1. 14-1 ©2009 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  Personal tax credits  Foreign tax credit  General business credits ©2009 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

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

7. 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

8. 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

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

12. 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

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 ©2009 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 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

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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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

32. 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

33. 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

34. 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

35. 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

36. 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

37. 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 14-37 ©2009 Pearson Education, Inc. Publishing as Prentice Hall