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Chapter 6
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Chapter 6
- 1. 2010 Cengage Learning Income Tax Fundamentals 2010 Gerald E. Whittenburg Martha Altus-Buller
- 5. 2010 Cengage Learning Example Kendra and Jose are taxpayers with children ages 19, 10, and 3. Their AGI is $113,200 and they file jointly. What is their Child Tax Credit, assuming two of their children are ‘qualifying children’?
- 11. Example Joanne has salary of $18,400 and investment income of $2,100. Lou, her spouse, is a full-time student. They have three children under 13 and total daycare costs of $7,800. What is their Child and Dependent Care Credit? How would this change if Lou is not a student and works part-time, earning $3,000, and Joanne received $2,200 of employer-provided dependent care assistance? 2010 Cengage Learning
- 12. 2010 Cengage Learning Example Joanne has salary of $18,400 and investment income of $2,100. Lou, her spouse, is a full-time student. They have three children under 13 and total daycare costs of $7,800. What is their Child and Dependent Care Credit? How would this change if Lou is not a student and works part time, earning $3,000, and Joanne received $2,200 of employer-provided dependent care assistance? Solution Qualifying costs are lesser of: Her earned income $18,400 or his earned income $6,000 (imputed at $500 / month) or annual daycare bill of $7,800 Multiply by % from Table 1 based on AGI $6,000 x 32% = $1,920 credit If Lou works and Joanne receives assistance, qualifying costs are lesser of: Her earned income $18,400 or his earned income $3,000 or net daycare bill $7,800 - $2,200 = $5,600 Multiply by % from Table 1 based on new AGI $3,000 x 30% = $900 credit
- 16. Education Credits - Example Example Dave and Val (MFJ) have 2 dependent children and have AGI of $72,000. Sean is taking 4 credits (part-time enrollment) at City College of Newark. His tuition/fees are $2,200. Corey is a freshman at Tulane. Her tuition is $39,200. What amounts may Dave and Val claim as education credits? 2010 Cengage Learning
- 19. 2010 Cengage Learning Example Joe Steele had $200,000 income from U.S. and $100,000 income from employment in Kuwait. He paid $40,000 in Kuwaiti taxes. His U.S. tax liability on $300,000 is $85,069; what is Joe’s foreign tax credit?
Notes de l'éditeur
- A refundable first -time homebuyer credit is available to qualified individuals that purchase a home to be used as their principal residence (Code Sec. 36, as amended by the Worker, Homeownership, and Business Assistance Act of 2009 (P.L. 111-92))).24 The credit may be claimed by first-time homebuyers and also by existing homeowners who meet certain conditions. The credit and any recapture of the credit are reported on Form 5405, First-Time Homebuyer Credit. The amounts, rules, restrictions, and eligibility applicable to the credit have changed several times since the initial enactment. The credit is currently set to expire at the end of April 2010. First-time homebuyers. The first -time homebuyer credit is available to individuals who have had no ownership interest in a principal residence during the three-year period ending on the date of the purchase of a home to be used as a principal residence. In the case of joint filers, neither spouse can have such an ownership interest during that period. For residences purchased on or after January 1, 2009, and before May 1, 2010, the maximum amount of credit that may be claimed is equal to the lesser of: (1) 10 percent of the purchase price, or(2) $8,000 ($4,000, if married, filing separate). The maximum credit amount is available for purchases which are under a written binding contract before May 1, 2010, and the purchase completed before July 1, 2010. The credit may be allocated in any reasonable manner among unrelated purchasers provide that no credit amount is allocated to unqualified individual (Notice 2009-12). Generally, no recapture of the credit will be required unless the taxpayer disposes of the home within 36 months of the date of purchase (see Recapture , following).
