Tax Benefits Chapter 1 pp National Income Tax Workbook™

Tax Benefits Limited by Incomepp  Many benefits in the I.R.C. are applicable only to taxpayers whose income does not exceed specific thresholds.  Benefits can be obtained by tax planning to minimize income and maximize deductions.

Above-the-Line Deductions and Exclusionspp  Gross Income and Adjusted Gross Income (AGI) are defined by the I.R.C. (§ 61 and § )  Definition of Modified Adjusted Gross Income (MAGI) can vary depending on the benefit.

Above-the-Line Deductions and Exclusionspp  Three income-limited items factor into AGI. ▪ Deductions for contributions to IRAs ▪ Deductions for student loan interest, ▪ The exclusion for certain interest paid on US savings bonds.

IRA Contributions pp. 2-7  Deductions for traditional IRA contributions may be limited if the taxpayer/spouse can participate in an employer provided retirement plan.  To determine deductible amount when in the phaseout range: (End of phaseout range – MAGI) x contribution limit / Phaseout range = Deductible amount

IRA Contributions pp. 2-7  Contributions to Roth IRA are not deductible, but are subject to a limit which is phased out as MAGI increases.  To determine contribution limit when in the phaseout range: (End of phaseout range – MAGI) x maximum contribution / Phaseout range = Contribution limit

Student Loan Interest Deductionspp. 7-9  Up to $2,500 deduction of qualified student loan interest.  Not available if filing MFS, and deduction is only available to the borrower.  If student loan is refinanced including additional funding used for non- education expenses, none of the subsequent interest is considered student loan interest.

US Savings Bond Interest Exclusionpp  Interest earned on US savings bonds can be excluded provided they were used to pay qualifying educational expenses.  Limited exclusion in the phaseout range is calculated by: (End of phaseout range – MAGI) x qualified savings bond interest/ Phaseout range = Exclusion

US Savings Bond Interest Exclusionpp  Planning Pointer ▪ Taxpayers may consider switching from low-rate savings bonds to a higher performing 529 plan, a tax free exchange.

Comparative Case Studies pp  Case #1: Barbara Brown ▪ IRA deduction not limited  Case #2: Gloria Green ▪ Calculation of nondeductible contribution  Case #3: Wilma White ▪ MAGI exceeds phaseout range

Below-the-Line Deductions pp  2015 standard deductions ▪ Single - $6,300 ▪ MFJ or QW - $12,600 ▪ HoH - $9,250 ▪ MFS - $6,300

Below-the-Line Deductions pp  Pease rule – itemized deductions reduced by lesser of two amounts ▪ 3% of AGI in excess of thresholds to the right ▪ 80% of all affected itemized deductions Filing Status AGI Single$258,250 MFJ or QW $309,900 HoH$284,050 MFS$154,950

Personal Exemptions Deduction Phaseoutp. 13  Personal and dependent exemption deduction can be completely phased out if AGI is substantial.  Decreases by 2% for each $2,500 over threshold amounts to the right. No deduction for AGI above phaseout region. Filing Status Phaseout Begins Phaseout Ends Single$258,250$380,750 MFJ or QW $309,900$432,400 HoH$284,050$406,550 MFS$154,950$216,200

Personal Exemptions Deduction Phaseoutp. 13  Pease limitation ▪ See Example 1.6 – 1.8

Other Itemized Deductions pp  Medical/dental expenses can be claimed as an itemized deduction, but deduction is reduced by 10% of AGI (7.5% of AGI if over 65 during ).

Other Itemized Deductions pp  Mortgage insurance through the VA or RHS are fully deductible in the year the contract is issued.  FHA and private mortgage insurance must be allocated over the shorter of the term of the mortgage or 84 months.

Other Itemized Deductions pp  Example 1.9 Limited Specific Itemized Deductions ▪ Medical expenses and mortgage insurance deductions

Other Itemized Deductions pp  Charitable contribution deductions are AGI limited. ▪ Generally the limit is 50% of AGI, but can be lower depending on type of property donated. ▪ Excess carries over for 5 years.

