Tax Credits and Payment Procedures

Tax Credits and Payment Procedures
© 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Big Picture Tom and Jennifer Snyder have two dependent children in college Lora is a freshman Her tuition and required fees in 2017 total $14,000 She has a scholarship amounting to $6,500, and the Snyders paid the balance of her tuition ($7,500), plus room and board of $8,500 Sam is a junior, and the Snyders paid $8,100 for his tuition plus $7,200 for his room and board The Snyders have AGI of $158,000 They would like to know what tax options are available to them related to these educational expenses They have heard about education tax credits, but they believe that their income is too high for them to get any benefit Are they correct? Read the chapter and formulate your response 2 © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Tax Credit VS. Tax Deduction
Tax benefit received from a tax deduction depends on the marginal tax rate of the taxpayer Tax benefit received from a tax credit is not affected by the taxpayer’s marginal tax rate Example: $1,000 expenditure: tax benefit of 25% credit compared to tax deduction at various marginal tax rates MTR % 15% 35% Tax benefit if a 25% credit is allowed $250 $250 $250 Tax benefit if tax deduction is allowed –0– $150 $350 3 © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Refundable vs Nonrefundable Credits (slide 1 of 2)
Paid even if the tax liability is less than amount of credit © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Refundable vs Nonrefundable Credits (slide 2 of 2)
Credit can only be used to offset tax liability If credit exceeds tax liability, excess is lost Exception: some nonrefundable credits have carryover provisions for excess © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Partial List of Refundable and Nonrefundable Credits
© 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

General Business Credit
Comprised of a number of business credits combined into one amount Limited to net income tax reduced by greater of: Tentative minimum tax 25% of net regular tax liability that exceeds $25,000 Unused credit is carried back 1 year, then forward 20 years © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Rehabilitation Expenditure Credit (slide 1 of 3)
Credit is a percentage of expenditures made to substantially rehabilitate industrial and commercial buildings and certified historic structures Credit rate 20% for nonresidential and residential certified historic structures 10% for other structures originally placed into service before 1936 © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

To qualify for credit, building must be substantially rehabilitated meaning qualified rehab expenditures exceed the greater of: The adjusted basis of the property before the rehab expenditures $5,000 Qualified rehab expenditures do not include the cost of the building and related facilities or cost of enlarging existing building © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Basis in structure is reduced by the credit amount Subject to recapture if rehabilitated property held less than 5 years or ceases to be qualifying property © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Work Opportunity Tax Credit (slide 1 of 2)
Applies to first 12 months of wages paid to individuals falling within target groups Credit limited to a percentage of first $6,000 wages paid per eligible employee 40% if employee has completed at least 400 hours of service to employer 25% if at least 120 hours of service Deduction for wages is reduced by credit amount 11 © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Work Opportunity Tax Credit (slide 2 of 2)
Targeted individuals generally subject to high rates of unemployment, including Qualified ex-felons, high-risk youths, food stamp recipients, veterans, summer youth employees, and long-term family assistance recipients Summer youth employees: Only first $3,000 of wages paid for work during 90-day period between May 1 and September 15 qualify for credit © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Research Activities Credit (slide 1 of 5)
Comprised of three parts Incremental research activities credit Basic research credit Energy research credit © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Incremental research activities credit Credit amount = 20% × (qualified expenditures – base amount) Expenditures qualify if research relates to discovery of technological info intended for use in developing a new or improved business component for taxpayer Expenditures qualify fully if research done in-house Only 65% qualifies if research conducted by outside party (under contract) © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Tax treatment of R&E expenditures Full credit and reduce expense deduction by credit amount Full expense deduction and reduce credit by (100% × credit × max. corp. tax rate) Full credit and capitalize research expenses and amortize over 60 months or more Amount capitalized is reduced by full amount of credit only if the credit exceeds the amount allowable as a deduction © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Basic research credit Additional 20% credit is allowed on basic research payments in excess of a base amount Basic research payments - amounts paid in cash to a qualified basic research organization, such as a college or university or a tax-exempt organization operated primarily to conduct scientific research Basic research is any original investigation for the advancement of scientific knowledge not having a specific commercial objective The definition excludes basic research conducted outside the United States and basic research in the social sciences, arts, or humanities © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Energy Research Credit – This credit is intended to stimulate additional energy research Credit amount = 20% of amounts paid or incurred by a taxpayer to an energy research consortium for energy research © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Low-income Housing Credit
