14-1 ©2011 Pearson Education, Inc. Publishing as Prentice Hall.

14-1©2011 Pearson Education, Inc. Publishing as Prentice Hall

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

©2011 Pearson Education, Inc. Publishing as Prentice Hall

14-3

SPECIAL TAX COMP METHODS, CREDITS &

PAYMENT (2 of 2)

Refundable creditsPayment of taxesTax planning considerationsCompliance and procedural

considerations


14-4

Alternative Minimum Tax

AMT computationAMT preference itemsAMT adjustmentsAMT credits


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


14-6


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)


14-7


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


14-8

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


14-9

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


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

14-11


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


14-12

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


14-13

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


14-14


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


14-15


Self-employment incomeNet earnings from sole

proprietorshipDirector’s feesTaxable research grantDistributive share of partnership

income plus guaranteed payments


14-16

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


14-17

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


14-18

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


14-20

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


14-21

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


14-22

Adoption Credit

Up to $12,170 credit in adoption year

Phased out between $182,520 – $222,520


14-23

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


14-24

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

14-25

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


14-26

Qualified Retirement Savings Contribution Credit

Credit for lower-income taxpayersCredit in addition to exclusion or

deduction otherwise allowable


14-27

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


14-28

Nonrefundable Personal Credits Limit

Nonrefundable credits cannot exceed regular tax liability plus TMT for year


14-29

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


14-30

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

14-31

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

14-32


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


14-33


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


14-34


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

14-35


Credit for research activities20% of incremental expenditures plus20% of basic research expenditures20% of energy research expensesNo deduction for creditable

expenditures


14-36

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

14-37

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


14-38

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


14-39

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


14-40

Payment of TaxesWithholding of Taxes (2 of 2)

Withholding allowances and methodsEvery employee must file an

Employee’s Withholding Allowance Certificate Form W-4


14-41

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


14-42

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

14-43

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

14-44

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

Comments or questions about PowerPoint Slides?Contact Dr. Richard Newmark at University of Northern Colorado’s

Kenneth W. Monfort College of [email protected]

14-45©2011 Pearson Education, Inc. Publishing as Prentice Hall

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