Chapter 12

Tax Credits and

Payments
Comprehensive Volume
2015 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 2014 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

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
taxpayers 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

Refundable vs Nonrefundable Credits

(slide 1 of 2)

Refundable credits
Paid even if the tax liability is less than amount of
credit

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

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

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

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

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

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

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

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

12

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

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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
14

Research Activities Credit

(slide 1 of 5)

Comprised of three parts

Incremental research activities credit
Basic research credit
Energy research credit

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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)

16

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 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
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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 taxexempt 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
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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

19

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 lowincome tenants
Credit is allowed over a 10-year period
Subject to potential recapture

20

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

21

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

22

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
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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
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Earned Income Credit

(slide 1 of 3)

General qualifications for credit

Must have earned income from being an employee
or self-employed
For 2009 through 2017, Congress has increased
Credit percentage for families with three or more
children, and
Phaseout threshold amounts for married taxpayers filing
joint returns

25

Earned Income Credit

(slide 2 of 3)

Credit amount (2014 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 $23,260 for MFJ with qualifying child
($17,830 for other taxpayers)
Use IRS tables to calculate exact credit amount

26

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 (2014 tax year)
7.65% earned income (up to $6,480)
Phase-out of credit begins when earned income (or
AGI) exceeds $13,540 for MFJ ($8,110 for others)

27

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

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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

29

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

30

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
31

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 $13,190 (in 2014)

Credit is phased-out ratably for modified AGI
between $197,880 and $237,880 (in 2014)

32

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

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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 taxpayers tax return

34

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

35

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

36

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

37

Child and Dependent Care Credit

(slide 3 of 4)

Eligible care costs defined

Costs for care of qualified individual within
taxpayers home or outside home
If outside home, physically or mentally incapacitated
dependent or spouse must spend at least 8 hours a day
within taxpayers 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
38

Child and Dependent Care Credit

(slide 4 of 4)

Earned income limitation

Amount of eligible care costs cannot exceed lower
of taxpayers or spouses earned income
Full-time student or disabled taxpayer or spouse
are deemed to have earned income up to maximum
per month limits

39

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
40

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 2014)
Cannot be claimed in same year the American
Opportunity credit is claimed
41

Education Tax Credits

(slide 3 of 5)

Eligible individuals include taxpayer, spouse,

and taxpayers dependents
To be eligible for American Opportunity
credit, student must take at least 1/2 of fulltime course load
No such requirement for lifetime learning credit

42

Education Tax Credits

(slide 4 of 5)

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 taxpayers AMT liability
The lifetime learning credit is neither refundable nor an AMT
liability offset

The American Opportunity credit is phased out,

beginning when the taxpayers modified AGI reaches
$80,000 ($160,000 for MFJ)
The credit is completely eliminated when modified AGI
reaches $90,000 ($180,000 for MFJ)

43

Education Tax Credits

(slide 5 of 5)

The lifetime learning credit amount is phased out when

modified AGI reaches $54,000 ($108,000 for MFJ)
The credit is completely eliminated when AGI reaches $64,000
($128,000 for MFJ)

Taxpayers are prohibited from receiving a double tax benefit

associated with qualifying educational expenses
Cant claim education credit and deduct the same expenses
Cant 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

44

The Big Picture - Example 32

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 Jennifers dependents.

The Snyders paid the following education expenses.

$7,500 of tuition and $8,500 for room and board for Lora, and
$8,100 of tuition plus $7,200 for room and board for Sam.

Loras and Sams tuition are qualified expenses for the

American Opportunity credit.
For 2014, Tom and Jennifer may claim a $2,500 American Opportunity
credit [(100% $2,000) + (25% $2,000)] for both Loras and Sams
expenses.
In total, a $5,000 American Opportunity credit.

45

The Big Picture - Example 33

American Opportunity Credit Phaseout

Return to the facts of The Big Picture on p. 13-1.

Now assume that Tom and Jennifers modified AGI for 2014 is
$172,000 instead of $158,000.
Tom and Jennifer are eligible to claim a $2,000 American
Opportunity credit for 2014.
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
phaseout range, or
($172,000 - $160,000)/$20,000) = 60% reduction.
Therefore, the maximum available credit for 2014 is $2,000.
$5,000 X 40% allowable portion.

