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2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible ebsite, in hole or in part.

Comprehensive Volume

1

Chapter 12

!a" Credits and#ay$ents

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!he %ig #icture

& !o$ and 'enni(er )nyder have to dependent children incollege.* Lora is a (resh$an

& +er tuition and reuired (ees in 201- total 1-,000.& )he has a scholarship a$ounting to /,500, and the )nyders paid the

balance o( her tuition ,500, plus roo$ and board o( 3,500.* )a$ is a 4unior, and the )nyders paid 3,100 (or his tuition plus ,200

(or his roo$ and board.

& !he )nyders have A6 o( 153,000.& !hey ould li7e to 7no hat ta" options are available to

the$ related to these educational e"penses.* !hey have heard about education ta" credits, but they believe that their

inco$e is too high (or the$ to get any bene(it.* Are they correct8

& Read the chapter and (or$ulate your response.

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!a" Credit 9). !a" :eduction

& !a" bene(it received (ro$ a ta" deduction depends on

the $arginal ta" rate o( the ta"payer

* !a" bene(it received (ro$ a ta" credit is not a((ected by the

ta"payer;s $arginal ta" rate& credit is alloed 250 250 250

!a" bene(it i( ta" deduction is alloed *0* 150 ?50

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Re(undable vs @onre(undable Creditsslide 1 o( 2

& Re(undable credits

*#aid even i( the ta" liability is less than a$ount o(

credit

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Re(undable vs @onre(undable Creditsslide 2 o( 2

& @onre(undable credits

*Credit can only be used to o((set ta" liability

*6( credit e"ceeds ta" liability, e"cess is lost

&

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eneral %usiness Credit slide 1 o( 2

& Co$prised o( a nu$ber o( business creditsco$bined into one a$ount

& Li$ited to net inco$e ta" reduced by greatero(=*!entative $ini$u$ ta"

*25> o( net regular ta" liability that e"ceeds

25,000& nused credit is carried bac7 1 year, then

(orard 20 years

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eneral %usiness Credit slide 2 o( 2

& 6ncludes the (olloing=*!a" credit (or rehabilitation e"penditures

*Bor7 opportunity ta" credit

*Research activities credit

*Loinco$e housing credit

*:isabled access credit

*Credit (or s$all e$ployer pension plan startupcosts

*Credit (or e$ployerprovided child care

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Rehabilitation (or nonresidential and residential certi(ied

historic structures*10> (or other structures originally placed intoservice be(ore 1D?/

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Rehabilitation

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Rehabilitation

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Bor7 Fpportunity !a" Creditslide 1 o( 2

& Applies to (irst 12 $onths o( ages paid to

individuals (alling ithin target groups

*Credit li$ited to a percentage o( (irst /,000

ages paid per eligible e$ployee

& -0> i( e$ployee has co$pleted at least -00 hours o(

service to e$ployer

& 25> i( at least 120 hours o( service*:eduction (or ages is reduced by credit a$ount

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Bor7 Fpportunity !a" Creditslide 2 o( 2

& !argeted individuals generally sub4ect to high

rates o( une$ploy$ent, including

*Euali(ied e"(elons, highris7 youths, (ood sta$p

recipients, veterans, su$$er youth e$ployees, and

longter$ (a$ily assistance recipients

& )u$$er youth e$ployees= Fnly (irst ?,000 o( ages

paid (or or7 during D0day period beteen May 1 and

)epte$ber 15 uali(y (or credit

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Bor7 Fpportunity !a" Credit= Long!er$

Ga$ily Assistance Recipient slide 1 o( 2

& Applies to (irst 2- $onths o( ages paid to

individuals ho have been longter$

recipients o( (a$ily assistance el(are bene(its

*Longter$ is at least an 13 $onth period ending on

hiring date

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Bor7 Fpportunity !a" Credit= Long!er$

Ga$ily Assistance Recipient slide 2 o( 2

& Ma"i$u$ credit is a percentage o( (irst

10,000 uali(ied ages paid in (irst and

second year o( e$ploy$ent

*-0> in (irst year

*50> in second year

& Ma"i$u$ credit per uali(ied e$ployee is

D,000

*:eduction (or ages is reduced by credit a$ount

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Research Activities Creditslide 1 o( 5

& Co$prised o( three parts

*6ncre$ental research activities credit

*%asic research credit

*

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Research Activities Creditslide 2 o( 5

& 6ncre$ental research activities credit

* Credit a$ount H 20> I uali(ied e"penditures * base

a$ount

&

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Research Activities Creditslide ? o( 5

& !a" treat$ent o( RJ< e"penditures*Gull credit and reduce e"pense deduction by credit

a$ount

*Gull e"pense deduction and reduce credit by100> I credit I $a". corp. ta" rate

*Gull credit and capitaliKe research e"penses anda$ortiKe over /0 $onths or $ore

& A$ount capitaliKed is reduced by (ull a$ount o( creditonly i( the credit e"ceeds the a$ount alloable as adeduction

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Research Activities Creditslide - o( 5

