1

Chapter 8 Income Taxation

of Individuals.Exemptions.

Itemized Deductions, CreditsHoward Godfrey, Ph.D., CPA

UNC CharlotteCopyright © 2014, Dr. Howard Godfrey

Edited October 7, 2014.

Part 1. IntroductionPart 2. Exemptions – Personal, DependencyPart 3. Filing Status – Joint, Separate,

Single, Head of HouseholdPart 4. Deductions From AGI – Std.

Deduction, Itemized deductionPart 5. Limits – High income taxpayers’

deductions, Part 6. Standard deduction for children,

Kiddie taxPart 7. Tax Credits – Child Credit, Earned

income credit, Dependent care, Higher Education

Part 8. Filing requirements

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General Tax Formula-2013 Gross Income $110,000

Deductions For A.G.I. (10,000) Adjusted Gross Income (AGI) 100,000 Exemptions $3,950 (7,900) Regular Item. Ded. (13,100) Misc. Item. Ded. 5,000

Less 2% of AGI (2,000)Deductible Amount 3,000

Total Deductions From AGI (18,000) Taxable Income $82,000

Gross income Less: Deductions for AGI Equals: Adj. Gross Income (AGI) Less: Standard deduction

or Itemized deductionsLess: Personal & dependency

exemptions Equals: Taxable income

Individual Income Tax Model

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

Taxable income

Mr. and Ms. Jones have combined salaries of $60,000. 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?

Gross income $60,000

Deduct. for AGI

Adj. Gross Income 60,000

Less:

1a. Itemized Ded.

1b. Standard Ded.

Itemized or Std. Ded.

2. Exemptions

Taxable Income

Mr. and Ms. Jones

Gross income $60,000 Deduct. for AGIAdj. Gross Income 60,000Less:1a. Itemized Ded. 14,000 1b. Standard Ded. 12,400

Itemized or Std. Ded. (14,000)2. Exemptions 4 3,950 (15,800)Taxable Income $30,200

Mr. and Ms. Jones

Introduction Limits-High-Income TPPers & Dep. Exempt. Exempt. & St. Ded. LimitsDependency Req. for Dependents

Filing Status Calculating Tax LiabilityJointly Unearned Income-ChildSeparate Income Tax CreditsSingle Filing RequirementsHead of Household Summary

Ded. from AGI Appendix to Chapter 8Standard Deduction Schedule EIC Itemized Deductions EIC Table-2012

Taxation of Individuals.

ExemptionsPersonalDependents

Exemptions- Sec. 151, 152• 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– Anyone who is claimed as a dependent cannot

claim a personal exemption– 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 tests1. Residency test - live with taxpayer more than 6

months2. 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 taxable sources must be less than the exemption amount ($3,950 for 2014)

3. Support test (provided by taxpayer)4. Not a qualifying child for any taxpayer

Qualifying Relative Support Test• Taxpayer must provide more than 50% of the

dependent's total support– Support includes amounts spent for food,

clothing, shelter, medical care, education and capital expenditures such as a car

– Value of services and scholarship funds are omitted in determining support received by a student

– Dependent’s nontaxable income used for support must be included in support determination

Dependency Exemptions-Joseph-1Joseph 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-2Joseph 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-3One. 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• Multiple support agreements allow one

member of group of support providers to claim the exemption when–Together the group meets support test–All other dependency tests are met–Member who claims exemption must

provide more than 10% of the total support and other members providing more than 10% support agree to exemption

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:–$254,200 if single–$279,650 if head of household–$305,050 if married filing jointly

or surviving spouse–$152,525 if married filing separately

Exemption Phaseout1) (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 ExemptionsWhat 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 Joint 2014Adjusted gross income $400,000Threshold $305,050

Amount above threshold

Layer amount ($2,500 or $1,250)

Number of layers

Number of Layers rounded upDisallowed % (2% per layer)

Exemption Phase-out Joint 2014Adjusted gross income $400,000Threshold $305,050

Amount above threshold $94,950

Layer amount ($2,500 or $1,250) $2,500

Number of layers 37.98

Number of Layers rounded up 38.0Disallowed % (2% per layer) 76.00%

Exemption amount Number of exemptions

Total exemptions before phase-outExemption Deduction Disallowed

Exemption Phase-out Joint 2014Adjusted gross income $400,000Threshold $305,050

Amount above threshold $94,950

Layer amount ($2,500 or $1,250) $2,500

Number of layers 37.98

Number of Layers rounded up 38.0Disallowed % (2% per layer) 76.00%

Exemption amount $3,950Number of exemptions 3

Total exemptions before phase-out $11,850Exemption Deduction Disallowed $9,006

Filing StatusJointSeparateSingleHead-Household

Filing Status • Taxpayer’s filing status determines

standard deduction and tax rate schedule

• Marital status determined on the last day of the tax year–Separated spouses are considered

married until divorce becomes final.

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.

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

–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

–Single

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 child2) An individual for whom the taxpayer may

claim a dependency exemption• A parent is not required to live with taxpayer

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 of the tax year and 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 - ORMedical Expenses TaxesInterestCharitable ContributionsMiscellaneous 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 DeductionHarry and Silvia, a married couple, are both age 67 and legally blind. What is their standard deduction for 2014?

