Unit 13 - Individual Tax Credits Flashcards
Tax credits
Reduce a taxpayers liability on a dollar for dollar basis
Usually more valuable than a tax deduction
A tax deduction reduces the amount of taxable income
But tax credit reduces the liability
Various types – refundable or nonrefundable
Nonrefundable tax credits
Reduce taxpayers liability for the year to zero – but not beyond that
Any remaining credit is not refunded to the taxpayer
Most common non-refundable tax credits available :
Child and independent care credit
Adoption credit
American opportunity tax credit
Lifetime learning credit
Retirement savings contributions credit
The credit for other dependents ODC
CHILD TAX CREDIT CTC
FOREIGN TAX CREDIT
Refundable tax credits
Reduce taxpayers liability to zero and also generate a refund to the taxpayer for the amount of which the credit exceeds the amount of tax he would otherwise
Refundable tax credits include the following
Additional child tax credit ACTC
The earned income tax credit EITC
Premium tax credit
American opportunity tax credit – partial
Credit for excess Social Security and RRTA tax withheld
Due diligence requirements
Tax prep must complete form 8867, paid prepare due diligence checklist for:
Head of household filing status
Earned income tax credit
Child tax credit
American opportunity tax credit
Additional child tax credit
Taxpayers, spouse, and qualifying child are required to have a valid, taxpayer identification number assigned on or before the due date or extended, due date of the return for the following :
AOTC
ACTC
CTC
ODC
EITC
Child and dependent care credit – CDCTC
A nonrefundable credit
Allows a taxpayer a credit for a percentage of childcare expenses for children, under age, 13 and or for disabled dependence of any age
If receiving any reimbursement under an FSA – taxpayer must deduct the reimbursed amount from qualified expenses
Maximum amount of care expenses used to calculate the credit is
$3000 for one qualifying dependent
$6000 for two or more qualifying independence
The amount of the credit ranges between 20% to 35% of qualifying expenses, depending on the taxpayers AGI
CDCTC – qualifying expenses
Preschool education
After school care
Disabled care
Transportation cost
Fees and deposits
Household services
CDCTC – eligibility test
Taxpayer must pass five eligibility test to qualify for the child and dependent care credit
Qualifying person test
Earned income test
Work related expense test
Joint return test
Provider identification test
Can still qualify for the CDCTC filing MFS if meet certain requirements
CDCTC – test number one qualifying person test
A qualifying person is
A dependent child under the age of 13 at the time the care was provided
A spouse who is physically or mentally disabled
Any other disabled dependent, who is incapable of self-care
Disabled person that the taxpayer could claim as a dependent, except the disabled person had gross income of $4700 or more
CDCTC – test number two earned income test
Taxpayer must have earned income during the year – if filing jointly both spouses must work
The following are considered as having earned income for any month they are :
A full-time student or
Disabled
Deemed earned income for one qualifying dependent equals $250 per month or $500 per month if the taxpayer has two or more dependence
The amount of qualifying (Daycare) expenses used to figure. The credit cannot be more than the taxpayers earned income for the year, if unmarried
Or the smaller of the spouses earned income for the year married
If one spouse has a net loss on schedule C – they would not qualify
CDCTC – test number three work related expense test
Expenses must be work related to qualify for this credit
Taxpayer must be working or actively searching for work
Cannot include (Daycare) expenses for date night
CDCTC – non-qualifying expenses
Tuition for children in kindergarten and above
Summer school or tutoring programs
Cost of sending a child to an overnight camp
Cost of transportation not provided by a daycare provider
A forfeited deposit to a daycare center
CDCTC – divorced parents
Only the custodial parent of the child is allowed to claim the child. Independent CareCredit.
CDCTC does not apply to childcare payments made to…
A family member who is the taxpayers owned dependent under 19 years old, or any other dependent listed on their tax return
CDCTC – test #4 joint return test
Claiming the child, independent care credit – married couples generally must file jointly
If a taxpayers filing status is MFS, and all of the following apply, the taxpayer is still permitted to claim the (Daycare) credit
- Taxpayer lived apart from their spouse during the last six months.
- Taxpayers home was the qualifying person home for more than half of the year.
- Taxpayer paid more than half the cost of keeping up for the year.
