1. Tax Benefits Chapter 1 pp. 1-37 2015 National Income Tax Workbook™

2. Tax Benefits Limited by Incomepp. 1-37  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.

3. Above-the-Line Deductions and Exclusionspp. 2-12  Gross Income and Adjusted Gross Income (AGI) are defined by the I.R.C. (§ 61 and § 101- 140)  Definition of Modified Adjusted Gross Income (MAGI) can vary depending on the benefit.

4. Above-the-Line Deductions and Exclusionspp. 2-12  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.

5. 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

6. 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

7. 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.

8. US Savings Bond Interest Exclusionpp. 9-11  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

9. US Savings Bond Interest Exclusionpp. 9-11  Planning Pointer ▪ Taxpayers may consider switching from low-rate savings bonds to a higher performing 529 plan, a tax free exchange.

10. Comparative Case Studies pp. 11-12  Case #1: Barbara Brown ▪ IRA deduction not limited  Case #2: Gloria Green ▪ Calculation of nondeductible contribution  Case #3: Wilma White ▪ MAGI exceeds phaseout range

11. Below-the-Line Deductions pp. 12-24  2015 standard deductions ▪ Single - $6,300 ▪ MFJ or QW - $12,600 ▪ HoH - $9,250 ▪ MFS - $6,300

12. Below-the-Line Deductions pp. 12-24  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

13. 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

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

15. Other Itemized Deductions pp. 15-19  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 2013- 2016).

16. Other Itemized Deductions pp. 15-19  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.

17. Other Itemized Deductions pp. 15-19  Example 1.9 Limited Specific Itemized Deductions ▪ Medical expenses and mortgage insurance deductions

18. Other Itemized Deductions pp. 15-19  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.

19. Other Itemized Deductions pp. 15-19  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.

20. Other Itemized Deductions pp. 15-19  Other expenses related to generating taxable income may be eligible itemized deductions, subject to a 2% of AGI floor.

21. Alternative Minimum Tax pp. 19-21  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.

22. Comparative Case Studies pp. 23-24  Case #1: Barbara Brown ▪ Itemized deductions less than standard deduction  Case #3: Wilma White ▪ Subject to Pease Limitations and PEP

23. Refundable/Nonrefundable Creditspp. 24-37  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.

24. Earned Income Credit pp. 24-28  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.

25. Earned Income Credit pp. 24-28  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 - $14,820 7.65$503 One34.00$9,880 - $18,110$18,110 - $39,131 15.98$3,359 Two or more40.00$13,870 - $18,110$18,110 - $44,454 21.06$5,548 Three or more45.00$13,870 - $18,110$18,110 - $47,747 21.06$6,242

26. Earned Income Credit pp. 24-28  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 - $20,330 7.65$503 One34.00$9,880 - $23,630$23,630- $44,651 15.98$3,359 Two or more40.00$13,870 - $23,630$23,630- $49,974 21.06$5,548 Three or more45.00$13,870 - $23,630$23,630 - $53,267 21.06$6,242

27. Earned Income Credit pp. 24-28  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.

28. Child Tax Credit pp. 28-30  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

29. Child and Dependent Care Creditpp. 30-32  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%.

30. Retirement Savings Contribution Creditpp. 32-33  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.

31. Education Credits pp. 33-36  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.

32. Education Credits pp. 33-36  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.

33. Case Studiespp. 36-37  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

34. Questions? 34