1. McGraw-Hill Education Copyright © 2015 by the McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website in whole or part. Chapter 9 Tax Credits (Lines 48 through 54 and Lines 66a through 69, Form 1040) “We have a tax code that favors those with the best accountants.” — Shane Keats

2. 9-2 LO #1: Credit for Child and Dependent Care Expenses Credit is available for working taxpayers with dependent care expenses. Qualifying expenses include those paid for household services and expenses paid for qualifying individuals so that the taxpayer can be gainfully employed.

3. LO #1: Credit for Child and Dependent Care Expenses A qualifying individual includes: (1) a person under the age of 13 for whom the taxpayer is entitled to a dependency deduction or, (2) a dependent or spouse of the taxpayer who is incapable of caring for himself or herself. 9-3

4. LO #1: Credit for Child and Dependent Care Expenses The credit is calculated as a percentage of the qualifying expenses incurred to care for dependents. Percentage between 20%–35% is used in the calculation, depending on taxpayer’s AGI. The amount of expenses that can be used for the calculation is limited to $3,000 for one qualifying individual and $6,000 for two or more qualifying individuals. 9-4

5. LO #1: Credit for Child and Dependent Care Expenses - % Table (IRS) IF your adjusted gross income is: But not over: percentage is: –$0 — $15,000 35% 15,000 — 17,000 34% 17,000 — 19,000 33% 19,000 — 21,000 32% 21,000 — 23,000 31% 23,000 — 25,000 30% 25,000 — 27,000 29% 27,000 — 29,000 28% 29,000 — 31,000 27% 31,000 — 33,000 26% 33,000 — 35,000 25% 35,000 — 37,000 24% 37,000 — 39,000 23% 39,000 — 41,000 22% 41,000 — 43,000 21% 43,000 — No limit 20% 8-5

6. 9-6 LO #1: Credit for Child and Dependent Care Expenses The expense amount is further limited by the earned income of either the taxpayer or the spouse, whichever is smaller. In case of a spouse incapable of caring for one- self, or a full-time student, the non-working spouse is treated as having earned $250 per month with one qualifying person, or $500 per month with two or more qualifying persons. In case of a student, only the months he/she is attending school may be used.

7. 9-7 LO #2: Credit for the Elderly or the Disabled Credit is available for taxpayers over 65 years of age or permanently and totally disabled. Credit is equal to 15% of allowable base amounts (depending on the filing status & number of qualifying persons).

8. LO #2: Credit for the Elderly or the Disabled The allowable base amounts are as follows:  $5,000 for single taxpayers (or only one spouse qualifies);  $7,500 for joint returns when both spouses qualify;  $3,750 for married person filing separately. However, the base amounts must be further reduced by (a) the amount of nontaxable social security and, (b) one-half of the amount that AGI exceeds the allowable base amounts (different from above). [$7,500 for single, $10,000 for joint filers and $5,000 for married filing separately]. 9-8

9. Credit for the Elderly or the Disabled Example Joe and Sue are married & file a joint return and are 70 and 60 years old, respectively. They have AGI of $12,000 and received social security benefits of $1,500. Base amount$5,000 Less: social security$1,500 ½ of AGI over $10,000$1,000 Allowable Base Amount $2,500 x 15% Credit $ 375 9-9

10. 9-10 LO #3: Education Credits There are two education credits available: –American opportunity tax credit (AOTC), formerly the Hope credit and –Lifetime learning credit Both allow credit for higher education expenses paid (that qualify) for the taxpayer, spouse, or dependents. To claim above credits a Form 8863 is filed.

11. LO #3: Education Credits Qualifying expenses are amounts paid for tuition, fees, books (with certain criteria to be met) and other related expenses to an eligible educational institution. An eligible institution is a postsecondary institution that is eligible to participate in a student aid program administered by the U.S. Department of Education. Almost all postsecondary institutions qualify. 9-11

12. LO #3: Education Credits AOTC is calculated as 100% of the first $2,000 of qualifying expenses and 25% of the next $2,000: for a maximum of $2,500 per student, per year. Lifetime learning credit is calculated as 20% of qualifying expenses: for a maximum of $2,000 per taxpayer, per year. A taxpayer may NOT use both credits in the same year for the same expenses. 9-12

13. 9-13 LO #3: Education Credits Both credits are phased out at certain amounts of MAGI. AOTC: Phase out begins at MAGI amounts of $80,000 for single filers and $160,000 for married filing joint, respectively. Single filers and married filing joint phase out completely at MAGI amounts of $90,000 and $180,000, respectively. Lifetime learning credit: Phase out begins at MAGI amounts of $54,000 for single filers and $108,000 for married filing joint, respectively. Single filers and married filing joint phase out completely at MAGI amounts of $64,000 and $128,000, respectively.