CDCTC Test #5 provider identification test
To qualify for this credit – taxpayer must include the name, address, and identification number of the caregiver or organization who provided care
If (Daycare) provider refuses – taxpayer can report whatever information they have and attach a statement explaining the situation
For daycare providers are exempt from an identification number, and these requirements
Most tax software will automatically enter LAFCP – living abroad, foreign care provider in the space for the care providers, taxpayer identification number
Child tax credit – CTC
How much is it?
How to calculate?
Where reported?
A nonrefundable credit of $2000 per qualifying child
With an AGI phase out at $200,000, or $400,000 for joint files
Income exceeding the limit, the credit will decrease by $50 for every $1000 that the AGI exceeds the limit (additional $40,000)
Child must have a valid SSN to qualify
ITIN and ATIN are not sufficient
Schedule 8812 is used for figuring and reporting the child tax credit
Qualifying child for the child tax credit
To be eligible to claim the CTC, taxpayer must have at least one qualifying child, and the child must meet the following test:
Age test – younger than 17 on 12/31
Relationship test – must be child, stepchild, foster child, sibling, step sibling, half sibling, or a descendent of any of them or adopted child
Support test – child must not provide more than half their own support
Dependency test – taxpayer must claim the child as a dependent
Joint return test – child cannot file a joint return unless to claim a refund
Citizenship test – must be a US citizen or US resident alien with a valid SSN
Residency test – lived with taxpayer more than half the year – exceptions for temporary absences, or children who are born/die within the year
Additional child tax credit
How much is it?
How to calculate it?
Where is it reported?
A refundable credit
Taxpayer must be able to claim the CTC in order to claim the additional child tax credit credit
This is the refundable component of the CTC
Taxpayer can claim up to $1600 for each qualifying child
Based on the lesser of :
15% percent of the taxpayers taxable earned income that is over $2500
Or
The amount of unused child tax credit
Schedule 8812 is used for figuring and reporting the ACTC
Credit for other dependence – ODC
What is it?
How much?
Who qualified?
Nonrefundable credit
Applies to dependence who do not qualify for the CTC
Such as children who are over the age threshold or other dependence, such as elderly parents
Credit is $500 per qualifying dependent
Cannot claim the ODC for themselves or a spouse – only available for dependence listed on the return
Dependent must be a US citizen, US national, or US resident and have a valid identification number by the due date of the return
AGI phase out begins at $200,000 for unmarried, and $400,000 for joint files
Credit reduced by $50 for each $1000 above the threshold
Adoption credit
What is it?
How much?
Who can you adopt?
Eligibility?
Where reported?
A nonrefundable credit
Up to $15,950 per child can be taken for qualified expenses paid to adopt a child
MFS taxpayers cannot claim the adoption credit
Eligible child must be under the age of 18 or physically or mentally disabled
Income phase out range for all filing statuses is the same
MAGI phase out starts at $239,230 and ends at $279,230
Any unused credit may be carried forward for up to five years
Credit is claimed on form 8839 – qualified adoption expenses
The adoption of a domestic child – qualified expenses paid before the year in which the adoption becomes final may be claimed in the year after the expenses were paid . Applies even if the adoption is unsuccessful.
Adopting a special-needs child
The maximum credit amount is allowed, even if the taxpayer does not have any adoption expenses
Special needs child must be a US citizen or US resident when the adoption begins
And one of the following must apply
- The state has determined the child cannot be returned to the parents home.
- The state has determined the child will not be adopted unless assistance is provided to the adoptive parents.
Child does not have to be disabled in order to qualify as “ special needs”
Employer provided adoption benefits
They are excluded from income
The exclusion and the credit cannot be claimed for the same expenses
No double dipping allowed
Adoption expenses
What’s included?
What’s not included?
Qualifying adoption expenses must be directly related to the adoption of the child
Including …
Attorney fees, adoption, fees, and court cost
Travel expenses related to the adoption, including meals and lodging
Cost of an unsuccessful adoption of a US citizen or US national
Adoption expenses to adopt a foreign child
Expenses do not include …
Any illegal adoption expenses
Surrogate parenting arrangement
Adoption of a spouse’s child
Foreign adoptions
If the eligible child is from a foreign country, the taxpayer cannot take the credit unless the adoption becomes final
A foreign child is defined as a child who was not a citizen or resident of the US at the time the adoption effort began
Foreign adoptions do not qualify as the special needs adoption. Only qualifying expenses.