Credit is issued on a nationwide allocation program Credit amount Based on qualified basis of the property which is dependent on the number of units rented to low-income tenants Credit is allowed over a 10-year period Subject to potential recapture © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Disabled Access Credit
Credit available for eligible access expenditures made by small businesses Includes amounts paid to remove barriers that would otherwise make a business inaccessible to disabled and handicapped individuals Facility qualifies if placed in service before November 6, 1990 Credit amount 50% × expenditures that exceed $250 but not in excess of $10,250 Thus, max. credit is $5,000 Basis in asset is reduced by credit amount © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Credit For Pension Plan Startup Costs
Small businesses can claim nonrefundable tax credit for admin costs of establishing and maintaining a qualified retirement plan Small business has < 100 employees who have earned at least $5,000 of compensation Credit amount = 50% of qualified startup costs limited to max credit of $500 per year for 3 years Deduction for startup costs is reduced by amount of credit © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Credit For Employer-Provided Child Care (slide 1 of 2)
Employers can claim a credit for providing child care facilities to their employees during normal working hours Limited to $150,000 per year Credit amount: 25% of qualified child care expenses 10% of qualified child care resource and referral services © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Credit For Employer-Provided Child Care (slide 2 of 2)
Deductible qualifying expenses must be reduced by the credit amount Basis of qualifying property must be reduced by credit amount Credit may be subject to recapture if child care facility ceases to be used for qualifying purpose within 10 years of being placed in service © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Earned Income Credit (slide 1 of 3)
General qualifications for credit Must have earned income from being an employee or self-employed In 2017, the maximum earned income credit for a taxpayer with One qualifying child is $3,400 ($10,000 X 34%), With two qualifying children is $5,616 ($14,040 X 40%, With three or more qualifying children is $6,318 ($14,040 X 45%) © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Credit amount (2017 tax year) Applicable percentage rate × earned income Rate and maximum amount of earned income determined by number of qualifying children Phase-out of credit begins when earned income (or AGI) exceeds $23,930 for MFJ with qualifying child ($18,340 for other taxpayers) Use IRS tables to calculate exact credit amount © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Credit for taxpayers having no children Available to taxpayers aged 25 through 64 Credit amount for couple filing jointly with no qualifying children (2017 tax year) 7.65% × earned income (up to $6,670) Phase-out of credit begins when earned income (or AGI) exceeds $13,930 for MFJ ($8,340 for others) © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Credit for Elderly or Disabled Taxpayers (slide 1 of 2)
General qualifications Age 65 or older, or Under age 65 and permanently and totally disabled © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Credit for Elderly or Disabled Taxpayers (slide 2 of 2)
Credit amount Maximum credit = $1,125 Amount reduced for taxpayers with Social Security benefits or AGI in excess of specified amounts IRS will calculate credit for taxpayer if necessary © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Foreign Tax Credit (slide 1 of 2)
The purpose of the foreign tax credit (FTC) is to mitigate double taxation since income earned in a foreign country is subject to both U.S. and foreign taxes Credit applies to both individuals and corporations that pay foreign income taxes Instead of claiming a credit, a deduction may be claimed for the taxes paid © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Foreign Tax Credit (slide 2 of 2)
Amount of the credit allowed is the lesser of: The foreign taxes imposed The overall limitation determined using the following formula: Foreign-source TI × U.S. tax before credit Worldwide TI = Overall FTC limitation For individual taxpayers, worldwide taxable income is determined before personal and dependency exemptions Unused FTCs can be carried back 1 year and forward 10 years © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Adoption Expenses Credit (slide 1 of 2)
Credit for qualified adoption expenses incurred in adoption of eligible child Examples of expenses: adoption fees, court costs, attorney fees Maximum credit is $13,570 (in 2017) Credit is phased-out ratably for modified AGI between $203,540 and $243,540 (in 2017) 30 © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Adoption Expenses Credit (slide 2 of 2)
Eligible child is one that is Less than 18 years of age, or Physically or mentally incapable of taking care of himself or herself Nonrefundable credit Excess may be carried forward for five years Married taxpayers must file jointly to claim © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Child Tax Credit (slide 1 of 2)
Credit amount is $1,000 per child Eligible children are: Under age 17 US citizen, and Claimed as dependent on taxpayer’s tax return © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Child Tax Credit (slide 2 of 2)
Credit is phased out by $50 for each $1,000 (or part thereof) of AGI above specified levels $110,000 for joint filers $55,000 for married filing separately $75,000 for single © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Child and Dependent Care Credit (slide 1 of 4)