& %asic research credit* Additional 20> credit is alloed on basic research

pay$ents in e"cess o( a base a$ount& %asic research pay$ents a$ounts paid in cash to a uali(ied basic

research organiKation, such as a college or university or a ta"e"e$pt organiKation operated pri$arily to conduct scienti(icresearch

* %asic research is any original investigation (or theadvance$ent o( scienti(ic 7noledge not having a speci(ic

co$$ercial ob4ective& !he de(inition e"cludes basic research conducted outside the

nited )tates and basic research in the social sciences, arts, orhu$anities

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Research Activities Creditslide 5 o( 5

& o( a$ounts paid or incurred

by a ta"payer to an energy research consortiu$ (or

energy research

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Loinco$e +ousing Credit

& Credit is issued on a nationide allocation

progra$

& Credit a$ount

*%ased on uali(ied basis o( the property hich is

dependent on the nu$ber o( units rented to lo

inco$e tenants

*Credit is alloed over a 10year period

*)ub4ect to potential recapture

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:isabled Access Credit

& Credit available (or eligible access e"penditures$ade by s$all businesses* 6ncludes a$ounts paid to re$ove barriers that ould

otherise $a7e a business inaccessible to disabled andhandicapped individuals

*Gacility uali(ies i( placed in service be(ore @ove$ber/, 1DD0

& Credit a$ount

*50> I e"penditures that e"ceed 250 but not in e"cesso( 10,250

& !hus, $a". credit is 5,000

*%asis in asset is reduced by credit a$ount

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Credit Gor #ension

#lan )tartup Costs

& )$all businesses can clai$ nonre(undable ta" credit

(or ad$in costs o( establishing and $aintaining a

uali(ied retire$ent plan

* )$all business has 100 e$ployees ho have earned atleast 5,000 o( co$pensation

& Credit a$ount H 50> o( uali(ied startup costs

li$ited to $a" credit o( 500 per year (or ? years

* :eduction (or startup costs is reduced by a$ount o( credit

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Credit Gor

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Credit Gor

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25

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Credit (or

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Credit (or

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Goreign !a" Creditslide 1 o( 2

& !he purpose o( the (oreign ta" credit G!C is

to $itigate double ta"ation since inco$e

earned in a (oreign country is sub4ect to both

.). and (oreign ta"es*Credit applies to both individuals and corporations

that pay (oreign inco$e ta"es

*6nstead o( clai$ing a credit, a deduction $ay beclai$ed (or the ta"es paid

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Goreign !a" Creditslide 2 o( 2

& A$ount o( the credit alloed is the lesser o(=* !he (oreign ta"es i$posed, or* !he overall li$itation deter$ined using the (olloing (or$ula=

Goreignsource !6 I .). ta" be(ore creditBorldide !6

H Fverall G!C li$itation

& Gor individual ta"payers, orldide ta"able inco$e is

deter$ined be(ore personal and dependency e"e$ptions

& nused G!Cs can be carried bac7 1 year and (orard 10years

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Adoption

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Adoption

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Child !a" Creditslide 1 o( 2

& Credit a$ount is 1,000 per child

&

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Child !a" Creditslide 2 o( 2

& Credit is phased out by 50 (or each 1,000

or part thereo( o( A6 above speci(ied levels

*110,000 (or 4oint (ilers

*55,000 (or $arried (iling separately

*5,000 (or single

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Child and :ependent Care Creditslide 1 o( -

& eneral uali(ications (or credit

*Must have e$ploy$ent related care costs (or a

& :ependent under age 1?, or

& :ependent or spouse ho is physically or $entallyincapacitated and ho lives ith the ta"payer (or $ore

than onehal( o( the year

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Child and :ependent Care Creditslide 2 o( -

& Credit a$ount

* to ?5>

depending on A6

& Married ta"payers $ust (ile a 4oint return to

obtain credit

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Child and :ependent Care Creditslide ? o( -

&

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Child and :ependent Care Creditslide - o( -

&

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o(

the ne"t 2,000 o( tuition e"penses

*Li(eti$e learning credit $a"i$u$ per ta"payer is

20> o( uali(ying e"penses up to 10,000 peryear in 201-& Cannot be clai$ed in sa$e year the A$erican

Fpportunity credit is clai$ed

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!he %ig #icture 2,000 O 25> 2,000P (or both Lora;s and )a$;se"penses.

* 6n total, a 5,000 A$erican Fpportunity credit.

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!he %ig #icture alloable portion.

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!he %ig #icture $ust be reduced

because their $odi(ied A6 e"ceeds the 103,000 li$it (or $arried ta"payers.* As their $odi(ied A6 e"ceeds the 103,000 li$it by 1-,000 and the phaseout

range is 20,000, their li(eti$e learning credit is reduced by 0>.* !here(ore, their li(eti$e learning credit (or 201- is 2-0 300 Q ?0>

& !heir total education credits a$ount to 5,2-0* 5,000 A$erican Fpportunity credit and 2-0 li(eti$e learning credit.