Expenses paid before or during the adoptive process are only includable for the credit once the adoption actually becomes final
Post adoption expenses
Any additional expenses paid after an adoption becomes final…
Are included in the tax credit calculation in the year paid
Regardless of whether the adoption was foreign or domestic
Educational credits
What are they?
Can you claim both?
Where reported?
Two education credits are available based on qualified expenses. Taxpayer pays for post secondary education.
- American opportunity tax credit – also called the AOC or AOTC
- Lifetime learning credit.
Taxpayer cannot claim both the American opportunity credit and the lifetime learning credit for the same student in one year
But can take both credits for different students claim as dependents
Form 8863, education, credits, is used to figure and claim both education credits
Education credits – who qualifies
Taxpayer can receive education credits for themselves, their spouse, and any dependents who attend an eligible educational institution during the previous tax year
Education credits – eligible institutions
Include colleges, universities, vocational schools, and community colleges
Payments made in advance for an academic term beginning within the first three months of the next calendar year can also be claimed . (in the same year the cost is paid – before school starts.)
Education credits – who doesn’t qualify
- If you could be claimed as a dependent on another person’s tax return.
- Married filing separately.
- Individuals with a non-resident alien spouse are not eligible.
- Income that exceeds the phase out limits.
Unmarried individuals limits are between $80,000 and $90,000
Married couples filing jointly phase out limits are $160,000 and $180,000
Education credits – qualified expenses
Any reductions?
Tuition and related fees
Required textbooks and other course materials required as a condition of enrollment
Any course involving sports, games, or hobbies is not a qualifying expense unless the course is part of the students degree program - or if taken to improve job skills in the case of the lifetime learning credit
Qualified education, expenses must be reduced by the amount of any tax-free education assistance received – such as pell grants, tax-free portions of scholarships, and employer provided educational assistance
The following expenses cannot be used:
- Room and board.
- Medical fees.
- Insurance expenses.
- Transportation cost.
- Any other personal, living, or family expenses.
How are tuition expenses reported to students
Form 1098 – T, tuition statement
Issued by the school
Shows tuition expense and scholarships
American opportunity tax credit – AOTC
Maximum credit of $2500 for each eligible student
The credit covers 100% of the first $2000 and 25% of the second $2000 of eligible expenses per student
Has a refundable portion …
Up to 40% of the credit can be refunded – allowing taxpayers to receive a maximum of $1000 even if they do not owe any tax
AOTC requirements
- Degree requirement – student must be enrolled in a program that leads to a degree, certificate, or other recognized educational credential.
- Minimum load – student must be enrolled at least halftime for at least one academic period beginning in the tax year
- no felony drug conviction cannot have any felony convictions for possessing or distributing a controlled substance
- Four years of post, secondary education – credit can be claimed only for expenses related to a students post, secondary education and only for a maximum of four years.
Lifetime learning credit
A nonrefundable tax credit of 20% of qualified tuition, fees, and any amounts paid directly to the educational institution for required books, supplies, and equipment up to $10,000 paid during the tax year
Maximum credit is $2000 per tax return, not per student
A families maximum credit is the same regardless of the number of qualified students
Lifetime learning credit requirements
- No degree or workload requirement
- All levels of post, secondary education, undergraduate, graduate, or professional degree candidate. Courses can also be just for professional development.
- An unlimited number of years.
- Felony drug convictions permissible.
Earned income tax credit – EITC
A refundable tax credit for lower income people who work and have earned income and adjusted gross income under certain thresholds
Must have a valid Social Security number by the due date of the return, including extensions
Refunds for taxpayers claim in the EIC will not be issued prior to February 15
EITC requirements
- Have a SSN that is valid for employment.
- Have earned income from wages, combat pay, or self-employment, etc.
- Investment income must be $11,000 or less for the year. (this figure inflates every year.) investment income includes interest, payments, dividends, capital gains, and passive rental income.
- Not be claimed as a dependent by another taxpayer.
- Be a US citizen or legal resident all year. (non-resident alien married to a US citizen or resident alien filing jointly can still qualify under some narrow circumstances.
- Cannot file form 2555 – related to the foreign earned income exclusion.