General qualifications for credit Must have employment related care costs for a Dependent under age 13, or Dependent or spouse who is physically or mentally incapacitated and who lives with the taxpayer for more than one-half of the year © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Credit amount Eligible care costs × applicable percentage Applicable percentage ranges from 20% to 35% depending on AGI Married taxpayers must file a joint return to obtain credit © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Eligible care costs defined Costs for care of qualified individual within taxpayer’s home or outside home If outside home, physically or mentally incapacitated dependent or spouse must spend at least 8 hours a day within taxpayer’s home Amount of costs that qualify is the lesser of actual costs or $3,000 for one qualified individual, and $6,000 for two or more qualified individuals © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Earned income limitation Amount of eligible care costs cannot exceed lower of taxpayer’s or spouse’s earned income Full-time student or disabled taxpayer or spouse are deemed to have earned income up to maximum per month limits © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Education Tax Credits (slide 1 of 5)
2 education tax credits are available American Opportunity credit (previously known as the Hope scholarship credit) Lifetime learning credit Both credits are available for qualifying tuition and related expenses Books and other course materials are eligible for the American Opportunity credit (but not the lifetime learning credit) Room and board are ineligible for both credits © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Maximum credits American Opportunity credit maximum per eligible student is $2,500 per year for first 4 years of postsecondary education 100% of the first $2,000 of tuition expenses plus 25% of the next $2,000 of tuition expenses Lifetime learning credit maximum per taxpayer is 20% of qualifying expenses (up to $10,000 per year in 2017) Cannot be claimed in same year the American Opportunity credit is claimed © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Eligible individuals include taxpayer, spouse, and taxpayer’s dependents To be eligible for American Opportunity credit, student must take at least ½ of full-time course load No such requirement for lifetime learning credit © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Both education credits are subject to income limitations, which differ for years after 2008 In addition, 40% of the American Opportunity credit is refundable and the entire credit allowed may be used to offset a taxpayer’s AMT liability The lifetime learning credit is neither refundable nor an AMT liability offset The American Opportunity credit is phased out, beginning when the taxpayer’s modified AGI reaches $80,000 ($160,000 for MFJ) The credit is completely eliminated when modified AGI reaches $90,000 ($180,000 for MFJ) © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The lifetime learning credit amount is phased out when modified AGI reaches $55,000 ($111,000 for MFJ) The credit is completely eliminated when AGI reaches $65,000 ($131,000 for MFJ) Taxpayers are prohibited from receiving a double tax benefit associated with qualifying educational expenses Can’t claim education credit and deduct the same expenses Can’t claim the credit for amounts that are excluded from income e.g., scholarships, employer-paid educational assistance May claim an education tax credit and exclude from gross income amounts distributed from a Coverdell Education Savings Account as long as the distribution is not used for the same expenses for which the credit is claimed © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Big Picture - Example 30 American Opportunity Credit
Return to the facts of The Big Picture on p. 13-1 Recall that Tom and Jennifer Snyder are married, file a joint tax return, have modified AGI of $158,000 Both Lora (a freshman) and Sam (a junior) are full-time students and are Tom and Jennifer’s dependents The Snyders paid the following education expenses $7,500 of tuition and $8,500 for room and board for Lora $8,100 of tuition plus $7,200 for room and board for Sam Lora’s and Sam’s tuition are qualified expenses for the American Opportunity credit For 2017, Tom and Jennifer may claim a $2,500 American Opportunity credit [(100% $2,000) + (25% $2,000)] for both Lora’s and Sam’s expenses In total, a $5,000 American Opportunity credit © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Big Picture - Example 31 American Opportunity Credit Phaseout
Return to the facts of The Big Picture on p. 13-1 Now assume that Tom and Jennifer’s modified AGI for 2017 is $172,000 instead of $158,000 Tom and Jennifer are eligible to claim a $2,000 American Opportunity credit for 2017 Their $5,000 available American Opportunity credit must be reduced because their AGI exceeds the $160,000 limit for married taxpayers The percentage reduction is computed as the amount by which modified AGI exceeds the limit, expressed as a percentage of the phase out range, or ($172,000 - $160,000)/$20,000) = 60% reduction Therefore, the maximum available credit for 2017 is $2,000 $5,000 X 40% allowable portion 44 © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Big Picture - Example 32 Lifetime Learning Credit
Return to the facts of The Big Picture on p. 13-1 Assume that Tom and Jennifer’s modified AGI is $126,000 and that Tom is going to school part-time to complete a graduate degree He pays qualifying tuition and fees of $4,000 during 2017 As Tom and Jennifer’s modified AGI is below $160,000, a $5,000 American Opportunity credit is available to them for Lora and Sam’s tuition In addition, Tom’s qualifying expenses are eligible for the lifetime learning credit The potential lifetime learning credit of $800 ($4,000 X 20%) must be reduced because their modified AGI exceeds the $112,000 limit for married taxpayers As their modified AGI exceeds the $112,000 limit by $14,000 and the phaseout range is $20,000, their lifetime learning credit is reduced by 70% Therefore, their lifetime learning credit for 2017 is $240 ($800 X 30%) Their total education credits amount to $5,240 $5,000 American Opportunity credit and $240 lifetime learning credit 45 © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Credit For Certain Retirement Plan Contributions