14. 9-14 LO #3: Education Credits When the MAGI is within phase-out range, the credit is reduced by multiplying the amount by a fraction, calculated as: AOTC: Married Taxpayers: $180,000- MAGI $20,000 Single Taxpayers: $90,000- MAGI $10,000

15. 9-15 LO #3: Education Credits When the MAGI is within phase-out range, the credit is reduced by multiplying the amount by a fraction, calculated as: Lifetime learning credit: Married Taxpayers: $128,000- MAGI $20,000 Single Taxpayers: $64,000- MAGI $10,000

16. 9-16 LO #4: Foreign Tax Credit Credit is available for taxpayers who paid foreign income taxes. Credit is equal to the amount of foreign taxes paid, but no greater than (i.e., limited to) (b) the portion of U.S. income tax liability attributable to foreign income.

17. LO #4: Foreign Tax Credit The formula to calculate the portion of U.S. income tax liability attributable to foreign income is: (This is the FTC limitation.) Foreign-source taxable income U.S. income U.S. Income tax ------------------------------------- X tax liability = attributable to Worldwide taxable income before FTC foreign tax Note: a taxpayer may choose to deduct foreign taxes as itemized deductions. Although it is rarely advantageous to itemize rather then take a credit, there are certain instances when itemizing is the better option. 9-17

18. 9-18 LO #5: Child Tax Credit Credit is provided for taxpayers with children under age 17. Child must be a U.S. citizen or resident. Child must be younger than the person claiming the credit and unmarried. Credit for each child is $1,000. Credit is phased out for AGI over certain amounts.

19. 9-19 LO #5: Child Tax Credit Phase-out begins at AGI of $110,000 and $75,000, for married filing joint and single taxpayers, respectively ($55,000 if married filing separate). The credit is reduced $50 for each $1,000, or fraction thereof, of AGI in excess of the above amounts. Example: If a single taxpayer has AGI of $77,000 & 1 qualifying child; his/her child tax credit will be $900 ($1,000 - $100); $50 for each $1,000 of AGI over $75,000).

20. LO #5: Child Tax Credit Although generally nonrefundable, this credit could provide a refund at certain earned income levels and if the taxpayer qualifies. The income level for tax year 2012 that may allow a refund is $3,000. A Form 8812 must be attached. 9-20

21. 9-21 LO #6: Retirement Savings Contributions Credit Credit is available for taxpayers who made contributions to certain qualified retirement accounts. Contributions can be made to IRAs, Roth IRAs, 401(k), 403(b), 457, SIMPLE or SEP plans or other qualified retirement plans.

22. 9-22 LO #6: Retirement Savings Contributions Credit Credit is based on a percentage of the contributions made. Maximum amount of contributions for credit purposes is $2,000 per person. Percentage used to calculate the credit depends on the filing status of the taxpayer and the MAGI.

23. LO #6: Retirement Savings Contributions Credit Filing Status, AGI and %’s Retirement Savings Contributions Credit Joint Filers Head of Household Other Over Not overOver Not overOver Not over % $0 $36,000$0$27,000$0$18,000 50% $36,000 $39,000$ 27,000 $29,250$ 18,000 $19,500 20% $39,000$60,000$ 29,250 $45,000$19,500$30,000 10% $60,000$45,000$ 30,000 0% 9-23

24. LO #6: Retirement Savings Contributions Credit If a taxpayer’s MAGI exceeds the amounts listed below, no credit is available. Joint returns:$60,000 Head of Household: $45,000 All other filers: $30,000 9-24

25. 9-25 LO #7: Adoption Credit Credit is available for 100% of qualified adoption expenses paid. Credit is available up to $13,190 per child adopted. If married, taxpayers generally must file jointly to take the credit.

26. LO #7: Adoption Credit Credit phase-out begins at MAGI above $197,880. Credit is completely phased out for AGI above $237,880. For MAGI within the phase-out range, the tentative credit is multiplied by the following fraction: $237,880 - MAGI $40,000 9-26

27. 9-27 LO #8: Earned Income Credit Credit is available for working taxpayers who are economically disadvantaged. EIC is a refundable tax credit. Credit is based on filing status, number of qualifying children (including none), and earned income amounts.

28. LO #8: Earned Income Credit Earned income includes wages, salaries, tips and earnings from self- employment (minus one-half of self- employment taxes). To be eligible for the credit, a taxpayer either must have a qualifying child or meet certain criteria. 9-28

29. 9-29 LO #8: Earned Income Credit Credit can completely phase-out at certain earned income levels. Certain types of income (mostly investment income), in excess of $3,350, will cause the taxpayer to become ineligible for the credit.

30. LO #8: Earned Income Credit Maximum Earned Income Credit Amounts: 1 Child 2 Children 3 or more Children No Children $3,305 $5,460 $6,143 $496 Note: The above amounts are the maximum EIC credit allowed. Depending on the earned income amount, number of children and filing status, the amount of the credit will phase out above certain amounts of earned income. 9-30