46

The Big Picture - Example 34

Lifetime Learning Credit

Return to the facts of The Big Picture on p. 13-1.

Assume that Tom and Jennifers modified AGI is $122,000 and that Tom is
going to school part-time to complete a graduate degree
He pays qualifying tuition and fees of $4,000 during 2014.

As Tom and Jennifers modified AGI is below $160,000, a $5,000

American Opportunity credit is available to them for Lora and Sams
tuition .
In addition, Toms qualifying expenses are eligible for the lifetime learning
credit.
The available lifetime learning credit of $800 ($4,000 X 20%) must be reduced
because their modified AGI exceeds the $108,000 limit for married taxpayers.
As their modified AGI exceeds the $108,000 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 2014 is $240 ($800 X 30%)

Their total education credits amount to $5,240

$5,000 American Opportunity credit and $240 lifetime learning credit.
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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

48

Small Employer Health

Insurance Credit
Health Care Act of 2010 provides a tax credit for a
qualified small employer for nonelective
contributions to purchase health insurance for its
employees
To qualify for credit, employer must
Have no more than 25 full-time equivalent employees whose
annual full-time wages average no more than $50,800
Pay at least half the cost of the health insurance premiums

The credit is 50% of the health insurance premiums paid

(35% in years 2010 through 2013)
It is subject to a phaseout if the employer has more than 10 fulltime equivalent employees and/or has annual full-time wages that
average more than $25,400

49

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)

50

Payment Procedures
(slide 2 of 8)

Social Security & Medicare

2014 rates
Social Security: 6.2% of first $117,000 wages
Medicare: 1.45% of all wages

If employee is overwithheld for Social Security, excess is

refundable credit

51

Payment Procedures
(slide 3 of 8)

Federal withholding
Employee files Form W-4 with employer
indicating marital status and withholding
allowances
Form W-2 issued by employer summarizes
employees wages, income tax withholding, and
FICA
Must be issued to employee by January 31 following
year-end

52

Payment Procedures
(slide 4 of 8)

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

53

Payment Procedures
(slide 5 of 8)

ES payments
To avoid penalties for underpayment, must
annually pay the smaller of:
90% of the current years tax, or
100% of last years tax
Exception: Increased to 110% of last years tax if AGI last year
exceeded $150,000 ($75,000 if married filing separately)

54

Payment Procedures
(slide 6 of 8)

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

55

Payment Procedures
(slide 7 of 8)

Self-employment tax
Taxpayers with net self-employment earnings of at
least $400 must pay self-employment tax
2014 rates
Social Security: 12.4% of first $117,000 net self-employment
income
Medicare: 2.9% of all net self-employment income

These rates are twice what an employee pays on wages

56

Payment Procedures
(slide 8 of 8)

Self-employment tax
Taxpayer receives a deduction from net self-employment
income of 7.65% for purposes of calculating the actual selfemployment tax, and
Taxpayer receives a for AGI deduction for 50% of the selfemployment tax paid

57

Additional Medicare Taxes on

High-Income Individuals
The Health Care Act of 2010 and the Health
Care Reconciliation Act of 2010 include 2
provisions that increase Medicare taxes for
high-income individuals beginning in 2013:
An additional .9% tax on wages received in excess
of specified amounts, and
An additional 3.8% tax on unearned income

58

Additional Tax on Wages

For tax years beginning after 12/31/2012 an
additional .9% Medicare tax is imposed on wages
received in excess of
$250,000 for married taxpayers filing jointly,
$125,000 for married filing separately, and
$200,000 for all other taxpayers

The additional tax on a joint return is on the

combined wages of the employee and the employees
spouse
Also applies to self-employed individuals
Net earnings from self-employment is used for the
threshold computations
59

Additional Tax on Unearned Income

(slide 1 of 2)

For tax years beginning after 12/31/2012 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, or
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 addition to the additional .9% Medicare tax

on wages or self-employment income.
60

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 dont have any excluded
foreign earned income, MAGI is the same as AGI
61

Refocus On The Big Picture (slide 1 of 2)

Recent tax legislation made significant changes in education
tax credits.
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 2014.
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 2014 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.
62

Refocus On The Big Picture (slide 2 of 2)

What If?
What if the Snyders AGI is $188,000?
In 2014, 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).

63

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

2015 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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