Other Itemized Deductions pp  Losses from theft of personal use property events are reduced by $100, and then by 10% of AGI.  Losses from business and income property are not subject to these reductions.

Other Itemized Deductions pp  Other expenses related to generating taxable income may be eligible itemized deductions, subject to a 2% of AGI floor.

Alternative Minimum Tax pp  I.R.C. § 55 imposes the alternative minimum tax (AMT) on both corporate and noncorporate taxpayers, which limits the use of specified benefits to reduce total tax.  2015 AMT rates are 26% for alternative minimum taxable income less than $185,400, and 28% otherwise.

Comparative Case Studies pp  Case #1: Barbara Brown ▪ Itemized deductions less than standard deduction  Case #3: Wilma White ▪ Subject to Pease Limitations and PEP

Refundable/Nonrefundable Creditspp  Credits reduce taxes by the same amount for low-bracket taxpayers as for high-bracket tax payers.  Many credits are limited or eliminated as a taxpayer’s income increases.

Earned Income Credit pp  The EIC is applicable to those who have income from wages, salaries, tips, union strike benefits, or long-term disability benefits received prior to minimum retirement age.

Earned Income Credit pp  The EIC increases over a range of earned income: Not Filing MFJ or MFS Qualifying Children Credit Rate (%) Income for Maximum Credit PhaseoutPhaseout Rate(%) Maximum Credit None7.65$6,580 - $8,240$8,240 - $14, $503 One34.00$9,880 - $18,110$18,110 - $39, $3,359 Two or more40.00$13,870 - $18,110$18,110 - $44, $5,548 Three or more45.00$13,870 - $18,110$18,110 - $47, $6,242

Earned Income Credit pp  The EIC increases over a range of earned income: Filing MFJ or MFS Qualifying Children Credit Rate (%) Income for Maximum Credit PhaseoutPhaseout Rate(%) Maximum Credit None7.65$6,580 - $13,750$8,240 - $20, $503 One34.00$9,880 - $23,630$23,630- $44, $3,359 Two or more40.00$13,870 - $23,630$23,630- $49, $5,548 Three or more45.00$13,870 - $23,630$23,630 - $53, $6,242

Earned Income Credit pp  Taxpayers with more than $3,400 in investment income for the year cannot claim EIC.  Self-employed taxpayers with earned income in the phasein range for the EIC may be able to increase their EIC by deferring expenses from and accelerating income to that year.  Taxpayers in the phaseout range of the EIC may be able to accelerate deductions and defer income to qualify for a higher EIC.

Child Tax Credit pp  Can be as much as $1000 per qualifying child.  Phases out with increasing AGI, decreases by $50 for each $1000 the AGI exceeds the limits. Filing Status Phaseout Range MFJ$110,000 - $129,001 Single, HoH, or QW $75,000 - $94,001 MFS$55,000 - $74,001

Child and Dependent Care Creditpp  Expenses for child or dependent care while the taxpayer is working can qualify for a tax credit.  Qualifying expenses are limited by earned income, and as AGI increases expenses used to calculate the percentage is reduced from 35% to 20%.

Retirement Savings Contribution Creditpp  Maximum credit is a percentage of $2,000 ($4,000 for MFJ) of qualified savings returns.  Percentage is 50%, 20%, or 10%, depending on taxpayers AGI.

Education Credits pp  American Opportunity Tax Credit ▪ Extended through Dec. 31, 2017 ▪ 100% of first $2000, 25% of next $2,000, for $2,500 maximum credit, 40% of which is refundable. ▪ Phased out over a range of AGI.

Education Credits pp  Lifetime Learning Credit ▪ Taxpayers can claim 20% of the first $10,000 of qualified educational expenses. ▪ MAGI phaseouts are lower than for AOTC, $110,000 to $130,000 for MFJ, $55,000 - $65,000 for all others.

Case Studiespp  Case #1: Barbara Brown ▪ AOTC and EITC refundable credit  Case #2: Gloria Green ▪ AOTC credit, but ineligible for other credits  Case #3: Wilma White ▪ Exceeds all credit phaseout ranges

Questions? 34