- A refundable earned income credit is available to certain low-income individuals (Code Sec. 32, as amended by the American Recovery and Reinvestment Act of 2009 (P.L. 111-5)).19 To be eligible to claim the credit, a taxpayer must have earned income with an adjusted gross income (AGI) below a certain level, a valid Social Security number, use a filing status other than married filing separately, must be a U.S. citizen or resident alien, have no foreign income, and investment income less than a certain amount. The amount of credit varies depending on the number of the taxpayer's qualifying children and their adjusted gross income level. Amount of Credit. The credit amount is determined by multiplying an individual's earned income that does not exceed a maximum amount (called the earned income amount) by the applicable credit percentage. In 2009, the maximum earned income amount for taxpayers with one qualifying child is $8,950, with two or more qualifying children is $12,570, and with no qualifying child is $5,970 (Rev. Proc. 2008-66; Rev. Proc. 2009-21). For 2010, the maximum earned income amount is $8,970 with one qualifying child, $12,590 with two or more qualifying children, and $5,980 with no qualifying children. The credit is reduced by a limitation amount determined by multiplying the applicable phaseout percentage by the excess of the amount of the individual's AGI (or earned income, if greater) over a phaseout amount. The earned income amount and the phaseout amount are adjusted yearly for inflation. The amount of allowable credit is determined through the use of the tables that appear at ¶87. Credit percentages and phaseout percentages limit the maximum amount of credit that may be claimed (Code Sec. 32(b)(1)). In 2009, the maximum earned income credit for taxpayers with one qualifying child is $3,043, with two qualifying children is $5,028, with three or more qualifying children is $5,657, and with no qualifying children is $457 (Rev. Proc. 2008-66; Rev. Proc. 2009-21). For 2010, the maximum earned income credit for taxpayers with one qualifying child will be $3,050, with two qualifying children will be $5,368, with three or more qualifying children will be $5,666, and with no qualifying children will remain the same at $457 (Rev. Proc. 2009-50).
- A nonrefundable credit is allowed for a portion of qualifying child or dependent care expenses paid for the purpose of allowing the taxpayer (and the taxpayer's spouse, if married filing a joint return) to be gainfully employed (Code Sec. 21).1 The credit is computed on Form 2441, Child and Dependent Care Expenses, for filers of Form 1040 and 1040A. The credit cannot be claimed on Form 1040EZ. To be eligible for the credit, the taxpayer must incur employment-related expenses in providing care for one of the following qualified individuals: (1)a dependent of the taxpayer as defined in Code Sec. 152(a)(1) (a qualifying child) who has not attained the age of 13 (¶137—¶137B);(2)a dependent of the taxpayer as defined under Code Sec. 152 (determined without regards to whether the individual may be claimed as a dependent by another taxpayer, has income in excess of $3,650 in 2009, or files a joint return with his or her spouse) who is physically or mentally incapable of caring for himself or herself and who has the same principal place of abode as the taxpayer for more than half of the year; or(3)the taxpayer's spouse, if the spouse is physically or mentally incapable of caring for himself or herself and has the same principal place of abode as the taxpayer for more than half of the year. Amount of Credit. The maximum amount of employment-related expenses to which the credit may be applied is $3,000 if one qualifying individual is involved or $6,000 if two or more qualifying individuals are involved (less excludable employer dependent care assistance program payments) (Code Sec. 21(c)). The credit amount is equal to the applicable percentage, as determined by the taxpayer's adjusted gross income (AGI), times the qualified employment expenses paid. Taxpayers with an AGI of $15,000 or less use the highest applicable percentage of 35 percent. For taxpayers with an AGI over $15,000, the credit is reduced by one percentage point for each $2,000 of AGI (or fraction thereof) over $15,000 (Code Sec. 21(a)(2)). The minimum applicable percentage of 20 percent is used by taxpayers with an AGI greater than $43,000. Thus, the maximum dependent care credit amount for one qualifying dependent is $1,050 and $2,100 for two or more qualifying dependents.
- .
- A credit against tax is available for new qualified plug-in electric drive motor vehicles placed in service after December 31, 2008, and before January 1, 2010. The amount of the credit is $2,500, plus $417 for each kilowatt hour of traction battery capacity in excess of four kilowatt hours (Code Sec. 30D, as amended by the American Recovery and Reinvestment Act of 2009 (P.L. 111-5)).36 Taxpayers can elect not to claim the credit for a vehicle that otherwise qualifies as new plug-in electric drive motor vehicle (Code Sec. 30D(e)(9)). The basis of a new qualified plug-in electric drive motor vehicle will be reduced by the amount of any credit claimed (Code Sec. 30D(e)(4)). If the plug-in electric drive motor vehicle will be used by a tax-exempt organization or governmental unit, the seller of the vehicle may claim the credit but only if they clearly discloses in writing to the entity the amount of any credit allowable with respect to the vehicle (Code Sec. 30D(f)(3)). Qualified Vehicles. In order for a motor vehicle to qualify as a new plug-in electric drive vehicle, the vehicle must be made by a manufacturer, acquired for use or lease, but not resale, the original use must begin with the taxpayer, and the motor vehicle must have: (1) a traction battery (high power battery for electric vehicle traction) propulsion source with at least four kilowatt hours of capacity; (2) an offboard source of energy to recharge the battery; and (3) a certificate of conformity under the Clean Air Act, and meet or exceed certain California emission standards (Code Sec. 30D(c)). The term "motor vehicle" means any vehicle that has at least four wheels and is manufactured primarily for use on public streets, roads, and highways (¶1321) (Code Secs. 30(c)(2) and 30D(e)(1)). A motor vehicle will not be eligible for the new qualified plug-in electric drive motor vehicle credit unless it is in compliance with the applicable provisions of Federal and State environmental and safety laws for the applicable make and model year (Code Sec. 30D(e)(10)).
