Chapter 9 Flashcards
Individual Income Tax Credits.
Tax deduction vs Credit
Tax credits are highly beneficial to taxpayers because they constitute dollar-for-dollar reductions of the actual tax owed to the government. A tax deduction, on the other hand, only reduces the amount of the taxpayer’s income that is subject to taxation. It produces a net tax benefit equal to the taxpayer’s marginal tax rate multiplied by each dollar deducted. For example, a taxpayer whose top marginal rate is 37 percent would receive a benefit equal to 37 cents for each deductible dollar. Although deductions are certainly beneficial, credits are more beneficial because they are applied directly to the tax liability.
Tax Credit For Children
For years 2018 through 2025, the amount of the credit is $2,000 for each qualifying child.
For 2018 through 2025 the credit is refundable up to $1,400 per qualifying child.
Qualifying Child
The child must be under the age of 17 at the close of the tax year. Under Sec. 24(a), the child tax credit generally requires that each qualifying child be younger than the person claiming the credit for the child, be unmarried, and be a dependent of the taxpayer. A child’s parents should now be the only taxpayers eligible to claim the credit. Finally, the child must be a citizen, national, or resident of the United States.
Adoption Tax Credit
For 2018, an adoption tax credit of up to $13,840 per eligible child is available for qualified expenses paid in the course of adopting a child. This figure is subject to annual inflation adjustments. The limit on the credit is a cumulative limit per child. In other words, no more than the maximum amount may be claimed for any one child regardless of the number of years for which the credit is claimed for that child.
Since 2012, the tax credit has been nonrefundable.
Refundable tax credits
Refundable tax credits are called “refundable” because they can reduce your tax liability below zero and allow you to receive a tax refund. If you qualify for a refundable credit and the amount of the credit is larger than the tax you owe, you will receive a refund for the difference.
Child Tax Credit Phaseout
Married Filing Jointly: AGI above $400,000
Filing Separately/Single: AGI above $200,000
The otherwise allowable credit is phased out by $50 for each $1,000 (or fraction thereof )
by which modified AGI exceeds the threshold amount. For example, a married couple filing jointly with one child this year would have no child credit if their modified AGI was more than $439,000. This is because their AGI exceeds $400,000 by $39,000 plus a fraction of $1,000. Therefore the credit is phased out by 40 × $50, or $2,000, the total amount of the credit.
Claiming an adoption credit
For tax years in which an adoption becomes final, the taxpayer is allowed to claim the credit for expenses paid during that year. For years in which qualified expenses are paid but in which the adoption does not become final, the taxpayer must claim the credit for those expenses for the tax year following the year in which the expenses are paid, even if the adoption never becomes final.
Foreign adoptions or adoptions of children with special needs qualify for the credit only if the adoption becomes final and must be claimed in that year even if paid in a prior year.
There is a 5-year carryover period available for taxpayers whose allowable adoption credit exceeds their tax liability for the year the credit is first allowable.
Adoption Tax Exclusion
There is also an income tax exclusion available for amounts paid by a taxpayer’s employer for qualified adoption expenses on behalf of the taxpayer/employee. Such amounts must be furnished under a nondiscriminatory adoption assistance program.
Dependent Care Credit Calculation
The allowable credit currently ranges from 20 to 35 percent of eligible expenses. The allow- able percentage is reduced by 1 percent for each $2,000 (or fraction thereof ) of adjusted gross income in excess of $15,000. The credit is fully reduced to 20 percent once the taxpayer’s AGI exceeds $43,000.
American Opportunity Credit
The American Opportunity Credit is allowed for qualifying expenses incurred for a maximum period of 4 years of the student’s postsecondary education.
The student also must be at least a “half-time” student.
The American Opportunity Credit will not be allowed if the student has been convicted of a felony drug offense during the year.
Lifetime Learning Credit
Lifetime Learning Credit may be claimed for all postsecondary years of education expenses including graduate and professional school expenses.
The Lifetime Learning Credit is also available with respect to expenses of a student who is taking courses to acquire or improve job skills, even if that student is not a half-time student as required under the American Opportunity Credit rules.
Rules for Calculating the American Opportunity Credit
The American Opportunity Credit can currently be claimed in amounts up to $2,500 per student for 2018. It is calculated based on 100 percent of the first $2,000 of qualifying expenses and 25 percent of the next $2,000 of expenses. Therefore the maximum credit is $2,500 for the first $4,000 of expenses.
Phaseout of the American Opportunity Credit
For married tax- payers filing jointly, the phaseout range for 2018 is between $160,000 and $180,000.
For single taxpayers, the phaseout range for 2018 is between $80,000 and $90,000.
Rules for Calculating the Lifetime Credit
The Lifetime Learning Credit is currently equal to 20 percent of up to the first $10,000 of qualifying expenses paid by the taxpayer. Therefore the maximum annual Lifetime Learning Credit is $2,000.
Phaseout of the Lifetime Credit
The phaseout range for 2018 was between $114,000 and $134,000 for married taxpayers filing jointly.
Between $57,000 and $67,000 for all other taxpayers.
