Federal Taxation VI: Tax Credits Flashcards
Tax Credit Category: Personal (8)
- Child Tax Credit
- Saver’s (IRA) Credit
- Education Tax Credits
- Dependent Care
- Adoption Expense Credit
- Elderly Credit
- Alternative Motor Vehicle Credit
- Foreign Tax Credit
Tax Credit: General Business (3)
- Research and Development
- Rehabilitation
- Miscellaneous
Predetermined Order of Credits
- Personal/nonrefundable - limited to gross tax and no carryover of excess
- General business - limited to % of gross tax after personal credits and carryover = back 1 yr/forward 20yrs
- Refundable Credits - applied last b/c no limit based on tax (excess is refunded)
Personal Credit: Child Credit
- $1,000 Child Credit allowed for each qualifying child
- Phased out w/ AGI greater than $110K (m)/$75K (s)… $50 for each $1K over trigger
- Additional is refundable to extent of 15% of earned income in excess of $3K
Personal Credit: Education
- Hope Credit/American Opportunity Tax Credit: $2,500/yr ($100% of 1st $2K, 25% of next $2K
- Lifetime Learning Credit: $2K per tax year (20% of $10K education expenses)
- cant use both in one year
Personal Credit: Saver’s Credit
Allowed for voluntary contributions to IRA and qualified retirement accounts. $1K max credit.
Personal Credit: Dependent Care
- To be eligible, person needing care must live with taxpayer more than 1/2 year
- Expenditures for household services are care and are required for credit
- Calculation = qualifying expenditures by appropriate credit % (35% AGI under $15K reduced by 1% for each $2K part above $15K. Minimum is 20% or $43K)
- Maximum = $3K or $6k if more than one dependent qualifies
Personal Credit: Adoption
Reasonable Expenses up to $13,190. Phased out w/ AGI of $197,880. Excess credit carried forward 5 yrs.
Personal Credit: Elderly Credit
= 15% of difference b/w initial (flat) amount and income
- taxpayer/spouse must be 65 or totally diabled
- flat amount = $5K for one or $7.5K for both spouses
- income is certain types of retirement pay plus 1/2 of AGI over $7.5K(s)/$10K(m)
Personal Credit: Motor Vehicle
- Alternative motor vehicle (terminated 2014)
2. New Qualified plug-in electric vehicles ($5K)
Personal Credit: EIC
Complex method of mitigating employment taxes for low income taxpayers. Refundable credit.
Personal Credit: EIC Credit Percentage.
Increases if taxpayer maintains a home with qualifying children.
7.65% - no qualifying children
34% - 1 qualifying child
40% - 2 qualifying children
45% - 3 or more qualifying children
Personal Credit: Health Coverage
- 72.5% of COBRA
2. Affordable Care Act
Business Credit: Foreign Tax Credit
To prevent double taxation of foreign income taxed in foreign jurisdiction. Limited to lower of foreign tax paid or proportion of US tax allocable to foreign sourced income.
Example: 20% income from abroad… can claim foreign tax credit of lesser of amount of foreign tax paid or 20% of US tax paid… (example calculates this as us tax x foreign taxable / worldwide taxable instead of flat 20%)
Excess: Back 1 year or forward 10
In Lieu of Foreign Tax Credit
- Can claim foreign tax as itemized deduction
- Can exclude income earned while bona fide resident in foreign country ($99,200 max, must live in country min 330 days/yr)
Net Regular Tax Liability
Regular tax less personal credits
General Business Credit
Combination of credits, calculated individually and subject to an overall limit
General Business Credit Limit
net regular liability
+ AMT less nonrefundable credits (not including AMT credit)
- 25% of net regular liability over $25,000.
- Excess carried back 1 year or forward 20
Business Credit: Rehabilitation
Credit % depends on type of expenditure:
- 10% - rehabilitate property from before 1936
- 20% - rehabilitate certified historic structure
Qualifying expenditures may adjust basis and be subject to recapture:
- adjusted basis of property reduced by amount of credit
- credit recaptured if building held less than 5 yrs
Business Credit: Small Employer Health Insurance for Eligible Small Employer (ESE)
- ESE can claim credit = 35% of nonelective contributions for health ins for employees
- To be eligible, ESE must contribute more than 50% of employee insurance premiums under a contribution arrangement
- Full credit only available when ESE w/ less than 10 employees have wages of less than $50K
- Owner and relatives are not treated as employees
Business Credit: Work Opportunity Tax Credit (WOTC) - may not be extended
- Calculated on amount of wages paid per employee during yr 1 of employment. 40% of qualified wages. Max: $2.4K.
- Credit is elective
- Targeted at certain employee groups (vets)
- WOTC reduces deduction for wages
Business Credit: Research
- Incremental research expenditures eligible for 20% credit
- May use alternative simplified credit = to 14% excess of qualified research expenses greater than 50% of average research expenses for last 3 yrs
Business Credits: Misc (examples)
- Cost of operating employee child care facility
- Energy credits for solar/geothermal property
- Contractor credits for efficient homes
- Nonbusiness energy credit
- Credits for disabled access and low-income housing
