Inc. 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

Comments or questions about PowerPoint Slides? Contact Dr. Richard Newmark at University of Northern Colorado’s Kenneth W. Monfort College of Business ©2008 Prentice Hall, Inc.