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% - 7.65%) 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 (2009- 2010)  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 25-64 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 richard.newmark@PhDuh.com 14-45 ©2011 Pearson Education, Inc. Publishing as Prentice Hall