- A tax credit is available to individuals for the installation of nonbusiness energy property, such as residential exterior doors and windows, insulation, heat pumps, furnaces, central air conditioners and water heaters (Code Sec. 25C).29 The credit applies to qualified energy efficiency improvements and qualified energy property installed before January 1, 2008, or on or after January 1, 2009, and on or before December 31, 2010. The property must be installed in, or on, a dwelling unit in the United States that is owned and used by the taxpayer as the taxpayer's principal residence . Original use of the property must commence with the taxpayer. The credit is claimed on Form 5695, Residential Energy Credits. Credit Limitations. The credit amount is equal to 30 percent of the sum of (a) taxpayer's residential energy property expenditures, plus (b) the cost of qualified energy efficiency improvements for the tax year. The amount of credit a taxpayer may claim is limited to a maximum of $1,500 for both 2009 and 2010 (Code Sec. 25C(b), as amended by the American Recovery and Reinvestment Act of 2009 (P.L. 111-5)). In addition, for tax year 2009, the amount of the nonbusiness energy credit that may be claimed by the taxpayer cannot exceed his or her regular income tax liability (reduced by the foreign tax credit), plus his or her alternative minimum tax (AMT) liability (Code Sec. 26(a)(2)). Beginning in 2010, the amount of the nonbusiness energy property credit that may be claimed cannot exceed the total of the nonrefundable personal credits less the adoption credit, the child tax credit, the American opportunity credit, the retirement savings contribution credit, the residential energy efficient property credit, the credit for qualified electric vehicles, the alternative motor vehicle credit, and the new qualified plug-in electric vehicle credit over the excess of the taxpayer's regular income tax liability over the taxpayer's AMT liability determined without regard to the alternative minimum tax foreign tax credit (Code Sec. 26(a)(1), as amended by the American Recovery and Reinvestment Act of 2009 (P.L. 111-5)). There is no carryforward of credit. See also ¶1315. Qualifying Energy Improvements. Qualifying energy improvements include any energy efficient building envelope component that meets certain energy conservation criteria (Code Sec. 25C(c)(1)). A building envelope component is defined as any insulation material or system which is designed to prevent heat loss or gain, exterior windows (including skylights), exterior doors, and any metal roof with either pigmented coating or cooling granules designed to reduce heat gain (Code Sec. 25C(c)(2)). Qualified Energy Property. Qualified energy property is defined as energy-efficient building property, qualified natural gas, propane, or oil furnace or hot water boiler, or an advance main air circulating fan that meet specific performance and quality standards (Code Sec. 25C(d)(2)). Qualified energy-efficient building property includes electric heat pump water heaters, qualified electric heat pumps, qualified central air conditioners, and qualified stove which use biomass fuels (Code Sec. 25C(d)(3)). Geothermal heat pumps are no longer considered qualified energy-efficient property for expenditures made after December 31, 2007.
- History In 1966, 155 taxpayers with AGI > $200,000 paid no income tax. In 1969, Congress reacted by enacting an add-on minimum tax to ensure high-income individuals would not escape payment of tax by using tax preferences. The tax took effect January 1, 1970. The rate was 10% from 1970 to 1975. In 1976, the rate increased to 15%. In 1982, the add-on minimum tax was replaced by the alternative minimum tax (AMT), with two rate brackets, 10% and 20%. In 1983, the 10% bracket was eliminated. In 1987, the method of computing AMT changed, the exemption began to be phased out, and the rate was increased from 20% to 21%. In 1993, the rate was increased to 26% and a second 28% bracket was added. Section 6.8 The Individual Alternative Minimum Tax (AMT) The Internal Revenue Service has created a minimum tax to insure that every taxpayer with economic income pays at least some amount of income tax. The 2006 AMT rates are 26 percent on the first $175,000 and 28 percent on the amounts above $175,000. A taxpayer’s AMT is based on taxable income plus or minus certain adjustments, adding the amount of “tax preferences” and subtracting an exemption allowance based on tax filing status.
