2011 Pearson Education Inc Publishing as Prentice Hall

SPECIAL TAX COMP METHODS, CREDITS & PAYMENT (1 of 2) ® Alternative minimum tax ® Self-employment tax ® Overview of tax credits ® Nonrefundable personal tax credits ® Foreign tax credit ® General business credits © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14 -2

SPECIAL TAX COMP METHODS, CREDITS & PAYMENT (2 of 2) ® Refundable credits ® Payment of taxes ® Tax planning considerations ® Compliance and procedural considerations © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14 -3

Alternative Minimum Tax ® AMT computation ® AMT preference items ® AMT adjustments ®

AMT Computation (1 of 3) Taxable income before NOL + Tax preference items + Personal & dependency exemptions + Standard deduction (if applicable) +/- Adjustments to taxable income Alternative minimum taxable income © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14 -5

AMT Computation (2 of 3) x - Alternative minimum taxable income AMT exemption Alternative minimum tax base Tax rate 26% on 1 st $175 K, 28% on excess Tentative minimum tax Nonrefundable personal credits Regular tax AMT due (if any) © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14 -6

AMT Computation (3 of 3) ® AMT exemption $70, 950 MFJ, $46, 700 single, $35, 475 MFS Reduced by 25% of AMTI in excess of threshold amount ¬$150, 000 MFJ, $112, 500 single, & $75, 000 MFS © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14 -7

AMT Preference Items ® Includes excess of accelerated depreciation over S/L depreciation ® Tax-exempt interest on certain private activity bonds Before 2009 or after 2010 ®% depletion > adjusted basis of prop ® Exclusion of gain on sale of certain small business stock under § 1202 © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14 -8

AMT Adjustments (1 of 3) ® AMT itemized deductions Casualty & theft loss in excess 10% of AGI Charitable contributions Medical expenses in excess of 10% of AGI Qualified housing interest Estate tax deduction on IRD © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14 -9

AMT Adjustments (2 of 3) ® Timing differences For personal property placed in service after 1998 ¬Difference between MACRS deduction and amount determined by using 150% DB For real property placed in service after 1986 and before 1999 ¬Difference between actual MACRS and SL using 40 -yr useful life © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14 -10

AMT Adjustments (3 of 3) ® Timing differences (continued) Incentive Stock Options (ISOs) ¬Difference between FMV of stock and price paid for it R&E expenditures ¬Difference between amount deducted and amount deduction if R&E capitalized and amortized over 10 -years © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14 -11

AMT Credits ® AMT foreign tax credit ® Child and dependent care credit ® Elderly and disabled credit ® Child tax credit ® American opp. & lifetime learning credits ® Qual. retirement savings contrib. credit ® Residential energy credits © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14 -12

Self-Employment (SE) Tax (1 of 3) ® Individuals subject to SE tax on amount of net earnings from self-employment ® Computing the tax Net earnings self-employment earnings ≥$400 subject to SE tax ¬Multiply SE income x 92. 35% (100% - 7. 65%) to determine net SE earnings © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14 -13

Self-Employment (SE) Tax (2 of 3) ® Computing SE SE tax (continued) tax 15. 3% ¬Consist of 12. 4% OASDI and 2. 9% Medicare ªOASDI for 2010 is $106, 800 ªNo limit on the Medicare portion of SE tax ½ of SE tax deductible for AGI © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14 -14

Self-Employment (SE) Tax (3 of 3) ® Self-employment income Net earnings from sole proprietorship Director’s fees Taxable research grant Distributive share of partnership income plus guaranteed payments © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14 -15

Overview of Tax Credits ® Use and importance of tax credits Used ® Value by Federal gov’t for tax policy of a credit vs. a deduction Credit is $ for $ reduction of tax liability Deduction x MTR = tax savings ® Classification of credits Refundable Nonrefundable © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14 -16

Nonrefundable Personal Tax Credits (1 of 2) ® Child tax credit ® Child and dependent care credit ® Tax credit for the elderly and disabled ® Adoption credit ® American opportunity tax credit ® Lifetime learning credit © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14 -17

Nonrefundable Personal Tax Credits (2 of 2) ® Residential energy credits ® Qualified retirement savings contributions credit ® Alternative motor vehicle credit ® Nonrefundable personal credit limits © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14 -18

Child Tax Credit ® Child tax credit $1, 000 for each qualifying child <17 Phased out at $50 per $1, 000 over threshold amount ¬$110 K MFJ; $75 K single; $55 K MFS A portion may be refundable in 2009 and 2010 © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14 -19

Child and Dependent Care Credit ® 20% - 35% of eligible care expenses to enable taxpayer to be employed ® Up to $3 K ($6 K) expenses for 1 (2+) child © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14 -20

Tax Credit for the Elderly and Disabled ® For low-income individuals ≥ 65 who retired due to permanent total disability ® 15% of $5 K ($7. 5 K if both spouses ≥ 65) reduced by certain amounts © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14 -21

Adoption Credit ® Up to $12, 170 credit in adoption year ® Phased out

American Opportunity Tax Credit (AOTC) Up to $2, 500 credit for tuition and related expenses per student Available for 1 st two years per student 100% of 1 st $2, 000 plus 25% 2 nd $2, 000 Must be half-time student Eligible expenses reduced by amounts received under other Code sections Phase out between $160 K-$200 K MFJ; $80 K-$100 K for other taxpayers © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14 -23

Lifetime Learning Credit ® Less restrictive than AOTC ® 20% of 1 st $10 K of eligible expenses NOT per student ® Phase out between $100 K-$120 K MFJ; $50 K-$70 K for other taxpayers ® Other rules same as AOTC © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14 -24

Residential Energy Credits ® Nonbusiness $1, 500 energy property credit once in a lifetime credit (2009 - 2010) 30% of cost of qualified energy efficiency improvements plus ® Residential energy efficiency credit Expenditures on alternative energy sources for principal residence 30% of eligible property © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14 -25

Qualified Retirement Savings Contribution Credit ® Credit for lower-income taxpayers ® Credit in addition to exclusion or deduction otherwise allowable © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14 -26

Alternative Motor Vehicle Credit ® Combines several credits Qualified fuel cell credit Advanced lean-burn technology credit Qualified hybrid credit Qualified alternative fuel refueling property credit Plug-in conversion credit Plug-in electric vehicle credit © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14 -27

Nonrefundable Personal Credits Limit ® Nonrefundable credits cannot exceed regular tax liability plus TMT

Foreign Tax Credit (1 of 2) ® U. S. citizens, resident aliens, and U. S. corps taxed on worldwide income ® FTC permits U. S. citizens and residents to avoid double taxation ® Directly reduces U. S. tax liability © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14 -29

Foreign Tax Credit (2 of 2) ® FTC limited to lesser of Foreign tax actually paid OR foreign taxable income U. S. tax worldwide taxable income x liability ® Unused credits Carryback 1 year, then Carryforward 10 years © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14 -30

General Business Credits (1 of 5) ® Combined for purposes of computing overall dollar limitation Excess credits carried back 1 year and forward 20 years applied on FIFO method Limited to net income tax less greater of ¬TMT or ¬ 25% of net regular tax liability in excess of $25 K © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14 -31

General Business Credits (2 of 5) ® Tax credit for rehabilitation expenditures 10% for structures placed in service before 1936 and 20% if certified historic structures ® Business energy credits 10% of energy-conserving properties 30% for solar and fuel cell property Several new energy credits added in 2009 © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14 -32

General Business Credits (3 of 5) ® Credit for employer-provided child care 25% of qualified child care expenses plus 10% of child care resources and referral expenditures Max $150 K credit ¬Cannot claim both credit and deduction © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14 -33

General Business Credits (4 of 5) ® Work opportunity credit 40% of 1 st $6 K of qualified wages paid to employees hired from 1 of 10 targeted groups ® Disabled For access credit small businesses ¬Gross receipts < $1 M or have < 30 employees 50% of eligible expenses in excess of $250 up to $10, 250 © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14 -34

General Business Credits (5 of 5) ® Credit for research activities 20% of incremental expenditures plus 20% of basic research expenditures 20% of energy research expenses No deduction for creditable expenditures © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14 -35

Refundable Credits Earned Income Credit ® Eligibility Earned rules: income and AGI thresholds met Principal place of abode in U. S. for > ½ of tax year Individual between 25 -64 years old Individual not a dependent of another taxpayer for tax year © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14 -36

Refundable Credits Homebuyers Tax Credit ® Purchase principal residence between 11/7/2009 – 4/30/2010 Must be first-time homebuyer ¬Did not own a principal residence for 3 yrs. ® Credit lesser of 10% of purch or $8 K ® Phaseout begins at $225 K MFJ $125 K ® Credit for others recaptured ratably over 15 yrs © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14 -37

Refundable Credits Making Work Pay Credit ® Intended to offset employees’ Social Security taxes ® Lesser of 6. 2% of wages or $400 ($800 MFJ) ® Phaseout begins at $75 K ($150 K MFJ) ® Economic Recovery Payments in 2009 reduces MWP by $250 14 -38 © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Payment of Taxes Withholding of Taxes (1 of 2) ® Withholding of taxes Employers required to withhold federal income taxes and FICA tax from employee compensation Special rules provided for more than one employer during same year Exemptions for certain employment activities such as ministers © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14 -39

Payment of Taxes Withholding of Taxes (2 of 2) ® Withholding allowances and methods Every employee must file an Employee’s Withholding Allowance Certificate Form W-4 © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14 -40

Payment of Taxes Estimated Tax Payments (1 of 2) ® Estimated tax payments Calendar year taxpayers quarterly payments due April 15, June 15, Sept 15 of the current year, and January 15 of following year © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14 -41

Payment of Taxes Estimated Tax Payments (2 of 2) ® Required estimated tax payments Avoid underpmt of estimated tax penalty 90% of current tax liability, or 100% of last year’s liability ¬ 110% if AGI > $150 K No penalty if underwitheld by <$1 K or individual had $0 tax liability in prior year © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14 -42

Tax Planning Considerations ® Avoiding Alternative Minimum Tax ® Avoiding the underpayment penalty for estimated tax ® Cash-flow considerations ® Use of general business credit ® Foreign tax credits and foreign earned income exclusion © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14 -43

Compliance and Procedural Considerations ® AMT filing procedures Form 6251 or 4626 ® Withholding and estimated payments Form W-2 and 1040 ES ® General Form Business Credit 3800 ® Personal tax credits Schedules EIC, Schedule R, Form © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14 -44

Comments or questions about Power. Point Slides? Contact Dr. Richard Newmark at University of Northern Colorado’s Kenneth W. Monfort College of Business richard. newmark@Ph. Duh. com © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14 -45