1. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

2. SPECIAL TAX COMP METHODS, CREDITS & PAYMENT
Alternative minimum tax
Self-employment tax
Personal and business tax credits
Payment of taxes
Tax planning considerations
Compliance and procedural considerations
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

3. Alternative Minimum Tax
AMT computation
AMT preference items
AMT adjustments
AMT credits
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

4. AMT Computation (1 of 3) Taxable income before NOL
+ Tax preference items, including
Personal & dependency exemptions
Standard deduction (if applicable)
+/- Adjustments to taxable income
Alternative minimum taxable income
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

5. AMT Computation (2 of 3)
Alternative minimum taxable income - AMT exemption Alternative minimum tax base x Tax rate 26% on 1st $175K, 28% on excess Tentative minimum tax - Nonrefundable personal credits - Regular tax AMT due (if any)
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

6. AMT Computation (3 of 3) Net LTCG tax rate is 15%
0% if regular tax rate 10% or 15%
AMT exemption in 2012
$45,000 MFJ, $33,750 single, $22,500 MFS if Congress does not restore indexing
Reduced by 25% of AMTI in excess of threshold amount
$150,000 MFJ, $112,500 single, & $75,000 MFS
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

7. 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
Exclusion of gain on sale of certain small business stock under §1202
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

8. AMT Adjustments In General
Three general categories
Itemized deductions disallowed in computing AMTI
Timing differences related to deferral of income or acceleration of deductions
Disallowance of standard deduction (if taken) and personal exemptions
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

9. AMT Adjustments AMT Itemized Deductions
Nondeductible for AMT
Miscellaneous itemized deductions
Income and real property taxes
Home mtg interest that is not “qualified housing interest”
Medical expenses between 7.5% - 10% of AGI
Personal and dependency exemptions
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

10. AMT Adjustments Timing Differences (1 of 2)
Personal property placed in service after 1998
Difference between MACRS and amount determined by using 150% DB
Real property placed in service after 1986 and before 1999
Difference between actual MACRS and SL using 40-yr useful life
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

11. AMT Adjustments Timing Differences (2 of 2)
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
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

12. AMT Credits AMT foreign tax credit Nonrefundable personal credits
Special computation
Nonrefundable personal credits
Future AMT credit
Credit for AMT paid in past years can be used to offset regular tax liability in future years
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

13. Self-Employment (SE) Tax (1 of 4)
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
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

14. Self-Employment (SE) Tax (2 of 4)
Computing SE tax (continued)
SE tax for 2012
Multiply SE earnings by both items below
10.4% for OASDI
Max SE earnings subject to OASDI is $110,000
2.9% for Medicare
All SE earnings subject to Medicare tax
59.6% of SE tax deductible for AGI
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

15. Self-Employment (SE) Tax (3 of 4)
Credit for excess Soc. Sec. tax paid if
Employee has more than one job and
Combined wages exceed OASDI ceiling
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

16. Self-Employment (SE) Tax (4 of 4)
Self-employment income sources
Net earnings from sole proprietorship
Director’s fees
Taxable research grant
Distributive share of partnership income plus guaranteed payments
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

17. Personal & Business 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
Nonrefundable credits
Refundable credits
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

18. 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
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

19. Nonrefundable Personal Tax Credits (2 of 2)
Residential energy credits
Alternative motor vehicle credit
Qualified retirement savings contributions credit
Nonrefundable personal credit limits
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

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+) qualified child(ren)
Child qualified is <13
Other dependents qualified if incapacitated
All qualified people must live with taxpayer > ½ of the year
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

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
Nontaxable Social Security benefits
½ of AGI > $7,500 ($10,000 MFJ)
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

22. Adoption Credit Up to $12,650 credit in adoption year
Phased out over $40,000 range
Range begins at $189,710 in 2012
Credit claimed in year of adoption
Even if expenses paid in prior year
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

23. 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 if child tax credit > total tax liability
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

24. Higher Education Tax Credits AOTC (1 of 2)
Up to $2,500 credit for tuition and related expenses per student
100% of 1st $2, % 2nd $2,000
Available for 1st four years per student
Must be half-time student
Eligible expenses reduced by amounts received under other Code sections
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

25. Higher Education Tax Credits AOTC (2 of 2)
Phase out between $160K-$200K MFJ; $80K-$100K for other taxpayers
Up to 40% of allowable AOTC is refundable
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

26. Higher Education Tax Credits Lifetime Learning Credit (1 of 2)
Less restrictive than AOTC
Unlimited number of years
Can be used for non-credit courses if they are to acquire/improve/maintain job skills
No ½ time student requirement
20% of 1st $10K of eligible expenses
NOT per student
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

27. Higher Education Tax Credits Lifetime Learning Credit (2 of 2)
Phase out
$20K range beginning at $104K MFJ
$10K range beginning at $52K for other taxpayers
Other rules same as AOTC
Cannot claim AOTC and LLC on same expenses
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

28. Residential Energy Credits Nonbusiness Energy Property Credit
Expired at end of 2011
Once in a lifetime credit cap
$1,500 through 2010
$500 in 2011
2011 rules
10% of cost of qualified energy efficiency improvements plus 100% cost of residential energy property expenditures
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

29. Residential Energy Credits Residential Energy Efficient Property Credit
For principal residence
30% of eligible property
Energy-efficient property includes
Solar water heaters
Residential wind property
Solar-electric property (e.g., solar panels)
2nd/vacation homes not eligible
Not for use with swim pools or hot tubs
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

30. 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
Editorial note – human-electric hybrids like electric bicycles do not qualify
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

31. Qualified Retirement Savings Contribution Credit
Credit for lower-income taxpayers
Credit in addition to exclusion or deduction otherwise allowable
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

32. Nonrefundable Personal Credits Limit
Nonrefundable credits cannot exceed regular tax liability plus TMT for year
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

33. 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
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

34. 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
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

35. General Business Credits (1 of 6)
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
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

36. General Business Credits (2 of 6)
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
Complex interaction among credits & grants
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

37. General Business Credits (3 of 6)
Work opportunity credit
Generally 40% of 1st $6K of qualified wages paid to employees hired from 1 of 10 targeted groups
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

38. General Business Credits (4 of 6)
Employer-provided child care credit
25% of qualified child care expenses plus
10% of child care resources and referral expenditures
Max $150K credit
Cannot claim both credit and deduction
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

39. General Business Credits (5 of 6)
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
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

40. General Business Credits (6 of 6)
Credit for research activities
20% of incremental expenditures plus
20% of basic research expenditures
20% of energy research expenses
No deduction for creditable expenditures
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

41. 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
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

42. Payment of Taxes Withholding of Taxes (1 of 2)
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
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

43. 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
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

44. Payment of Taxes Estimated Tax Payments (1 of 2)
Calendar year taxpayers’ quarterly payments due April 15, June 15, Sept 15 of the current year, and January 15 of following year
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

45. 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 underwithheld by <$1K or individual had $0 tax liability in prior year
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

46. 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
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

47. Compliance and Procedural Considerations
AMT filing procedures
Form 6251 or 4626
Withholding and estimated payments
Forms W-2 and 1040ES
General business credit
Form 3800
Personal tax credits
Schedule EIC, Schedule R, Form 1116, Form 2441, Form 8863
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

48. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall