Tax Credits for Adoption by fnc27840

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									              Chapter 14
Special Tax Computation Methods, Tax
     Credits, and Payment of Tax




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                   Alternative Minimum Tax

• Backup to the income tax.
• May have to pay if taxable income
  exceeds exemption amount of:
      – $45,000 if married filing a joint return
      – $33,750 if filing status is single or head
        of household.
      – $22,500 if married filing separate



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    Alternative Minimum Tax Formula

• Taxable Income
   – Plus: Personal and dependency exemptions
             Tax preference items
   – Plus or minus: Adjustments
• Equals Alternative Minimum Taxable Income (AMTI)
   – Minus: Exemption Amount**
• Equals Alternative Minimum Tax Base
   – Times rate (26% of first $175,000; then 28%)
• Equals Tentative Minimum Tax
   – Minus: Regular tax
• Equals Alternative Minimum Tax (AMT)

  **Reduced by 25% of AMTI in excess of $150,000 MFJ, $112,500 single TP’s
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               Adjustments to Taxable Income

• Add back personal exemptions.
• The following itemized deductions are allowed
  when computing AMT:
   – Medical expenses in excess of 10% of AGI.
   – Casualty losses.
   – Gambling losses.
   – Charitable contributions.
   – Qualified interest.
• Taxes and miscellaneous itemized
  deductions are not allowed for the AMT
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                       Preferences
• The AMT is designed to take back all or
  part of the tax benefits derived through
  the use of these tax preferences.
      – Deduction for certain depletion.
      – Tax-exempt interest on certain private activity
        bonds.
      – Accelerated depreciation on certain property
        placed in service before 1987.
           • MACRS depreciation in excess of AMT depreciation
             is an adjustment
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      Alternative Minimum Tax Relief

• Increased the current AMT exemption of
  $45,000 to $49,000 for MFJ (current
  $33,750 to $35,750 for single)
• Effective for years 2001-2004 only
• No change was made in the AMT rates
• Estimates are that 3.5 million more
  taxpayers will be subject to AMT under
  the new tax law

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                       Self Employment Tax

•   Imposed on SE net earnings over $400
•   Tax base is 0.9235 (1-.0765) x SE income
•   SE rate of 15.3%, 2.9% HI, 12.4% OASDI
•   OASDI ceiling $76,200 (00), $80,400 (01)
•   1/2 SE tax allowed as For AGI deduction
•   Earnings from SE include earnings from sole
    proprietorship, partnership, director’s fees

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                   Credits (Table I14-1)

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


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                    Earned Income Credit

• Encourage economically disadvantaged
  individuals to join the work-force.
• The maximum credit for 2001 (with one
  child) is 2,424. Phaseout begins at
  income of $13,090 and ends at $28,260
  (one child). In addition, each child must
  meet all three of the following tests:
  Relationship, Residency, Age.

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          Earned Income Credit-New Law

• Earned Income Credit (EIC) is Modified
  – Beginning and ending phase-outs increased
       • $1000 for 2002-2004
       • $2000 for 2005-2007
       • $3000 in 2008 and after
  – AMT no longer reduces the taxpayer’s EIC
  – Relationship test is broadened to include siblings
    and their descendants
  – Definition of “earned income” is simplified

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                    Child and Dependent Care
                         Expense Credit

 • Keep a home
 • Have earned income
 • The dependent is under the age of 13 or
   either of the spouses is physically or
   mentally incapacitated.
 • Tax credit has a ceiling of $2,400 for
   one qualifying child and $4,800 for two.


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         Amount of Child and Dependent
                  Care Credit
         AGI                     Rate
       $10,000 or less           30%
       >$10,000 <= $12,000       29%
       >$12,001 <= $14,000       28%
       ……………………….                …...
       >$26,001 <= $28,000       21%
       More than $28,000         20%

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     Miscellaneous Provisions-New Law

• Dependent Care Tax Credit
  – Increased maximum credit rate from 30% to 35%
  – Increased eligible expenses to $3,000 for one child
    and $6,000 for two or more children
  – Percentage is phased down (not below 20%) by 1%
    for each $2,000 of AGI above $15,000
      • 20% rate for AGI above $43,000
  – Effective beginning in 2003


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      Miscellaneous Provisions-New Law

• Credit for employer-provided child care facilities
  – 25% credit for employee child care expenses
  – 10% credit for child care resource and referral
    services
  – Maximum credit of $150,000 per year
  – Effective beginning in 2002




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                    Business Credits

 • General business credit
   – Comprised of a number of business
     credits combined into one amount
   – Annual limitation applied to combined
     amount
   – Unused credit is carried back 3 years,
     then forward 15 years


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                    Business Credits

 • Rehabilitation expenditure credit
       – 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
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                  Work Opportunity Credit

• 40% (reduced to 25% for employment of 400
  hours or less) of the first $6,000 paid to
  employees from targeted groups
  – Qualified AFDC, veteran, ex-felon, high-risk youth,
    vocational rehabilitation referral, summer youth
    employee, food stamp recipient, SSI recipient
  – Maximum credit is $2,400 ($6,000 x 40%) except
    qualified summer youth program max is $1,200 ($3,000 x
    40%)
  – Credit is taken for first year wages of individuals hired
    after September 30, 1996 and before January 1, 2002
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             New Welfare to Work Credit
                      Part of General Business Credit

