Income Tax Fundamentals 2017 Student Slides CHAPTER 6 Credits & Special Taxes © 2019 Cengage. All rights reserved.

Credits and Deductions A credit is a direct reduction in tax liability Credits are used to target certain groups for tax benefit Provide equal benefit to all taxpayers A deduction is a reduction of taxable income Reduces tax liability in the amount of benefit Deduction x tax rate = benefit Provides more benefit to higher income taxpayers

Child Tax Credit Provides tax relief through a credit to taxpayers with children Credit for each child under age 17 claimed as a dependent and meeting definition of “qualifying child” Credit is $1,000 per child Credit begins phasing out when AGI > $110,000 (MFJ) AGI > $ 75,000 (HH, S) AGI > $ 55,000 (MFS) Phased out $50 for each $1,000 (or part thereof) that AGI exceeds threshold

Earned Income Credit (EIC) (1 of 3) Refundable credit Serves as “negative” income tax Can get refund even if have no tax liability Taxpayer(s) with children can receive EIC Not eligible if married filing separate All parties must have valid Social Security numbers Foreign income exclusion not allowed Earned income must meet certain guidelines (see page 6-9 for list) “Disqualified income” (certain types of investment income) must be less than $3,400

Earned Income Credit (EIC) (2 of 3) Taxpayer may get EIC, even without a qualifying child Have to meet all the qualifications of prior slide (pp 6-8 – 6-9) plus Taxpayer must be between ages 25 and 65 Taxpayer cannot be eligible to be claimed as another taxpayer’s dependent or be a qualifying child of another taxpayer Taxpayer must live in U.S. for more than one-half of the tax year

Earned Income Credit (EIC) (3 of 3) PATH Act of 2015 instituted changes to EIC beginning in 2016 Each child claimed must have TIN# by due date of return If taxpayer erroneously claims earned income credit (due to reckless/intentional disregard) – then loses ability to claims for two tax years (longer if fraudulent) If IRS rejects EIC for any reason other than math/clerical error, taxpayer must complete Form 8862 to claim EIC in a future year For 2016, refunds due to earned income credit will not be issued before 2/15/17 to give IRS time to review required information

Affordable Care Act (ACA) Also called Obamacare; it has many provisions that have been incrementally implemented in prior years 3.8% net investment income tax, .9% Medicare surtax, etc. Certain taxpayers exempt See table on p. 6-19 – they report to the IRS on Form 8965 (p. 6-21) Some provisions beyond scope of textbook (ie – the employer’s shared responsibility provision)

Individual Shared Responsibility Provision of ACA (1 of 3) Need to show minimum essential coverage (MEC) or pay a ‘penalty tax’ for failure to meet these levels MEC is level of health coverage that ensures essential benefits are provided Taxpayer can purchase from Insurance company Through his/her employer From health insurance exchange Note: all plans must meet MEC, but coverage options vary and include bronze, silver, gold and platinum

Individual Shared Responsibility Provision of ACA (2 of 3) Health insurance companies, self-insured employers, etc. that provide MEC issue year end forms to taxpayer (Form 1095-A, 1095-B or 1095-C)

Individual Shared Responsibility Provision of ACA (3 of 3) Individual shared responsibility is calculated as an annual number, then divided by 1/12 for monthly use Applied to each household member without coverage or an exemption MEC = greater of 2.5% of household income or $695/adult plus $347.50/child (family maximum of $2085) Capped by average annual bronze premium

Premium Tax Credit Provisions of the ACA Eligible taxpayers (requirements on pages 6-24 – 6-25) may receive tax credit to lower the cost of health care Income eligibility is 400% of poverty level (depending on household size) Taxpayers below poverty level are eligible for Medicaid and not the credit Use specific tables to compute allowable credit; lesser of Actual health care premiums paid or Silver plan premiums less the taxpayer’s expected contribution healthcare premiums See pp. 6-25 - 6-27 for Form 8962 and instructions as to how to calculate the premium tax credit

American Opportunity Credit (AOTC) (1 of 2) Provides tax relief for qualified higher education expenses See “Qualified Educational Expenses” table on page 6- 32 Calculated on Form 8863 (pp 6-33 – 6-34) Available for each eligible student (taxpayer, spouse or dependent) in first 4 years of college; eligibility includes: AOTC has not been claimed for more than four years and has not completed 4 years of higher education at start of tax year Pursuing degree/recognized credential

American Opportunity Credit (AOTC) (2 of 2) Student must be at least 1/2 time for one term during tax year Student receives Form 1098-T from higher education institution Student must not have felony drug conviction Credit = 100% of first $2,000 + (25% of the next $2,000) Maximum credit = $2,500 Phased out when AGI > certain levels (see page 6-35) 40% of it is refundable Note: AOTC is the expanded and renamed ‘old’ HOPE credit and has been made permanent

Lifetime Learning Credit (LLC) Provides tax relief for education expenses - encourages taxpayers to take courses to acquire or improve job skills Tuition and fees only (not books) Can be used for less than ½ time attendance Credit is not subject to felony drug offense restrictions Calculated on Form 8863 (pp 6-33 – 6-34) Credit = 20% of first $10,000 Maximum credit = $2,000 per year Lower AGI phase-outs than American Opportunity Credit May take credit in relation to undergraduate, graduate or professional courses No limit on number of years you may claim LLC

Overview of Major Energy Credits In 2016, two major credits designed to encourage individuals to utilize energy-efficient products Plug-in Electric Vehicle Credit Credit for Residential Energy-Efficient Property (REEP) Check out www.fueleconomy.gov for more information on federal and state electric vehicle tax incentives

Energy-Efficient Vehicles Credit Credit for purchase of hybrid gas-electric vehicles Amounts vary, based on combination of weight and kilowatt hour of traction battery capacity (between $2,500 - $7,500) Credit phases out for each car manufacturer when they hit 200,000 cars sold Allowed for Chevy Volt, Nissan Leaf, Tesla Model S and numerous other electric vehicles

Residential Energy-Efficiency Property (REEP) Credit Credit for alternative energy expenditures installed at taxpayer’s primary or secondary residence 30% credit for qualified installation of solar, wind or ground source geothermal heat pumps Can’t get credit for heating swimming pool or hot tub Different credits allowed for fuel cell property Intent is to aid solar/wind industries, while encouraging use of renewables

Nonbusiness Energy Property Credit Credit for energy improvements made to individual taxpayer’s primary residence $500 credit for any one year and for the lifetime Windows,= $200 Main circulating fan $50 Natural gas, propane or oil furnace, or hot water boiler $150 Energy-efficient building property $300 Note: Currently set to expire at end of 2016

Myriad of Other Credits Numerous tax credits available in addition to ones listed in slides, including: Elderly/Disabled Credit Disabled Access Credit General Business Credit Small Employer Health Insurance Credit Research Activities Credit Work Opportunity Credit Brief descriptions of each credit provided on page 6-42; Credits have a propensity to expire so check www.irs.gov/credits-deductions for status of above credits