14-1 ©2011 Pearson Education, Inc. Publishing as Prentice Hall
Dec 16, 2015
14-2
SPECIAL TAX COMP METHODS, CREDITS &
PAYMENT (1 of 2)
Alternative minimum taxSelf-employment taxOverview of tax creditsNonrefundable personal tax
creditsForeign tax creditGeneral business credits
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14-3
SPECIAL TAX COMP METHODS, CREDITS &
PAYMENT (2 of 2)
Refundable creditsPayment of taxesTax planning considerationsCompliance and procedural
considerations
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Alternative Minimum Tax
AMT computationAMT preference itemsAMT adjustmentsAMT credits
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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
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AMT Computation(2 of 3)
Alternative minimum taxable income
- AMT exemption Alternative minimum tax base
x Tax rate 26% on 1st $175K, 28% on excess
Tentative minimum tax- Nonrefundable personal credits- Regular tax
AMT due (if any)
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AMT Computation(3 of 3)
AMT exemption$70,950 MFJ, $46,700 single,
$35,475 MFSReduced by 25% of AMTI in excess
of threshold amount$150,000 MFJ, $112,500 single, &
$75,000 MFS
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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
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AMT Adjustments(1 of 3)
AMT itemized deductionsCasualty & theft loss in excess 10%
of AGICharitable contributionsMedical expenses in excess of 10%
of AGIQualified housing interestEstate tax deduction on IRDGambling losses©2011 Pearson Education, Inc. Publishing as Prentice
Hall
14-10
AMT Adjustments(2 of 3)
Timing differencesFor personal property placed in
service after 1998Difference between MACRS deduction
and amount determined by using 150% DB
For real property placed in service after 1986 and before 1999Difference between actual MACRS and
SL using 40-yr useful life©2011 Pearson Education, Inc. Publishing as Prentice Hall
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AMT Adjustments(3 of 3)
Timing differences (continued)Incentive Stock Options (ISOs)
Difference between FMV of stock and price paid for it
R&E expendituresDifference between amount deducted
and amount deduction if R&E capitalized and amortized over 10-years
©2011 Pearson Education, Inc. Publishing as Prentice Hall
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AMT Credits
AMT foreign tax creditChild and dependent care creditElderly and disabled creditChild tax creditAmerican opp. & lifetime learning
creditsQual. retirement savings contrib.
creditResidential energy credits
©2011 Pearson Education, Inc. Publishing as Prentice Hall
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Self-Employment (SE) Tax(1 of 3)
Individuals subject to SE tax on amount of net earnings from self-employment
Computing the taxNet earnings self-employment
earnings ≥$400 subject to SE taxMultiply SE income x 92.35% (100% -
7.65%) to determine net SE earnings
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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 $106,800No limit on the Medicare portion of SE
tax
½ of SE tax deductible for AGI
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Self-Employment (SE) Tax(3 of 3)
Self-employment incomeNet earnings from sole
proprietorshipDirector’s feesTaxable research grantDistributive share of partnership
income plus guaranteed payments
©2011 Pearson Education, Inc. Publishing as Prentice Hall
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Overview of Tax Credits
Use and importance of tax creditsUsed by Federal gov’t for tax
policyValue of a credit vs. a deduction
Credit is $ for $ reduction of tax liability
Deduction x MTR = tax savingsClassification of credits
RefundableNonrefundable
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Nonrefundable Personal Tax Credits (1 of 2)
Child tax creditChild and dependent care creditTax credit for the elderly and
disabledAdoption creditAmerican opportunity tax creditLifetime learning credit
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Nonrefundable Personal Tax Credits (2 of 2)
Residential energy creditsQualified retirement savings
contributions creditAlternative motor vehicle creditNonrefundable personal credit
limits
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Child Tax Credit
Child tax credit$1,000 for each qualifying child <17Phased out at $50 per $1,000 over
threshold amount$110K MFJ; $75K single; $55K MFS
A portion may be refundable in 2009 and 2010
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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
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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
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Adoption Credit
Up to $12,170 credit in adoption year
Phased out between $182,520 – $222,520
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American Opportunity Tax Credit (AOTC)
Up to $2,500 credit for tuition and related expenses per student
Available for 1st two years per student
100% of 1st $2,000 plus 25% 2nd $2,000
Must be half-time studentEligible expenses reduced by
amounts received under other Code sections
Phase out between $160K-$200K MFJ; $80K-$100K for other taxpayers
