Transcript Chapter 1- Instructor PowerPoint Slides. Summer, 2008
Chapter 8
Income Taxation of Individuals.
Exemptions.
Itemized Deductions, Credits Howard Godfrey, Ph.D., CPA UNC Charlotte Copyright © 2014, Dr. Howard Godfrey Edited October 7, 2014.
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Part 1. Introduction Part 2. Exemptions – Personal, Dependency Part 3. Filing Status – Joint, Separate, Single, Head of Household Part 4. Deductions From AGI – Std. Deduction, Itemized deduction Part 5. Limits – High income taxpayers’ deductions, Part 6. Standard deduction for children, Kiddie tax Part 7. Tax Credits – Child Credit, Earned income credit, Dependent care, Higher Education Part 8. Filing requirements
General Tax Formula-2013 Gross Income $110,000 Deductions For A.G.I.
(10,000) Adjusted Gross Income (AGI) 100,000 Exemptions $3,950 Regular Item. Ded.
Misc. Item. Ded.
5,000 Less 2% of AGI (2,000) Deductible Amount Total Deductions From AGI Taxable Income (7,900) (13,100) 3,000 (18,000) $82,000
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Individual Income Tax Model Gross income Less: Deductions for AGI Equals: Adj. Gross Income (AGI) Less: Standard deduction Less: or Itemized deductions Personal & dependency exemptions Equals: Taxable income
Taxable income
Times: Tax rate Equals: Gross income tax liability Less: Tax credits Plus: Additions to tax Less: Tax prepayments Equals: Net tax due or tax refund
Mr. and Ms. Jones of $60,000. have combined salaries Their only expenditures affecting the tax return are state income taxes of $6,000, mortgage interest of $7,000 and real estate taxes amounting to $1,000. They have two small children whom they support, and file a joint return. What is their taxable income for 2014 ?
Mr. and Ms. Jones Gross income Deduct. for AGI Adj. Gross Income Less: 1a. Itemized Ded.
1b. Standard Ded.
Itemized or Std. Ded.
2. Exemptions Taxable Income $60,000 60,000
Mr. and Ms. Jones Gross income Deduct. for AGI Adj. Gross Income Less: 1a. Itemized Ded.
1b. Standard Ded.
Itemized or Std. Ded.
2. Exemptions Taxable Income 4 14,000 12,400 3,950 $60,000 60,000 (14,000) (15,800) $30,200
Taxation of Individuals.
Introduction Limits-High-Income TP Pers & Dep. Exempt. Exempt. & St. Ded. Limits
Dependency Req.
for Dependents Filing Status
Jointly
Calculating Tax Liability
Unearned Income-Child Separate Single Head of Household
Ded. from AGI
Standard Deduction Itemized Deductions Income Tax Credits
Filing Requirements Summary Appendix to Chapter 8
Schedule EIC EIC Table-2012
Exemptions Personal Dependents
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Exemptions- Sec. 151, 152
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Each taxpayer (who is not a dependent) is entitled to one personal exemption Exemption deduction is $3,950 for 2014 Additional exemptions allowed for each person who is considered a dependent
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Anyone who is claimed as a dependent cannot claim a personal exemption
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For purposes of the dependency exemption, a dependent is a qualifying child or qualifying relative
Requirements – all dependents. Sec. 152(b) Must meet these tests 1. You may not claim an exemption for yourself, if you are the dependent of another taxpayer 2. Citizenship test – U.S. or contiguous country 3. Joint Return. Married individual who files a joint return generally is not a dependent of another person
Qualifying Child. Sec. 152(c) Must meet these tests 1. Residency test - live with taxpayer more than 6 months 2. Relationship test – child of taxpayer- or descendent of such child - brother, sister, stepbrother or stepsister of taxpayer, or descendant (of any of these relatives) 3. Age test - under 19 (or under 24 if full-time student) Disabled individual has no age test.
4. Support test - child cannot provide more than half his own support.
Qualifying Relative- Sec. 152(d) These tests must be met: 1. Relationship test - must either be a qualifying relative of the taxpayer or a resident in the taxpayer’s household for the entire year 2. Gross income test - the qualifying relative's gross income from ($3,950 for 2014) taxable sources must be less than the exemption amount 3. Support test (provided by taxpayer) 4. Not a qualifying child for any taxpayer
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Qualifying Relative Support Test Taxpayer must provide more than 50% dependent's total support of the
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Support includes amounts spent for food, clothing, shelter, medical care, education and capital expenditures such as a car
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Value of services and scholarship funds are omitted in determining support received by a student
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Dependent’s nontaxable income used for support must be included in support determination
Dependency Exemptions-Joseph-1 Joseph provides $12,000 of support for his mother, Miriam , who lives in his house. Miriam is a U.S. citizen and single. Miriam’s only income is Social Security of $5,000 and taxable pension income of $4,000.
Miriam uses the Social Security income for support but puts all of the pension income into her savings account.
Dependency Exemptions-Joseph-2 Joseph also provides $6,000 of support for his 22-year-old son, Mike, who is a full-time student attending college on a basketball scholarship. The balance of Mike’s support comes from a scholarship that pays Mike's $10,000 tuition and fees for the year. How many dependents can Joseph claim on his tax return?
Dependency Exemptions-Joseph-3
One
. Miriam is not a child of Joe she cannot be a qualifying child. Her gross income ($4,000) is above the $3,950 limit so she does meet the gross income test.
Tax-free income not in gross inc. Mike is a qualifying child so he qualifies as a dependent.
Multiple Support Agreement
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Multiple support agreements allow one member of group of support providers to claim the exemption when
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Together the group meets support test
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All other dependency tests are met
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Member who claims exemption must provide more than 10% of the total support and other members providing more than 10% support agree to exemption
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Phaseout of Exemptions Personal and dependency exemptions are phased out at a rate of 2% (for each $2,500 (or fraction thereof) ($1,250 for MFS)of AGI above thresholds:
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$254,200 if single
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$279,650 if head of household
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$305,050 if married filing jointly or surviving spouse
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$152,525 if married filing separately
Exemption Phaseout 1) (AGI – threshold AGI)/$2,500 = Phase-out Factor (always round up to next whole
number)
2) Phase-out Factor x 2 = Phase-out Percentage 3) Exemption Amount – Exemption Reduction = Allowable Exemption Deduction
Phaseout of Exemptions What is the total deduction for personal and dependency exemptions for the following taxpayers?
Married filing jointly with two dependents and AGI of $400,000
Exemption Phase-out Adjusted gross income Threshold Joint Amount above threshold Layer amount ($2,500 or $1,250) Number of layers Number of Layers rounded up Disallowed % (2% per layer) 2014 $400,000 $305,050
Exemption Phase-out Adjusted gross income Threshold Amount above threshold Joint Layer amount ($2,500 or $1,250) Number of layers Number of Layers rounded up Disallowed % (2% per layer) Exemption amount Number of exemptions Total exemptions before phase-out Exemption Deduction Disallowed 2014 $400,000 $305,050 $94,950 $2,500 37.98
38.0
76.00%
Exemption Phase-out Adjusted gross income Threshold Amount above threshold Joint Layer amount ($2,500 or $1,250) Number of layers Number of Layers rounded up Disallowed % (2% per layer) Exemption amount Number of exemptions Total exemptions before phase-out Exemption Deduction Disallowed 2014 $400,000 $305,050 $94,950 $2,500 37.98
38.0
76.00% $3,950 3 $11,850 $9,006
Filing Status Joint Separate Single Head-Household
Filing Status
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Taxpayer’s filing status determines standard deduction and tax rate schedule
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Marital status determined on the last day of the tax year
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Separated spouses are considered married until divorce becomes final.
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Filing Status - Married Can file jointly if both spouses are US citizens or US residents (or if nonresident alien agrees to be taxed on worldwide income) If the couple files separately , both must itemize deductions or both must use the standard deduction.
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Surviving Spouse Marital status is determined at the date of death so a joint return can be filed for the year in which a spouse dies A surviving spouse may continue to use the tax rates and standard deduction for married persons filing jointly for the next 2 years only if a dependent child lives with the taxpayer
Filing Status – Unmarried Unmarried taxpayers file as
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Head of household - an unmarried person who provides more than half of the cost of maintaining a home in which a qualifying child or other qualifying relative lives for more than half the year
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Single
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Head of Household Claimed if taxpayer is unmarried (and not a surviving spouse) Taxpayer pays more than half the cost of maintaining home which is the principal residence for more than half the year of 1) A qualifying child 2) An individual for whom the taxpayer may claim a dependency exemption
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A parent is not required to live with taxpayer
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Abandoned Spouse A taxpayer who is married but whose spouse did not live with him or her at any time during the last six months year and of the tax who provides more than half the cost of maintaining the home in which a dependent child lives A qualifying abandoned spouse uses head of household tax rates and standard deduction
Deductions From AGI
Standard Deduction - OR Medical Expenses Taxes Interest Charitable Contributions Miscellaneous Deductions
Standard Deduction. Cover $6,200 single individual $12,400 married - joint return, Also S.Sp.
$6,200 married filing separately $9,100 head of household Additional standard deduction if taxpayer is elderly (age 65 or older) or blind $1,550 if single or head of household $1,200 if married or surviving spouse
Standard Deduction
Harry and Silvia, a married couple, are both age 67 and legally blind. What is their standard deduction for 2014?
Standard Deduction Harry & Silvia-Married Basic Standard Ded.
Additional Std. Ded.
Amount Number Year: 2014 Total Std. Deduction
Standard Deduction Harry & Silvia-Married Basic Standard Ded.
Additional Std. Ded.
Amount Number $1,200 4 Joint Year: 2014 $12,400 4,800 Total Std. Deduction $17,200
Itemized Deductions
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Itemized deductions provide tax benefit only to the extent that, in total, they exceed the taxpayer ’ s standard deduction
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Taxpayers can maximize use of the standard deduction and itemized deductions by timing certain deductible payments
Medical Expenses-Sec. 213-1
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Medical expenses paid for the taxpayer, spouse & dependents, after reduction for insurance reimbursements, are deductible only to the extent they exceed 10% of AGI for the year.
Medical Expenses-2
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Qualified medical costs includes prescription drugs and insulin, costs of a hospital, clinic, doctor, dentist, eyeglasses, contract lenses, transportation for medical care and health insurance costs.
Medical Expenses-3
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Health insurance premiums for taxpayers and their dependents are deductible only if paid from after-tax income
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Premiums paid through an employer-sponsored cafeteria plan are not deductible
Medical Expenses-4 Premiums for disability insurance and for loss of life, limb or income are not deductible Premiums for long-term care insurance are deductible, subject to limits based on age
Medical Expense Deduction Daniel's AGI is $90,000. He incurred $14,000 of medical expenses and was reimbursed for $3,000 of these expenses. What is his allowable medical expense deduction if he itemizes?
Dan Daniels
Adjusted Gross Income Med. Expenses Reimbursements 14,000 $90,000 Net Less: 10% of AGI Deduction
Dan Daniels
Adjusted Gross Income Med. Expenses Paid Reimbursements 14,000 (3,000) Net Subtract 10% of AGI 11,000 (9,000) Deduction - Med. Expenses $90,000 $2,000
Taxes – Sec . 164
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Deductible taxes include
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State, local, & foreign real property taxes
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State & local personal property taxes
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State, local, & foreign income taxes
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Other federal, state, local, and foreign taxes incurred in a business or other income producing activity
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Can elect to deduct state & local general sales taxes instead of state & local income taxes
Tax Deduction from AGI?
State income tax Federal income tax County real estate tax Inspection fee for car he uses only personally Homeowners’ association fees on personal home Gift Tax Self-employment tax Total Paid 12,000 2,000 50 Deduct $3,000 $3,000 $2,000 500 2,000 1,000 $20,550 $5,000
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Nondeductible Taxes Federal income taxes Employee's share of payroll taxes Federal excise taxes not incurred for business State & local sales taxes on goods for personal use Assessments on property that increase property value
Tax Benefit Rule-1 In 2013, Rebecca and Gregory, a married couple, filed a joint return with AGI of $70,000 and total allowable itemized deductions of $11,000, which included state income taxes paid of $3,100. They received a $900 refund of state income taxes in April 2014.
How much of the state income tax refund must they include in income and in which year do they include it?
