Tax Credits, Prepayments and Alternative Minimum Tax AMT

Chapter 9

Tax Credits, Prepayments and Alternative Minimum Tax [AMT]

(Revised 02-03-2016)

Tax Credits

·  Reduce tax by $1 for every $1 of qualified credit.

·  Better than deductions which provide only a percentage of tax savings.

There are two types of tax credits:

Non-Refundable:

·  Cannot reduce a balance due (at that point) below zero.

Refundable:

·  May reduce a balance due below zero and be refunded to taxpayer.

Non-Refundable Credits:

Household and Dependent (Child) Care Credit

·  Credit of up to 35% of expenses for caring for a child/dependent to allow the taxpayer or Spouse to work.

·  $3,000 of child care expenses for one child.

·  $6,000 of child care expenses for two or more children.

·  Credit percentage is reduced by 1 percentage point for every $2,000 or portion thereof when AGI exceeds $15,000 (See page 9-3 for percentages and credit limitations).

·  Minimum credit rate is 20%.

·  Taxpayers with AGI over $43,000 get 20%.

·  Maximum expenses eligible must be reduced by any amounts excluded by employer provided day care or other Flexible Spending Child Care plans.

·  Dependent must be under age 13, unless disabled.

·  If married, the spouse must work or be a full time student or disabled, but

dependent care expenses cannot exceed the earned income of the taxpayer or lower earning spouse.

American Opportunity Credit /Hope and Lifetime Learning Credits

·  Available for college tuition and fees for moderate income taxpayers, spouses and dependents.

Phases out if AGI is between:

·  $80,000 – 90,000 (single)

·  $160,000 – 180,000 (Married Filing Joint)

American Opportunity Credit (Formerly the Hope Credit)

·  Maximum credit of $2,500 for each of first FOUR years of post-secondary education.

·  100% of first $2,000 and 25% of next $2,000 of qualified education expenses (Tuition fees and books)

·  Must be at least a half-time student.

Lifetime Learning Credit

·  20% of the first $10,000 of qualified tuition/fees/expenses.

·  Does not have to be a ½ time student.

·  Any years qualify; not just the first two.

·  Cannot claim in the same year the Hope Credit is used for the same student.

Phases out if AGI is over

·  55,000 (single)

·  110,000 (Married Filing Joint)

Child Tax Credit

A $1,000 credit per child is available for qualifying children under 17 years old.

The Credit phases out if AGI is over:

·  $75,000 (Single)

·  $110,000 (Married Filing Joint)

·  Credit reduced $50 for each $1,000 (or portion thereof) AGI exceeds the above amounts.

It is partially fully refundable for “Low Income” taxpayers, see paragraph 9032.

Qualified Retirement Savings Credit

·  Made for contributions to qualified retirement plans.

·  Maximum eligible contribution is $2,000.

·  Rate is based on AGI.

·  Credit is phased out if AGI Exceeds certain levels - see text

Foreign Tax Credit

·  Eliminates/reduces double taxation effect of income earned and taxed in another country.

·  Rather than taking a credit the taxpayer may instead deduct foreign taxes as an itemized deduction.

·  The credit is the lesser of the tax imposed by the foreign country or the US tax on that same income.

Residential Energy Credits

·  A credit of up to $500 (10% of cost) for qualifying replacements of energy efficient doors, heating/cooling equipment, etc is available for 2016???

o  Windows maximum credit is $200

·  30% credit for the cost of qualifying alternative energy equipment (solar panels etc)

Business Credits:

·  Various – See Text

Refundable Credits:

Withholding on Wages

·  Taxes withheld from wages on a W-2, interest or dividends, etc.

Excess Social Security tax withheld

·  If the taxpayer worked for more than one employer during the year and together they withheld Social Security tax on more than the “FICA” limit on wages, the excess is refunded on the tax return. If only one employer over-withholds, that employer must refund the over withheld amount.

Adoption Credit

·  Credit of up to $13,570 is available for qualified adoption expenses.

·  Qualified expenses include adoption fees, court costs, attorney fees and other expenses of legal adoptions of a child under 18 years old, or an individual incapable of self-care.

·  Full credit is allowed even if expenses are less in cases of “special needs” adoptions.

·  The credit phases out when AGI is over $203,540 (single)

·  No credit is allowed for any expenses reimbursed by the employer or by a federal, state, or local program.

·  This credit is normally taken in the year incurred, except for special needs adoptions which are taken in the year adoption is final.

Earned income credit

·  Refunds tax for Low income workers.

·  Based on Earned Income.

·  Essentially refunds Social security tax while maintaining Social Security quarters.

·  Unfortunately there is a lots of Fraud in this area.

Estimated tax Payments

·  Due April, June, September and January 15th of the next year.

·  Penalties exist for underpayments of estimated tax.

·  Payments are based on income earned during those periods.

·  May be reduced for any tax withheld by other sources.

Underpayment limits

If taxpayers fail to pay at least: the following, there can be penalties imposed:

·  90% of this years tax, or

·  100% of last year’s tax (110% if AGI is over $150,000 if joint or $75,000 if single),or the balance due is less than $1,000.

Alternative Minimum Tax

Congress wants to insure everyone pays at least some tax (a minimum tax).

Taxpayer computes their "regular tax liability" and re-computes this amount to come up with a "tentative minimum tax".

If tentative minimum tax is larger than regular tax liability, the difference is the Alternative Minimum Tax (AMT), which is added to the regular tax. Thus, AMT is an "add-on tax".

Computation of AMT:

1. Re-Compute taxable income, adjusting for certain items which may increase or decrease taxable income.

e.g. add back excess of MACRS depreciation over straight line depreciation, itemized deductions for taxes , home equity interest not used to purchase or improve your home, and all “2%” miscellaneous itemized deductions are not allowed either and must be added back; The AMT Form design also adds back the personal and dependent exemption amount!

See text for a list of specific items

2. Add back tax preference items (which always make AMTI go up):

For example, the difference between FMV & “Strike” (purchase) price of incentive stock options when options are exercised, or another preference item might be 7% of any excluded Sec 1202 stock gain.

3. Subtract exemption below:

Amount Status

$54,300 Single taxpayers

84,500 Married filing joint, surviving spouses

42,250 Married filing separately, estates and trusts

HOWEVER:

The above exemption amounts are phased out by 25% of the amount of alternative

Minimum taxable income that exceeds:

Amount Status

$120,700 Unmarried taxpayers

160,900 married-joint, surviving spouses,

80,450 Married filing separately, estates/trusts

EXAMPLE:

Assume a married filing separate taxpayer has AMT income before exemption of $100,450

That income exceeds the above phase out threshold by $20,000 ($100,450-80,450).

·  Thus, the taxpayer would lose $5,000 (25% x $20,000) of exemption, leaving $37,250 ($42,250 - $5,000) of remaining AMT Exemption.

·  AMT income after the remaining exemption would be $63,200. ($100,450 minus the $37,250 remaining exemption).

4. Multiply AMT income (reduced by the remaining exemption amount) by 26%[1] to find the "tentative tax"

5. Subtract any AMT foreign tax credit to find final "tentative tax"

6. Subtract regular tax from tentative tax to get AMT.

For example: assume the above taxpayer had a regular tax liability of $15,000 and no foreign tax credit. Since AMT income after exemption is $63,200:

Tentative tax ($63,200 x 26%) $16,432

Less: regular tax (15,000)

Alt Min Tax $ 1,432

Thus, the taxpayer would pay a total tax of $16,432 for the year!

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[1]If AMT Income is greater than specified thresholds, multiply by 28%