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Credit Gor Certain Retire$ent

#lan Contributions

& Credit as enacted to encourage lo and $iddle

inco$e ta"payers to contribute to uali(ied retire$ent

plans

&

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)$all

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#ay$ent #roceduresslide 1 o( 3

&

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#ay$ent #roceduresslide 2 o( 3

& )ocial )ecurity J Medicare

* 201- rates

& )ocial )ecurity= /.2> o( (irst 11,000 ages

& Medicare= 1.-5> o( all ages

* 6( e$ployee is overithheld (or )ocial )ecurity, e"cess is

re(undable credit

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#ay$ent #roceduresslide ? o( 3

& Gederal ithholding

*

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#ay$ent #roceduresslide - o( 3

&

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#ay$ent #roceduresslide 5 o( 3

& o( the current year;s ta", or& 100> o( last year;s ta"

*

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#ay$ent #roceduresslide / o( 3

&

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#ay$ent #roceduresslide o( 3

& )el(e$ploy$ent ta"*!a"payers ith net sel(e$ploy$ent earnings o( at

least -00 $ust pay sel(e$ploy$ent ta"

& 201- rates* )ocial )ecurity= 12.-> o( (irst 11,000 net sel(e$ploy$ent

inco$e

* Medicare= 2.D> o( all net sel(e$ploy$ent inco$e

& !hese rates are tice hat an e$ployee pays on ages

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#ay$ent #roceduresslide 3 o( 3

& )el(e$ploy$ent ta"* !a"payer receives a deduction (ro$ net sel(e$ploy$ent

inco$e o( ./5> (or purposes o( calculating the actual sel(e$ploy$ent ta", and

* !a"payer receives aforA6 deduction (or 50> o( the sel(e$ploy$ent ta" paid

Additional Medicare !a es on

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Additional Medicare !a"es on

+igh6nco$e 6ndividuals

& !he +ealth Care Act o( 2010 and the +ealth

Care Reconciliation Act o( 2010 include 2

provisions that increase Medicare ta"es (or

highinco$e individuals beginning in 201?=

*An additional .D> ta" on ages received in e"cess

o( speci(ied a$ounts, and

*An additional ?.3> ta" on unearned inco$e

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Additional !a" on Bages

& Gor ta" years beginning a(ter 12?12012 anadditional .D> Medicare ta" is i$posed on agesreceived in e"cess o(* 250,000 (or $arried ta"payers (iling 4ointly,

* 125,000 (or $arried (iling separately, and* 200,000 (or all other ta"payers

& !he additional ta" on a 4oint return is on theco$bined ages o( the e$ployee and the e$ployee;s

spouse& Also applies to sel(e$ployed individuals*@et earnings (ro$ sel(e$ploy$ent is used (or the

threshold co$putations

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Additional !a" on nearned 6nco$eslide 1 o( 2

& Gor ta" years beginning a(ter 12?12012 an

additional ?.3> Medicare ta" is i$posed on the

unearned inco$e o( individuals, estates, and trusts

* Gor individuals, the ta" is ?.3> o( the lesser o(=& @et invest$ent inco$e, or

& !he e"cess o( $odi(ied ad4usted gross inco$e MA6 over

* 250,000 (or $arried ta"payers (iling a 4oint return

*125,000 i( $arried (iling separately, and

* 200,000 (or all other ta"payers

& !his is in addition to the additional .D> Medicare ta"

on ages or sel(e$ploy$ent inco$e.

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Additional !a" on nearned 6nco$eslide 2 o( 2

& 6n general, net investment incomeincludes

interest, dividends, annuities, royalties, rents,

and net gains (ro$ the sale o( invest$ent

property less related deductions

& MA6 H A6 O any (oreign earned inco$e

e"clusion

*!hus, (or individuals ho don;t have any e"cluded

(oreign earned inco$e, MA6 is the sa$e as A6

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Re(ocus Fn !he %ig #icture slide 1 o( 2

& Recent ta" legislation $ade signi(icant changes in educationta" credits.

& !he A$erican Fpportunity ta" credit provides so$e relie( (or!o$ and 'enni(er )nyder.

* %oth Lora and )a$ uali(y (or a 2,500 A$erican Fpportunity creditin 201-.

& 100> o( the (irst 2,000 and 25> o( the ne"t 2,000 o( uali(ied e"penses.

& !hese credits are phased out (or $arried ta"payers; as A6e"ceeds 1/0,000.

* )ince the )nyders; A6 is only 153,000, the total education creditsavailable to the$ on their 201- inco$e ta" return is 5,000.

* Gurther, this credit $ay be used to o((set any AM! liability.

* -0> 2,000 is re(undable to the )nyders.

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Re(ocus Fn !he %ig #icture slide 2 o( 2

& Bhat 6(8

& Bhat i( the )nyders; A6 is 133,0008

* 6n 201-, the )nyders ould not uali(y (or any education

credits& !heir inco$e e"ceeds the li$its (or both the A$erican Fpportunity

and the li(eti$e learning credits.

* A deductionfor A6 is alloed (or uali(ied tuition and

related e"penses involving higher education.

& +oever, their A6 e"ceeds the 1/0,000 $a"i$u$ alloed (or a

deduction see Chapter D (or additional details.

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