Tax Benefit Rule-2 Zero. Their itemized deductions of $11,000 did not exceed their standard deduction of $12,200. As there was no tax benefit derived from deducting state income taxes, none of the refund is included in income.
Tax Benefit Rule-3 If their total itemized deductions for 2013 had been $13,000, then $800 ($13,000 - $12,200 standard deduction) of the $900 refund would be included in income in 2014. If their itemized deductions had been $14,000 or more, the entire $900 refund would be included in income in 2014.
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Interest Expense- Sec. 163 Deductible interest includes
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Investment interest
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Home mortgage interest No deduction loan interest) for most other personal interest such as interest on auto loans, life insurance loans, credit card debt, and delinquent tax payments (except previously mentioned student
HW-30 Interest Expense-1 Pablo & Adriana, a married couple (joint return), buy a $190,000 home by paying $38,000 cash down and taking a mortgage for the balance of the purchase price. The mortgage company charges them $3,000 in points for originating the loan that they pay at closing. They pay $7,000 in interest on the mortgage this year. They also purchase a new car this year for $28,000 by taking out a car loan from their credit union. They paid $975 in interest on the car loan this year. How much can Pablo and Adriana deduct for interest expense this year if they itemize their deductions?
Interest Expense-1 Pablo & Adriana file jointly Bought home at cost of Made down payment of Gave mortgage of Paid points at closing of Facts $190,000 38,000 152,000 3,000 Mortage interest paid Bought new auto for 7,000 28,000 Financed auto with loan 28,000 Auto interest paid Interest expense deduction?
975 Deduct?
Interest Expense-1 Pablo & Adriana file jointly Bought home at cost of Made down payment of Gave mortgage of Paid points at closing of Mortage interest paid Facts $190,000 38,000 152,000 3,000 7,000 Bought new auto for Financed auto with loan 28,000 28,000 Auto interest paid Interest expense deduction?
975 Deduct?
3,000 7,000 $ 10,000
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Investment Int. Expense-1 Investment interest includes interest on loans to acquire or hold investment property and margin account interest paid to a broker.
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Investment Interest Expense-2 Investment interest expense is only deductible to the extent of net investment income.
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Net investment income = excess of investment income over investment expenses.
Excess is carried forward (indefinitely) subject to same limit in future years.
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Qualified Residence Interest- Sec. 163(h)(3) Interest paid for acquisition debt or home equity debt for up to 2 qualified residences Interest on acquisition debt of up to $1 million principal amount (combined limit for 2 homes) is deductible
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Acquisition debt includes mortgage to buy, construct, or improve the residence.
Qualified Residence Interest
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Interest on up to $100,000 principal amount of home equity loan is deductible
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Loan proceeds can be used for any purpose
Qualified Residence Interest
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Points (loan origination fees) paid on initial home mortgages are deductible
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Points paid to refinance an exiting loan must be amortized over life of loan.
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Charitable Contributions – Sec. 170 Congress allows individuals, corporations, estates and trusts to deduct contributions to certain qualified organizations.
Partnerships & S corps pass the contributions through to partners and shareholders who then claim deductions on their own tax returns.
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Charitable Contributions Qualified charitable organizations
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Gov. units (federal, state and local govt.) and entities formed and operated exclusively for religious, charitable, scientific, literary or educational purposes, including churches, nonprofit hospitals, school and universities, libraries, and social service agencies Direct contributions to needy individuals are not deductible
Charitable Contributions
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No deduction allowed to the extent that valuable goods or services are received in return for the contribution
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Exception - contributors to universities who receive preferred rights to purchase tickets for university athletic events may deduct 80% of the amount of their contribution.
