Individual Income Taxes (13)

• 40% if employee has completed at least 400 hours of service to employer • 25% if at least 120 hours of service
– Deduction for wages is reduced by credit amount
1
The Big Picture
• Tom and Jennifer Snyder have two dependent children in college.
– Lora is a freshman
• Her tuition and required fees in 2013 total $14,000. • She has a scholarship amounting to $6,500, and the Snyders paid the balance of her tuition ($7,500), plus room and board of $8,500.
(slide 2 of 5)
• Incremental research activities credit
– Credit amount = 20% × (qualified expenditures – base amount)
Chapter 13
Tax Credits and Payment Procedures
Individual Income Taxes
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– 20% for nonresidential and residential certified historic structures – 10% for other structures originally placed into service before 1936
8
Rehabilitation Expenditure Credit
• Includes the following:
– – – – – – Tax credit for rehabilitation expenditures Work opportunity tax credit Research activities credit Low-income housing credit Disabled access credit Credit for small employer pension plan startup costs – Credit for employer-provided child care
5
General Business Credit (slide 1 of 2)
• Comprised of a number of business credits combined into one amount • Limited to net income tax reduced by greater of:
– 40% in first year – 50% in second year
• Maximum credit per qualified employee is $9,000
– Deduction for wages is reduced by credit amount
14
Research Activities Credit
• Qualified rehab expenditures do not include the cost of the building and related facilities or cost of enlarging existing building
9
Rehabilitation Expenditure Credit
(slide 1 of 5)
• Comprised of three parts
– Incremental research activities credit – Basic research credit – Energy research credit
15
Research Activities Credit
• Summer youth employees: Only first $3,000 of wages paid for work during 90-day period between May 1 and September 15 qualify for credit
12
Work Opportunity Tax Credit: Long-Term Family Assistance Recipient (slide 1 of 2) • Applies to first 24 months of wages paid to individuals who have been long-term recipients of family assistance welfare benefits
– Long-term is at least an 18 month period ending on hiring date
13
Work Opportunity Tax Credit: Long-Term Fra Baidu bibliotekamily Assistance Recipient (slide 2 of 2) • Maximum credit is a percentage of first $10,000 qualified wages paid in first and second year of employment
– Tentative minimum tax – 25% of net regular tax liability that exceeds $25,000
• Unused credit is carried back 1 year, then forward 20 years
6
General Business Credit (slide 2 of 2)
– Sam is a junior, and the Snyders paid $8,100 for his tuition plus $7,200 for his room and board.
• The Snyders have AGI of $158,000. • They would like to know what tax options are available to them related to these educational expenses.
3
Refundable vs Nonrefundable Credits
(slide 1 of 2)
• Refundable credits
– Paid even if the tax liability is less than amount of credit
4
Refundable vs Nonrefundable Credits
(slide 3 of 3)
• Basis in structure is reduced by the credit amount • Subject to recapture if rehabilitated property held less than 5 years or ceases to be qualifying property
10
Work Opportunity Tax Credit
(slide 1 of 2)
• Applies to first 12 months of wages paid to individuals falling within target groups
– Credit limited to a percentage of first $6,000 wages paid per eligible employee
• Example: $1,000 expenditure: tax benefit of 25% credit compared to tax deduction at various marginal tax rates
MTR 0% 15% 35% Tax benefit if a 25% credit is allowed $250 $250 $250 Tax benefit if tax deduction is allowed –0– $150 $350
7
Rehabilitation Expenditure Credit
(slide 1 of 3)
• Credit is a percentage of expenditures made to substantially rehabilitate industrial and commercial buildings and certified historic structures • Credit rate
2
Tax Credit VS. Tax Deduction
• Tax benefit received from a tax deduction depends on the marginal tax rate of the taxpayer
– Tax benefit received from a tax credit is not affected by the taxpayer’s marginal tax rate
(slide 2 of 3)
• To qualify for credit, building must be substantially rehabilitated meaning qualified rehab expenditures exceed the greater of:
– The adjusted basis of the property before the rehab expenditures, or – $5,000
– They have heard about education tax credits, but they believe that their income is too high for them to get any benefit. – Are they correct?
• Read the chapter and formulate your response.
11
Work Opportunity Tax Credit
(slide 2 of 2)
• Targeted individuals generally subject to high rates of unemployment, including
– Qualified ex-felons, high-risk youths, food stamp recipients, veterans, summer youth employees, and long-term family assistance recipients
(slide 2 of 2)
• 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