Earned income and AGI limits
The amount of the EITC credit varies based on a taxpayers earnings and how many children are claimed as dependence on the return
Both taxpayers earned income and their AGI must be less than certain thresholds
EITC – no qualifying children – maximum amount
$600
EITC – one qualifying child – maximum amount
$3995
EITC – two qualifying children – maximum amount
$6604
EITC – three or more qualifying children – maximum amount
$7430
What qualifies as income for the EITC
Only earned income, such as wages, tips, combat pay, union, strike, benefits, and net earnings from self-employment qualifies for the EITC
Earned income, for EIC purposes, does not include:
Social Security benefits, SSI, or welfare payments
Alimony or child support
Pensions or annuities
Unemployment benefits
Inmate wages, including work, release programs
Income from investments, passive rental activities, or other passive sources
Income that is excluded from tax is generally not considered earned income for the EIT – with the exception of combat pay and qualified Medicare waiver payments
Taxpayer can choose to include this non-taxable pay in their earned income if it gives them a better tax result
Qualifying children for EITC purposes
Must be all the following tests
- Relationship test
- Age test.
- Joint return test.
- Residency test.
EITC qualifying child – relationship test
Child must be related to the taxpayer in one of the following ways:
- Son, daughter, stepchild, eligible, foster child, adopted child, or descendent of any of them.
- Brother, sister, brother, sister, stepbrother, stepsister, or descendent of any of them.
- A foster child can be eligible if placed in the taxpayers home by an authorized placement agency or by the courts.
Qualifying child listed on schedule EIC must have a valid SSN .
If the dependent does not have an SSN – taxpayer eligible to take the smaller credit available as if no children claimed
EITC qualifying child – age test
To qualify for the EITC, the child must be
Age 18 or younger
A full-time student, age 23 or younger
Any age, if permanently disabled
Plus, the qualifying child must be younger than the taxpayer claiming them unless the dependent is permanently disabled
EIC qualifying child – joint return test
The qualifying child or dependent cannot file a joint return with a spouse except to claim a refund
EITC qualifying child – residency test
The child must have lived with the taxpayer in the United States for more than half the year
Only a custodial parent can claim the EITC
US military personnel stationed outside the US are considered to live in the US during that duty.
A child who was born or died during the year, would meet the residency test for the entire year if the child lived with the taxpayer the time the child was alive
Childless EITC
A taxpayer with a qualifying child can claim the EITC without any age limitations
But taxpayer without a child can only claim the EIT see if all of the following test are met
- Must be between the age of 25 and 65 – on a joint return only one spouse must meet the age requirement
- Must not qualify as a dependent of another person.
- Must live in the United States for more than half of the year.
- Cannot file form 2555 – related to the foreign earned income exclusion.
EITC fraud and penalties
If the IRS audits taxpayers return and disallows all or part of the EITC – the taxpayer…
- Must pay back the amount in error with interest.
- May need to file form 8862, information to claim earned income credit after disallowance.
- Cannot claim the EIT for the next two years if the IRS determines the air is because of reckless or intentional disregard of the rules.
- Cannot claim EIT for the next 10 years if the IRS determines is because of fraud.
Retirement savings contributions credit
How much?
How to calculate?
Where is it reported?
Also referred to as the savers credit
The credit is 10%, 20%, or 50% of eligible contributions to IRAs or an employer, sponsored retirement plan
Up to a maximum credit of $1000 or $2000 MFJ, depending on a taxpayers AGI
Amount of the credit is the eligible contribution by the applicable credit rate, which is based on filing status and AGI
Foreign income cannot be included in the taxpayers AGI for the purposes of calculating this credit
Taxpayer must generally subtract the amount of distributions received from their retirement plans
- in the two years before the year the credit is claimed
- the year the credit is claimed
- the period after the end of the year, but before the due date, including extensions, for filing the return for the credit year
The credit is claimed on form 8880, credit for qualified retirement, savings contributions
Savers credit eligibility
To be eligible for for this credit, the taxpayer must fulfill all of the following requirements:
- At least age 18 or older.
- Not be a full-time student.
- Not claimed as a dependent on another person‘s return.
Credit for excess Social Security and RRTA tax withheld
The credit is for workers who overpay their tax for Social Security or railroad retirement taxes
Fully refundable
If a single employer over withheld too much – that is the employers error to adjust the access for the employee
If the employer refuses – file a claim for refund using form 843 – claim for refund and request for abatement