Charitable Contributions
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Individuals can deduct up to 50% of AGI
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Excess contributions may be carried forward up to 5 years
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Charitable Contributions No deduction for contributions of the taxpayer ’ s services and rent-free use of the taxpayer ’ s property
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Out-of-pocket costs incurred for volunteer work for a qualifying charity are deductible Property other than long-term capital gain property is valued at lesser of FMV or basis
Contributions of LTCG Property
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LTCG property is valued at FMV (which is often greater than adjusted basis)
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Tangible personalty given to a charity which does not use the property in its tax-exempt activity is valued at the lower adjusted basis
Contributions of LTCG Property
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Deduction for LTCG property valued at FMV is limited to 30% of AGI
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30% limit can be avoided (and 50% AGI limit applied) if taxpayer elects to use lower basis
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If made, election applies to all LTCG contributions that year
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Charitable Contributions Stocks or other income producing property that have declined in value should be sold so that the loss can be claimed with the sale proceeds donated Fees incurred for appraisals of donated property may be deducted as a misc. itemized deductions Deduction for donated vehicles sold by charity limited to gross sales proceeds
Charitable Contributions-1 Arnold, a single individual, has adjusted gross income of $65,000 in the current year. Arnold donates the following items to his favorite qualified charities: $5,000 cash to the athletic department booster club at State University. This contribution gives him the right to purchase preferred seats to all home games. The value of this preferred right is $900.
Charitable Contributions-2 ABC stock acquired six years ago at a cost of $6,000. FMV at date of contribution was $22,000.
Personal clothing items purchased two years ago at a cost of $1,000. FMV at the date of contribution was $400.
Charitable contribution in the current year?
Arnold Adj. Gross Income Cash to Athletic Club Deduction limit - 80% ABC Corp. stock (L.T.) Cost-2000 FMV-2013 Deductible Amount Clothing Cost FMV Data $65,000 5,000 Return 6,000 22,000 1,000 400
Arnold Adj. Gross Income Data $65,000 Cash to Athletic Club Deducion limit - 80% ABC Corp. stock (L.T.) Cost-2000 FMV-2013 Ded. limit - 30% AGI Clothing Cost FMV Deduction (Limit-50% AGI) 5,000 6,000 22,000 1,000 400 Return $4,000 19,500 400 $23,900
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Miscellaneous Deductions Only excess over 2% of AGI is deductible
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Unreimbursed employee business expenses
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Job hunting expenses (in searching for a new job in current line of business)
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Investment-related expenses
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Hobby expenses (up to hobby income)
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Tax preparation and planning advice
Deduction Limits High income taxpayers’ deduction Standard deduction for dependent children Kiddie tax
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Phase-out of Itemized Deductions
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Total deductions phased out by 3% of AGI in excess of $305,050 (Joint) in 2014 (single $254,200) Exception - deductions not phased out:
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Medical expenses
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Investment interest
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Casualty and theft losses Total deductions are not reduced by more than 80% regardless of type
Limit on itemized ded.
Joint Adjusted gross Income
Pg. 8-21
Threshold Excess Total itemized deductions Expenses Not Phased-Out (1) 2014 $325,000 $305,050 $19,950 $22,000 12,000 Expenses Subject to Phase-Out 3% of excess (line 2) 3% 80% of affected deductions Lesser of two amounts above Total Itemized Deductions $10,000 (1) Medical, Inv. Int., Gambling & Casualty losses.
Limit on itemized ded.
Joint Adjusted gross Income
Pg. 8-21
Threshold Excess Total itemized deductions Expenses Not Phased-Out (1) 2014 $325,000 $305,050 $19,950 $22,000 12,000 Expenses Subject to Phase-Out 3% of excess (line 2) 3% 80% of affected deductions Lesser of two amounts above Total Itemized Deductions $10,000 599 8,000 599 21,402 (1) Medical, Inv. Int., Gambling & Casualty losses.
Dependent’s Standard Deduction Dependent ’ s standard deduction is limited to the greater of: 1) $1,000 (in 2014) or 2) Earned income + $350 (up to otherwise allowable standard deduction)
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Earned income includes salary and wages
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Earned income does not include interest income, dividend income, capital gains, or income as beneficiary of a trust
Dependent’s Taxable Income Scott is 15 years old and qualifies as a dependent on his parents' tax return. In 2014 he earned $2,200 from a part-time job and received $1,200 of dividend income on stock given to him by his aunt. What is Scott’s taxable income?
Scott Wages Dividend Income Adjusted Gross Income Standard Deduction: Greater of: 1. Base deduction 2. Earned income + $350 Taxable Income 2014 $2,200 1,200 3,400
Scott
Wages Dividend Income Adjusted Gross Income Standard Deduction: Greater of: 1. Base deduction 2. Earned income + $350.