Standard DeductionHarry & Silvia-Married Year: 2014Basic Standard Ded.Additional Std. Ded.

Amount Number

Total Std. Deduction

Standard Deduction JointHarry & Silvia-Married Year: 2014Basic Standard Ded. $12,400Additional Std. Ded.

Amount Number$1,200 4 4,800

Total Std. Deduction $17,200

Itemized Deductions• Itemized deductions provide tax

benefit only to the extent that, in total, they exceed the taxpayer’s standard deduction

• Taxpayers can maximize use of the standard deduction and itemized deductions by timing certain deductible payments

Medical Expenses-Sec. 213-1• 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• 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• Health insurance premiums for

taxpayers and their dependents are deductible only if paid from after-tax income–Premiums paid through an

employer-sponsored cafeteria plan are not deductible

Medical Expenses-4Premiums 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 DeductionDaniel'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 DanielsAdjusted Gross Income $90,000

Med. Expenses 14,000

Reimbursements

Net

Less: 10% of AGI

Deduction

Dan DanielsAdjusted Gross Income $90,000

Med. Expenses Paid 14,000

Reimbursements (3,000)

Net 11,000

Subtract 10% of AGI (9,000)

Deduction - Med. Expenses $2,000

Taxes – Sec . 164•Deductible taxes include

–State, local, & foreign real property taxes–State & local personal property taxes–State, local, & foreign income taxes–Other federal, state, local, and foreign taxes

incurred in a business or other income-producing activity

–Can elect to deduct state & local general sales taxes instead of state & local income taxes

Tax Deduction from AGI? Paid DeductState income tax $3,000 $3,000 Federal income tax 12,000County real estate tax 2,000 $2,000 Inspection fee for car he uses only personally 50Homeowners’ association fees on personal home 500Gift Tax 2,000Self-employment tax 1,000Total $20,550 $5,000

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-1In 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-2Zero. 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-3If 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.

Interest Expense- Sec. 163• Deductible interest includes

–Investment interest–Home mortgage interest

• No deduction 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 loan interest)

HW-30 Interest Expense-1Pablo & 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 Facts Deduct?Bought home at cost of $190,000Made down payment of 38,000 Gave mortgage of 152,000 Paid points at closing of 3,000 Mortage interest paid 7,000 Bought new auto for 28,000 Financed auto with loan 28,000 Auto interest paid 975 Interest expense deduction?

Interest Expense-1

Pablo & Adriana file jointly Facts Deduct?

Bought home at cost of $190,000

Made down payment of 38,000

Gave mortgage of 152,000

Paid points at closing of 3,000 3,000 Mortage interest paid 7,000 7,000 Bought new auto for 28,000

Financed auto with loan 28,000

Auto interest paid 975

10,000$ Interest expense deduction?

Investment Int. Expense-1• Investment interest includes

interest on loans to acquire or hold investment property and margin account interest paid to a broker.

Investment Interest Expense-2• Investment interest expense is only

deductible to the extent of net investment income.–Net investment income = excess of

investment income over investment expenses.

• Excess is carried forward (indefinitely) subject to same limit in future years.

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–Acquisition debt includes mortgage to

buy, construct, or improve the residence.

Qualified Residence Interest• Interest on up to $100,000

principal amount of home equity loan is deductible– Loan proceeds can be used

for any purpose

Qualified Residence Interest• Points (loan origination fees)

paid on initial home mortgages are deductible– Points paid to refinance an

exiting loan must be amortized over life of loan.

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.

Charitable Contributions• Qualified charitable organizations

– 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•No deduction allowed to the extent that valuable goods or services are received in return for the contribution– 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• Individuals can deduct up to 50% of AGI–Excess contributions may

be carried forward up to 5 years

Charitable Contributions• No deduction for contributions of the

taxpayer’s services and rent-free use of the taxpayer’s property–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•LTCG property is valued at FMV (which is often greater than adjusted basis) – 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• Deduction for LTCG property

valued at FMV is limited to 30% of AGI– 30% limit can be avoided

(and 50% AGI limit applied) if taxpayer elects to use lower basis

– If made, election applies to all LTCG contributions that year

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-1Arnold, 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-2ABC 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 Data Return

Adj. Gross Income $65,000

Cash to Athletic Club 5,000Deduction limit - 80%ABC Corp. stock (L.T.)

Cost-2000 6,000FMV-2013 22,000Deductible Amount

ClothingCost 1,000FMV 400

Arnold Data Return

Adj. Gross Income $65,000

Cash to Athletic Club 5,000Deducion limit - 80% $4,000ABC Corp. stock (L.T.)