- Tax was originally intended for high income taxpayers with many shelters it has evolved to impact many middle income people Separate system for calculating taxes if Alternative Minimum Tax (AMT) is higher than regular federal tax liability, must pay AMT amount AMT Rates 26% up to $175,000 ($87,500 MFS) Alternative Minimum Taxable Income (AMTI) 28% above $175,000 ($87,500 MFS) AMTI long-term capital gains taxed at preferential rates
- 10. Business tax deductions (such as depreciation, research costs, and intangible drilling costs) 9. Tax-exempt interest from private activity bonds 8. Long-term capital gains (increased AGI triggers phase-out of AMT exemption) 7. Exercise of incentive stock options (difference between market price and strike price) 6. Miscellaneous itemized deductions subject to the 2% floor 5. Medical expenses (10% floor in lieu of 7.5% floor) 4. Mortgage interest on refinanced or second mortgages and home equity loans not used to buy, build, or improve a home 3. State and local income, sales, and property taxes 2. Standard deduction 1. Personal exemptions
- The kiddie tax applies to a child if: (1)the child is required to file a tax return (see §1,505); (2)the child does not file a joint return for the tax year; (3)the child's investment income is more than $1,900 (for 2009 and 2010); (4)either parent of the child is alive at the end of the year; and (5)effective for tax years beginning after May 25, 2007, the child is: under the age of 18 at the end of the tax year; under the age of 19 at the end of the tax year and does not provide more than half of his or her own support with earned income; or under the age of 24 at the end of the tax year, a full-time student, and does not provide more than half of his or her own support with earned income
- Under the kiddie tax , the child's tax liability is equal to the greater of: (1) the tax on all of the child's income without regard to the rules for the kiddie tax; or (2) the sum of the tax on the child's total income reduced by net unearned income (see §1,510.10), plus the child's share of the allocable parent tax (see §1,510.15). Code Sec. 1(g)(1). If the parents do not have the same tax year as a child, then the allocable parental tax is determined on the basis of the tax year of the parent ending in the child's tax year. See §1,510.20 for a discussion of the allocable parental tax. Compliance Tip A parent with a child subject to the kiddie tax must supply the child with his taxpayer identification number (i.e., social security number) and other information. See §1,510.25. Compliance Tip Form 8615, Tax for Certain Children Who Have Investment Income of More Than $1,900 (for 2009), is used to compute the kiddie tax and it must be attached to the child's tax return for the year. However, if the child's unearned income is equal less then twice the standard deduction amount for a dependent ($1,900 for 2009 and 2010), then the child's tax liability is computed in the usual manner on his or her return. Form 8615 is also not used if a child's parents are both deceased at the end of the tax year. A parent may also elect to report the child's unearned income on his or her return using Form 8814, Parents' Election to Report Child's Interest and Dividends, instead of using Form 8615. See §1,525.
- If a husband and wife file separate returns, half of all community income must be reported by each spouse. Community income is all income from community property, salaries, wages, and other compensation for the services of either the husband or wife or both. In addition, in Idaho, Louisiana, Texas and Wisconsin, all income earned from separate property is generally community income. However, there are exceptions to the general rule. For instance, in most community property states, a husband and wife may, before marriage, enter into a valid agreement providing that any income earned by either of them for personal services is his or her separate property, although the requirements vary widely from state to state. Then, the income earned by either spouse after the agreement is entered into is treated, for federal tax purposes, as the separate income of the spouse earning the income, not as community income. Rev. Rul. 73-390, 1973-2 CB 12. Taxpayers may also be able to avoid community property laws if they are separated (see §45,920.20) or if they are entitled to innocent spouse relief. See §45,920.10. The IRS can deny the benefits of community property law to a taxpayer who abandons a spouse (see §45,920.05) or who conceals community property from a spouse and treats it as separate property. See §45,920.15. If a taxpayer moves into a community property state during the year, income is prorated between community property and non-community property periods. Veit v. Commissioner, Dec. 17,240(M), 8 TCM 919.