Taxable Income 1,000 2,550 2014 $2,200 1,200 3,400 2,550 $850
K is 8 years old and single. She is claimed as a dependent on her parents' return. She had interest income of $2,050. Her parents have taxable income of $150,000. What is her taxable income for 2014?
Child's Income (Age 8) Earnings from job Interest on savings, etc.
Gross Income Less Deduct for AGI Adjusted Gross Income Personal Exemption Std Ded. -Unearned Income Std Deduction - Excess Total Standard Deduction Taxable Income $0 2,050 2,050 2,050 0 (1,000) (1,000) 1,050
Unearned Income Information Earned Total Income Income Child's Income (Age 8) Earnings from job Interest on savings, etc.
Gross Income Less Deduct for AGI Adjusted Gross Income Personal Exemption Std Ded. -Unearned Income 2,050 2,050 2,050 0 (1,000) Std Deduction - Excess Total Standard Deduction Taxable Income Taxable Amount & Tax At Child's rates At Parent's Rates Child's tax before credits (1,000) 1,050 1,000 50 Parents' taxable income & marginal tax rate 2,050 2,050 2,050 0 (1,000) 0 (1,000) 1,050 1,000 50 150,000 Tax Return Tax Rate Tax 10% 28% 28% $100 14 $114
Tax Credits
Child Credit Earned income Dependent care Higher Education
Credits vs. Deductions
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Deductions only reduce tax liability by a percentage based on the taxpayer’s marginal tax rate Credits are direct dollar-for-dollar reductions in the gross tax liability
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Tax credits have the same dollar value to all taxpayers, regardless of their marginal tax brackets
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• Child Tax Credit-1
$1,000 nonrefundable tax credit for each qualifying child under age 17
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Qualifying children include the taxpayer’s son, daughter, stepson, stepdaughter, grandchild, or eligible foster child that the taxpayer claims as a dependent
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Note: under a separate computation, some of the credit may be refundable.
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Child Tax Credit-2 •
Phased out at rate of $50 for every $1,000 (or part thereof) of AGI in excess of
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$110,000 if married filing jointly ($55,000 if MFS)
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$75,000 if single or head of household
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Child Tax Credit Cindy files as head of household and has three dependent children ages 12, 14, and 16. Her AGI is $80,000. Cindy child tax credit?
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Child Credit Adjusted Gross Income Amount of credit per child Number of children under 17 Total credit before phaseout Phase Out Threshold AGI above Threshhold Number of layers at $1,000 Phaseout per layer Phase-out Child Credit $ 80,000 1,000 3 3,000
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Child Credit Adjusted Gross Income Amount of credit per child Number of children under 17 Total credit before phaseout Phase Out Threshold AGI above Threshhold Number of layers at $1,000 Phaseout per $1,000 layer Phase-out Child Credit $75,000 $5,000 5 $50 $ 80,000 1,000 3 3,000 250 $2,750
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Earned Income Credit
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The earned income credit provides tax relief to low-income taxpayers
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Credit is refundable
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The taxpayer may receive a refund if the credit exceeds the tax liability
Earned Income Credit Eligibility Requirements
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Taxpayer or spouse
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Must live more than half the year in the U.S.
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Must be older than 24 and younger than 65
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Cannot be a dependent of another
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May not have portfolio or passive income in excess of $3,400 (2014) Married taxpayers must file jointly
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Earned Income Credit Amount Amount of the credit depends on
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The taxpayer’s earned income
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Phased-out after maximum limit is reached
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The number of qualifying children living in the taxpayer’s home
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Child must be less than 19 years old (24 if full-time student)
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Must be a natural, step, or foster child and reside with taxpayer more than half of the year
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Amount is determined using an IRS table
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Dependent Care Credit. Sec. 21. -1
Nonrefundable credit for taxpayers who pay for child or dependent care so they can work
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Dependent Care Credit -2 Credit percentage varies from 20% to 35% of up to $3,000 (1 qualifying child) or $6,000 for 2 or more qualifying children under 13
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35% if AGI does not exceed $15,000
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Reduced by 1% for each $2,000 (or fraction thereof) AGI exceeds $15,000
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Minimum credit rate is 20% if AGI exceeds $43,000
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Credit is not refundable
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Dependent Care Credit-Jane June is a single individual with AGI of $45,000. June has a five-year-old son who is in day care while she works.
a. How much can she claim for the dependent care credit if she spends $5,000 for child care during the year?
b. How much can she claim for the dependent care credit if she spends $3,000 for child care during the year?