• Credit for wages paid to long-term family
  assistance recipients
      • 18 consecutive months of assistance
      • no longer qualify for assistance
• First two years of employment
      • 35% qualified first-year wages
      • 50% of qualified second-year wages
• On first $10,000 of wages each year
      • maximum $8,500 for any employee
• Cash plus certain benefits
• Effective: begin work aft 1997 bef 12/31/01
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                    New Child Tax Credit


 • A child tax credit of $400 (1998), $500
   (1999-2000), $600 (2001)
       – child, stepchild, foster child under 17
         claimed as dependent
       – phased out of $50 for each $1000 over
         threshold of $110,000 (MFJ), $75,000
         unmarried individuals, $55,000 (MFS)
       – non-refundable unless 3 or more
         children

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       Child Related Tax Relief-New Law
• Increase and Expand Child Tax Credit for dependent
  children under age 17
  –   $600 for 2001-2004
  –   $700 for 2005-2008
  –   $800 for 2009
  –   $1,000 for 2010 and later
• Child Credit is refundable
  – 10% of earned income over $10,000 for 2001-2004
  – 15% of earned income over $10,000 in 2005 and later
  – Taxpayers with 3 qualifying children
       • credit is refundable to extent of social security taxes paid
  – Refundable credit not reduced by AMT in 2002 and later
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         Child Credit Example-New Law
• Married filing joint with two children with wage
  income of $20,000 in 2001
    –   Wages                                     $20,000
    –   Less standard deduction                     (7,600)
    –   Less exemptions ($2,900 x 4)               (11,600)
    –   Taxable income                            $ 800
    –   Tax ($5,800 x 15%)                        $ 120
    –   Child credit ($600 x 2)                   $ (1,200)
    –   Excess of credit over tax                 $ (1,080)
    –   Refund limited                            $ (1,000)**

**Refundable credit limited to 10% x ($20,000 - $10,000) or $1,000
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                     Higher Education Credit

• Hope Credit (Nonrefundable)
   – For first two years of individual’s post-
     secondary education (after 1997)
   – 100% of first $1,000 and 50% next $1,000
         • $1,500 annual limitation, $3,000 overall limit
   – Must be enrolled 1/2 normal full-time for one
     or more semester during year
   – Convicted drug related felons don’t qualify
   – Phase out $80,000-$100,000(MFJ) and
     $40,000-$50,000 for individuals
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                     Higher Education Credit

• Lifetime Learning (LL) - nonrefundable
   – Equal to 20% of $5,000 ($10,000 aft 2002) of
     post-secondary expenditures paid during year
         • generally limited to tuition and academic fees
   – Effective for expenses after 6/30/98
   – Elective
         • If Hope credit claimed can’t use LL
   – If married must file MFJ
   – Phase out $80,000-$100,000(MFJ) and
     $40,000-$50,000 for individuals
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         Deduction for Qualified Education
               Expenses- New Law
• New above-the-line deduction allowed for
  qualified higher education expenses
  – As defined for purposes of education credits
• Limit in 2002-2003
  – $3,000 if AGI is not over $65,000 ($130,000 MFJ)
• Limit in 2004-2005
  – $4,000 if AGI is not over $65,000 ($130,000 MFJ)
  – $2,000 if AGI is not over $80,000 ($160,000 MFJ)
• Effective for 2002 through 2005
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                    Other Tax Credits

 • Adoption expenses credit
       – Credit for qualified adoption expenses
         incurred in adoption of eligible child
            • Examples of expenses: adoption fees, court
              costs, attorney fees
       – Maximum credit is $5,000 ($6,000 in
         case of special needs child)
            • Credit is phased-out ratably for modified
              AGI between $75,000 and $115,000
       – After 2001 will only be available for
         adoption of special needs children
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     Miscellaneous Provisions-New Law

• Adoption tax credit and exclusion for
  employer-provided adoption assistance
  – Made permanent
  – Increased to $10,000
  – Increased beginning phase out from $75,000 to
    $150,000 of modified adjusted gross income
  – Credit is allowed against AMT
  – Effective in 2002 and later

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                       Estimated Tax Payments

• Calendar year individuals must make quarterly
  estimates on April 15, June 15, September 15
  of current and January 15 of following year
• To avoid penalty estimates must be lesser of:
  – 90% of current year tax liability
  – 100% of prior year if AGI less than $150,000
       • if $150,000 or more
             – 1999 estimates must be 105% of 1998 tax liability
             – 2000 estimates must be 108.6% of 1999 tax liability
             – 2001 estimates must be 110% of 2000 tax liability

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              Pension and IRA Provisions-
                       New Law
• Temporary Contribution Tax Credit
  – Lower income workers entitled to credit for
    contributions to cash-or-deferred arrangement
    including Roth IRAs
  – Amount is lesser of contribution or $2,000 x rate
      • 50% credit for MFJ with AGI less than $30,000
      • 20% MFJ $30,000-$32,500
      • 10% MFJ $32,500-$50,000
  – Effective for years 2002 through 2006

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