1. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Individual Income Taxes 1 Chapter 13 Tax Credits and Payment Procedures

2. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2 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 0% 15%35% Tax benefit if a 25% credit is allowed $250 $250 $250 Tax benefit if tax deduction is allowed –0– $150 $350

3. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3 Refundable vs Nonrefundable Credits (slide 1 of 2) Refundable credits –Paid even if the tax liability is less than amount of credit

4. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4 Refundable vs Nonrefundable Credits (slide 2 of 2) Nonrefundable credits –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

5. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 5 General Business Credit (slide 1 of 2) 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

6. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6 General Business Credit (slide 2 of 2) Includes the following: –Tax credit for rehabilitation expenditures –Work opportunity tax credit –Research activities credit –Low-income housing credit –Disabled access credit –Credit for small employer pension plan startup costs –Credit for employer-provided child care

7. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 7 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

8. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 8 Rehabilitation Expenditure Credit (slide 2 of 3) 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, or –$5,000 Qualified rehab expenditures do not include the cost of the building and related facilities or cost of enlarging existing building

9. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 9 Rehabilitation Expenditure Credit (slide 3 of 3) 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

10. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 10 Jobs Credit A new $1,000 Jobs Credit is allowed for every unemployed individual hired from Feb. 4 through Dec. 31, 2010 –Must work for employer for at least 52 consecutive weeks –Wages during last 26 weeks of employment must equal at least 80% of wages for first 26 weeks The credit applies to any tax year ending after the 2010 date of enactment.

11. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 11 Work Opportunity Tax Credit (slide 1 of 3) 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

12. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12 Work Opportunity Tax Credit (slide 2 of 3) 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

13. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 13 Work Opportunity Tax Credit (slide 3 of 3) ARRTA of 2009 adds two additional targeted groups for 2009 and 2010 –Unemployed veterans Discharged or released from active duty in 2008, 2009, and 2010, and Recipients of unemployment benefits for at least 4 weeks during the year prior to being hired –Disconnected youth Aged 16 to 25 when hired Not attending school Not employed for the six months prior to being hired, and Not having sufficient skills to be employed

14. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 14 Work Opportunity Tax Credit: Long-Term Family Assistance Recipient (slide 1 of 2) Applies to first 24 months of wages paid to individuals who have been long-term recipients of family assistance welfare benefits –Long-term is at least an 18 month period ending on hiring date

15. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 15 Work Opportunity Tax Credit: Long-Term Family Assistance Recipient (slide 2 of 2) Maximum credit is a percentage of first $10,000 qualified wages paid in first and second year of employment –40% in first year –50% in second year Maximum credit per qualified employee is $9,000 –Deduction for wages is reduced by credit amount

16. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 16 Research Activities Credit (slide 1 of 5) Comprised of three parts –Incremental research activities credit –Basic research credit –Energy research credit

17. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 17 Research Activities Credit (slide 2 of 5) 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)

18. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 18 Research Activities Credit (slide 3 of 5) 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 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

19. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 19 Research Activities Credit (slide 4 of 5) 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

20. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 20 Research Activities Credit (slide 5 of 5) 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

21. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 21 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

22. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 22 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

23. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 23 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

24. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 24 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

25. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 25 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

26. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 26 Earned Income Credit (slide 1 of 3) General qualifications for credit –Must have earned income from being an employee or self-employed –For 2009 and 2010, ARRTA of 2009 increases Credit percentage for families with three or more children, and Phaseout threshold amounts for married taxpayers filing joint returns

27. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 27 Earned Income Credit (slide 2 of 3) Credit amount (2010 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 $21,460 for MFJ with qualifying child ($16,450 for other taxpayers) Use IRS tables to calculate exact credit amount

28. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 28 Earned Income Credit (slide 3 of 3) Credit for taxpayers having no children –Available to taxpayers aged 25 through 64 Credit amount for couple filing jointly with no qualifying children (2010 tax year) –7.65% × earned income (up to $5,980) –Phase-out of credit begins when earned income (or AGI) exceeds $12,490 for MFJ ($7,480 for others)

29. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 29 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

30. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 30 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

31. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 31 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

32. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 32 Foreign Tax Credit (slide 2 of 2) Amount of the credit allowed is the lesser of: –The foreign taxes imposed, or –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

33. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 33 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 $12,170 (in 2010) –Credit is phased-out ratably for modified AGI between $182,520 and $222,520

34. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 34 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

35. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 35 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

36. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 36 Child Tax Credit (slide 2 of 2) Credit is phased out by $50 for each $1,000 of AGI above specified levels –$110,000 for joint filers –$55,000 for married filing separately –$75,000 for single

37. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 37 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

38. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 38 Child and Dependent Care Credit (slide 2 of 4) 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

39. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 39 Child and Dependent Care Credit (slide 3 of 4) 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

40. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 40 Child and Dependent Care Credit (slide 4 of 4) 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

41. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 41 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 nonrefundable 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

42. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 42 Education Tax Credits (slide 2 of 5) 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 2009) Cannot be claimed in same year the American Opportunity credit is claimed

43. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 43 Education Tax Credits (slide 3 of 5) Eligible individuals include taxpayer, spouse, and taxpayer’s dependents To be eligible for American Opportunity credit, student must take at least 1/2 of full- time course load –No such requirement for lifetime learning credit

44. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 44 Education Tax Credits (slide 4 of 5) Both education credits are subject to income limitations, which differ for 2009 and 2010 –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 married taxpayers filing jointly) –The credit is completely eliminated when modified AGI reaches $90,000 ($180,000 for married taxpayers filing jointly)

45. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 45 Education Tax Credits (slide 5 of 5) The lifetime learning credit amount is phased out when modified AGI reaches $50,000 ($100,000 for MFJ) –The credit is completely eliminated when AGI reaches $60,000($120,000 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

46. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 46 First-Time Homebuyer Credit (slide 1 of 5) For home purchases from January 1, 2009 through April 30, 2010, a credit of 10% of the purchase price is allowed for first-time buyers –Max credit is $8,000 ($4,000 for married filing separately) Single and married persons filing jointly are treated alike –Each is subject to the same $8,000 maximum –Only available if purchase price of home is $800,000 or less The credit is phased out for modified AGI between $125,000 and $145,000 for single taxpayers ($225,000 and $245,000 for MFJ)

47. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 47 First-Time Homebuyer Credit (slide 2 of 5) Taxpayer qualifies as first-time buyer if taxpayer has not owned a principal residence during the 3 year period before the purchase As long as the time limitations for the purchase are met, the credit may be claimed in either 2008 or 2009

48. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 48 First-Time Homebuyer Credit (slide 3 of 5) For homes purchased after 11-06-09, credit is available to existing homeowners who are long-term residents –Must have maintained the same principal residence for 5 of the last 8 years –Max credit is limited to $6,500 ($3,250 for married individuals filing separately)

49. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 49 First-Time Homebuyer Credit (slide 4 of 5) The homebuyer credit contains a recapture provision –Provision is waived for homes purchased after December 31, 2008 (even if the credit is claimed in 2008) For homes purchased in 2008, credit must be repaid beginning 2 years after home is purchased –Repaid in equal installments over 15 years –If disposed of before the 15-year period is up, recapture of the unpaid balance occurs

50. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 50 First-Time Homebuyer Credit (slide 5 of 5) Homes purchased after December 31, 2008 are also subject to an accelerated recapture rule –If disposed of within 36 months from the date of purchase or if the property ceases to be taxpayer’s principal residence, the entire credit must be recaptured Recapture cannot exceed any gain from the sale No recapture upon the death of taxpayer, involuntary conversion, or transfer between spouses incident to a divorce The Homebuyer Credit is a refundable credit –Thus, in certain situations, it could generate a payment from the IRS in excess of any tax liability

51. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 51 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

52. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 52 Making Work Pay Credit In 2009 and 2010, the ARRTA of 2009 includes a refundable income tax credit of up to $400 ($800 for MFJ) –Calculated at a rate of 6.2% of earned income –Phases out at a rate of 2% of modified AGI above $75,000 ($150,000 for MFJ) Most receive this refundable credit in their paychecks as a reduction in withholding

53. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 53 Payment Procedures (slide 1 of 9) 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)

54. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 54 Payment Procedures (slide 2 of 9) Social Security & Medicare –2010 rates Social Security: 6.2% of first $106,800 wages Medicare: 1.45% of all wages Employee and employer both pay at these rates –If employee is overwithheld for Social Security, excess is refundable credit

55. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 55 Payment Procedures (slide 3 of 9) Under the Hiring Incentives Act, employers are exempt from the employer’s share of Social Security tax on workers hired who have been unemployed for at least 60 days –The maximum value of exemption is 6.2% of wages up to the 2010 wage cap of $106,800 –To qualify for the exemption, employment must begin after February 3, 2010 –The payroll tax exemption relates to wages paid after the 2010 date of enactment through December 31, 2010

56. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 56 Payment Procedures (slide 4 of 9) 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

57. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 57 Payment Procedures (slide 5 of 9) 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

58. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 58 Payment Procedures (slide 6 of 9) ES payments –To avoid penalties for underpayment, must annually pay the smaller of: 90% of the current year’s tax, or 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)

59. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 59 Payment Procedures (slide 7 of 9) 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

60. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 60 Payment Procedures (slide 8 of 9) Self-employment tax –Taxpayers with net self-employment earnings of at least $400 must pay self-employment tax 2010 rates –Social Security: 12.4% of first $106,800 net self-employment income –Medicare: 2.9% of all net self-employment income These rates are twice what an employee pays on wages

61. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 61 Payment Procedures (slide 9 of 9) Self-employment tax –Taxpayer receives a deduction from net self- employment income of 7.65% for purposes of calculating the actual self-employment tax –Taxpayer receives a for AGI deduction for 50% of the self-employment tax paid

62. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 62 If you have any comments or suggestions concerning this PowerPoint Presentation for South-Western Federal Taxation, please contact: Dr. Donald R. Trippeer, CPA trippedr@oneonta.edu SUNY Oneonta