Credit was enacted to encourage low and middle income taxpayers to contribute to qualified retirement plans Eligible contributions of up to $2,000 qualify Credit rate depends on level of AGI and filing status Maximum credit is $1,000 ($2,000 × 50%) To qualify, must be at least 18 years old and not a dependent of another taxpayer or a full-time student © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Payment Procedures (slide 1 of 8)
Employer is responsible for withholding income taxes and employees’ share of FICA employment taxes (Social Security and Medicare) Also, employer must match FICA and pay full cost of FUTA (unemployment taxes) 47 © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Social Security & Medicare 2017 rates Social Security: 6.2% of first $127,200 wages Medicare: 1.45% of all wages If employee is overwithheld for Social Security, excess is refundable credit © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Federal withholding Employee files Form W-4 with employer indicating marital status and withholding allowances Form W-2 issued by employer summarizes employee’s wages, income tax withholding, and FICA Must be issued to employee by January 31 following year-end © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Estimated payments (ES payments) Any taxpayer (employee or self-employed) who will owe at least $1,000 in taxes for the year (and meets none of the exceptions) must make ES payments © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

ES payments To avoid penalties for underpayment, must annually pay the smaller of: 90% of the current year’s tax 100% of last year’s tax Exception: Increased to 110% of last year’s tax if AGI last year exceeded $150,000 ($75,000 if married filing separately) © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

ES payments For calendar year individual taxpayer, ES payments of 1/4 of annual amount are due April 15, June 15, and September 15 of the tax year, and January 15 of the following year © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Self-employment tax Taxpayers with net self-employment earnings of at least $400 must pay self-employment tax 2017 rates Social Security: 12.4% of first $127,200 net self-employment income Medicare: 2.9% of all net self-employment income These rates are twice what an employee pays on wages © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Self-employment tax Taxpayer receives a deduction from net self-employment income of 7.65% for purposes of calculating the actual self-employment tax, and Taxpayer receives a for AGI deduction for 50% of the self-employment tax paid © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Affordable Care Act Provisions
The Affordable Care Act (ACA), enacted to increase the quality and affordability of health insurance, included a number of tax provisions, such as The Individual Shared Responsibility Payment The Premium Tax Credit The Employer Shared Responsibility Payment The Small Employer Health Insurance Credit 55 © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Additional Medicare Taxes on High-Income Individuals
Two provisions increase Medicare taxes for high-income individuals: An additional 0.9% tax on wages received in excess of specified amounts, and An additional 3.8% tax on unearned income 56 © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Additional Tax on Wages
An additional 0.9% Medicare tax is imposed on wages received in excess of $250,000 for married taxpayers filing jointly $125,000 for married filing separately $200,000 for all other taxpayers The additional tax on a joint return is on the combined wages of the employee and the employee’s spouse Also applies to self-employed individuals Net earnings from self-employment is used for the threshold computations 57 © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Additional Tax on Unearned Income (slide 1 of 2)
An additional 3.8% Medicare tax is imposed on the unearned income of individuals, estates, and trusts For individuals, the tax is 3.8% of the lesser of: Net investment income The excess of modified adjusted gross income (MAGI) over $250,000 for married taxpayers filing a joint return $125,000 if married filing separately, and $200,000 for all other taxpayers This is in on top of the additional 0.9% Medicare tax on wages or self-employment income 58 © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Additional Tax on Unearned Income (slide 2 of 2)
In general, net investment income includes interest, dividends, annuities, royalties, rents, and net gains from the sale of investment property less related deductions MAGI = AGI + any foreign earned income exclusion Thus, for individuals who don’t have any excluded foreign earned income, MAGI is the same as AGI 59 © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Refocus On The Big Picture (slide 1 of 2)
The American Opportunity tax credit provides some relief for Tom and Jennifer Snyder Both Lora and Sam qualify for a $2,500 American Opportunity credit in 2017 100% of the first $2,000 and 25% of the next $2,000 of qualified expenses These credits are phased out for married taxpayers’ as AGI exceeds $160,000 Since the Snyders’ AGI is only $158,000, the total education credits available to them on their 2017 income tax return is $5,000 Further, this credit may be used to offset any AMT liability 40% ($2,000) is refundable to the Snyders 60 © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Refocus On The Big Picture (slide 2 of 2)
What If? What if the Snyders’ AGI is $188,000? In 2017, the Snyders would not qualify for any education credits Their income exceeds the limits for both the American Opportunity and the lifetime learning credits A deduction for AGI is allowed for qualified tuition and related expenses involving higher education However, their AGI exceeds the $160,000 maximum allowed for a deduction (see Chapter 9 for additional details) 61 © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Dr. Donald R. Trippeer, CPA
If you have any comments or suggestions concerning this PowerPoint Presentation for South-Western Federal Taxation, please contact: Dr. Donald R. Trippeer, CPA SUNY Oneonta © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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