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Lifetime Learning Credit
Less restrictive than AOTC20% of 1st $10K of eligible
expensesNOT 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
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Residential Energy Credits
Nonbusiness energy property credit$1,500 once in a lifetime credit
(2009-2010)30% of cost of qualified energy
efficiency improvements plusResidential energy efficiency
creditExpenditures on alternative energy
sources for principal residence30% of eligible property
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Qualified Retirement Savings Contribution Credit
Credit for lower-income taxpayersCredit in addition to exclusion or
deduction otherwise allowable
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Alternative Motor Vehicle Credit
Combines several creditsQualified fuel cell creditAdvanced lean-burn technology
creditQualified hybrid creditQualified alternative fuel refueling
property creditPlug-in conversion creditPlug-in electric vehicle credit
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Nonrefundable Personal Credits Limit
Nonrefundable credits cannot exceed regular tax liability plus TMT for year
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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
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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 creditsCarryback 1 year, thenCarryforward 10 years©2011 Pearson Education, Inc. Publishing as Prentice
Hall
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General Business Credits(1 of 5)
Combined for purposes of computing overall dollar limitationExcess credits carried back 1 year
and forward 20 years applied on FIFO method
Limited to net income tax less greater ofTMT or 25% of net regular tax liability in excess
of $25K©2011 Pearson Education, Inc. Publishing as Prentice
Hall
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General Business Credits(2 of 5)
Tax credit for rehabilitation expenditures10% for structures placed in service
before 1936 and 20% if certified historic structures
Business energy credits10% of energy-conserving properties30% for solar and fuel cell propertySeveral new energy credits added in
2009
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General Business Credits(3 of 5)
Credit for employer-provided child care25% of qualified child care expenses
plus10% of child care resources and
referral expendituresMax $150K credit
Cannot claim both credit and deduction
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General Business Credits(4 of 5)
Work opportunity credit40% of 1st $6K of qualified wages
paid to employees hired from 1 of 10 targeted groups
Disabled access creditFor 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
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General Business Credits(5 of 5)
Credit for research activities20% of incremental expenditures plus20% of basic research expenditures20% of energy research expensesNo deduction for creditable
expenditures
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Refundable CreditsEarned Income Credit
Eligibility rules:Earned income and AGI thresholds
metPrincipal place of abode in U.S. for
> ½ of tax yearIndividual between 25-64 years
oldIndividual not a dependent of
another taxpayer for tax year©2011 Pearson Education, Inc. Publishing as Prentice Hall
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Refundable CreditsHomebuyers Tax Credit
Purchase principal residence between 11/7/2009 – 4/30/2010Must 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
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Refundable CreditsMaking 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
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Payment of TaxesWithholding of Taxes (1 of 2)
Withholding of taxesEmployers 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
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Payment of TaxesWithholding of Taxes (2 of 2)
Withholding allowances and methodsEvery employee must file an
Employee’s Withholding Allowance Certificate Form W-4
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Payment of TaxesEstimated Tax Payments (1 of 2)
Estimated tax paymentsCalendar 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
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Payment of TaxesEstimated Tax Payments (2 of 2)
Required estimated tax paymentsAvoid underpmt of estimated tax
penalty90% of current tax liability, or 100% of last year’s liability
110% if AGI > $150KNo penalty if underwitheld by <$1K
or individual had $0 tax liability in prior year©2011 Pearson Education, Inc. Publishing as Prentice
Hall
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Tax Planning Considerations
Avoiding Alternative Minimum Tax
Avoiding the underpayment penalty for estimated tax
Cash-flow considerationsUse of general business creditForeign tax credits and foreign
earned income exclusion©2011 Pearson Education, Inc. Publishing as Prentice Hall
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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 creditsSchedules EIC, Schedule R, Form
1116, Form 2441, Form 8863©2011 Pearson Education, Inc. Publishing as Prentice
Hall
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