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Dependent Care Credit Number of dependents Childcare Costs 1 $5,000 $45,000 Earnings - Parent 1 Earnings - Parent 2 Total wages Max. subject to credit Credit rate Credit $45,000
Dependent Care Credit Number of dependents Childcare Costs 1 $5,000 $45,000 Earnings - Parent 1 Earnings - Parent 2 Total wages Max. subject to credit Credit rate Credit $45,000 $3,000 20% $600
Education Credits-1 Two elective (possibly refundable) tax credits for college tuition & fees for the taxpayer, spouse, or dependents
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(AOTC) (old Hope Credit) – 100% of first $2,000 and 25% of second $2,000 tuition and fees for first 4 years of college. (maximum $2,500 per student per year )
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Lifetime Learning Credit – 20% of up to $10,000 spent for tuition & fees (max. $2,000 per taxpayer (family) )
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A student who is a dependent cannot claim the credit. Parent, etc. gets the credit for expense paid by child Note: with first credit, if you spend $2,000, you get a credit of $2,000. Now so with the second one.
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• • •
Education Credits-2 Expenses paid with a Pell Grant, scholarship, or employer-provided educational assistance do not qualify The election is separate for each student, so a parent may choose one credit for one child and a different credit for a second child Both credits phase out is AGI is above threshold.
AOTC (previously the Hope Scholarship credit) $80,000 to $90,000, or $160,000 to $180,000 (Joint) LLC (Lifetime Learning Credit) $54,000 - $64,000, or $109,000 - $129,000 (Joint)
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Example 57 in text Exp. subject to credit Our Education Cost Credit percentage Amount Credit before phaseout AOTC (Hope) 100% of 25% of First $2000 Next $2,000 2,000 1,200 100% $2,000 25% $300 2,300 Life-Time Learn. Credit 20% of maximum expense of $10,000 4,500 20% $900 900 Phase Out Adjusted Gross Income Threshold starts at Threshold range AGI above Threshhold Reduction % Percent allowed Credits allowed $110,000 $160,000 $20,000 $0 0% 100% $2,300 Cost of books allowed for Hope, but not for LLC $110,000 $109,000 $20,000 $1,000 5% 95% $855
Excess FICA
What happens when you work for two companies and they each withhold FICA, resulting in excess withholding? [You earned $40,000 for the first company and $84,000 for the second company.]
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Excess FICA (2017) Wages Rate FICA 6.20% Medicare 1.45% Co. 1 $40,000 2,480 580 3,060 Co. 2 Total $84,000 $124,000 5,208 1,218 6,426 $7,688 $1,798 9,486 Correct Totals: Rate FICA 6.20% Medicare 1.45% Wages Tax Refund - See Form 1040-Line 69
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Excess FICA (2017) Wages Rate FICA 6.20% Medicare 1.45% Co. 1 $40,000 2,480 580 3,060 Co. 2 Total $84,000 $124,000 5,208 1,218 6,426 $7,688 $1,798 9,486 Correct Totals: Rate FICA 6.20% Medicare 1.45% Wages 117,000 120,000 Refund - See Form 1040-Line 69 Tax 7,254 1,740 8,994 $492
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Filing Returns
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Payment of Income Tax Estimated quarterly payments are made by persons with large amounts of income from sources not subject to withholding
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Due on April 15, June 15, September 15 of current year and January 15 of following year If payments are not 90% or more of the total tax owed (or an amount required based on the prior year than $1,000 ’ s tax), a penalty may be charged, unless balance due is less
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Filing Requirements Any taxpayer whose gross income is less than the sum of the standard deduction and the personal exemption (but not dependency exemptions) does not have to file a tax return
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$10,150 in 2014 for a single individual
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$20,300 in 2014 for married filing jointly Returns should be filed if 1) Net self-employment income is $400 or more 2) A child claimed as a dependent has unearned income only of over $1,000 3) Any married person filing separately has income over $3,000
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