Cost-2000 6,000FMV-2013 22,000Ded. limit - 30% AGI 19,500

ClothingCost 1,000FMV 400 400

$23,900Deduction (Limit-50% AGI)

Miscellaneous Deductions • Only excess over 2% of AGI is

deductible–Unreimbursed employee business

expenses–Job hunting expenses (in searching for a

new job in current line of business)–Investment-related expenses–Hobby expenses (up to hobby income)–Tax preparation and planning advice

Deduction LimitsHigh income taxpayers’ deductionStandard deduction for dependent childrenKiddie tax

Phase-out of Itemized Deductions• Total deductions phased out by 3% of

AGI in excess of $305,050 (Joint) in 2014 (single $254,200)

• Exception - deductions not phased out:–Medical expenses–Investment interest–Casualty and theft losses

• Total deductions are not reduced by more than 80% regardless of type

Limit on itemized ded. Joint 2014Adjusted gross Income Pg. 8-21 $325,000

Threshold $305,050

Excess $19,950Total itemized deductions $22,000Expenses Not Phased-Out (1) 12,000

Expenses Subject to Phase-Out $10,000

3% of excess (line 2) 3% 80% of affected deductions Lesser of two amounts above Total Itemized Deductions

(1) Medical, Inv. Int., Gambling & Casualty losses.

Limit on itemized ded. Joint 2014Adjusted gross Income Pg. 8-21 $325,000

Threshold $305,050

Excess $19,950Total itemized deductions $22,000Expenses Not Phased-Out (1) 12,000

Expenses Subject to Phase-Out $10,000

3% of excess (line 2) 3% 599

80% of affected deductions 8,000 Lesser of two amounts above 599 Total Itemized Deductions 21,402

(1) Medical, Inv. Int., Gambling & Casualty losses.

Dependent’s Standard DeductionDependent’s standard deduction is limited to

the greater of:1) $1,000 (in 2014) or2) Earned income + $350 (up to otherwise

allowable standard deduction)– Earned income includes salary and wages– Earned income does not include interest

income, dividend income, capital gains, or income as beneficiary of a trust

Dependent’s Taxable IncomeScott 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 2014Wages $2,200Dividend Income 1,200Adjusted Gross Income 3,400Standard Deduction:Greater of:1. Base deduction2. Earned income + $350Taxable Income

Scott 2014Wages $2,200Dividend Income 1,200Adjusted Gross Income 3,400Standard Deduction:Greater of:1. Base deduction 1,000 2. Earned income + $350. 2,550 2,550Taxable Income $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 $0Interest on savings, etc. 2,050

Gross Income 2,050Less Deduct for AGIAdjusted Gross Income 2,050

Personal Exemption 0Std Ded. -Unearned Income (1,000)Std Deduction - ExcessTotal Standard Deduction (1,000)

Taxable Income 1,050

Unearned Earned Total TaxIncome Income Income Rate Tax

Child's Income (Age 8)Earnings from job

Interest on savings, etc. 2,050 2,050Gross Income 2,050 2,050Less Deduct for AGIAdjusted Gross Income 2,050 2,050

Personal Exemption 0 0Std Ded. -Unearned Income (1,000) (1,000)Std Deduction - Excess 0Total Standard Deduction (1,000) (1,000)

Taxable Income 1,050 1,050Taxable Amount & Tax

At Child's rates 1,000 1,000 10% $100

At Parent's Rates 50 50 28% 14 Child's tax before credits $114

Parents' taxable income & marginal tax rate 150,000 28%

Information Tax Return

Tax Credits Child CreditEarned incomeDependent careHigher Education

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Credits vs. Deductions• 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 –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–Qualifying children include the

taxpayer’s son, daughter, stepson, stepdaughter, grandchild, or eligible foster child that the taxpayer claims as a dependent

–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– $110,000 if married filing jointly

($55,000 if MFS)– $75,000 if single or head of

household

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Child Tax CreditCindy 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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Adjusted Gross Income 80,000$ Amount of credit per child 1,000 Number of children under 17 3 Total credit before phaseout 3,000

Phase OutThresholdAGI above Threshhold Number of layers at $1,000Phaseout per layerPhase-outChild Credit

Child Credit

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Adjusted Gross Income 80,000$ Amount of credit per child 1,000 Number of children under 17 3 Total credit before phaseout 3,000

Phase OutThreshold $75,000AGI above Threshhold $5,000Number of layers at $1,000 5 Phaseout per $1,000 layer $50Phase-out 250 Child Credit $2,750

Child Credit

Earned Income Credit

• The earned income credit provides tax relief to low-income taxpayers

• Credit is refundable–The taxpayer may receive a refund if

the credit exceeds the tax liability

Earned Income CreditEligibility Requirements

• Taxpayer or spouse–Must live more than half the year in the

U.S.–Must be older than 24 and younger than

65–Cannot be a dependent of another–May not have portfolio or passive income

in excess of $3,400 (2014)• Married taxpayers must file jointly

Earned Income CreditAmount

• Amount of the credit depends on – The taxpayer’s earned income

• Phased-out after maximum limit is reached

– The number of qualifying children living in the taxpayer’s home

• Child must be less than 19 years old (24 if full-time student)

• Must be a natural, step, or foster child and reside with taxpayer more than half of the year

• 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 -2Credit percentage varies from 20% to 35% of

up to $3,000 (1 qualifying child) or $6,000 for 2 or more qualifying children under 13–35% if AGI does not exceed $15,000–Reduced by 1% for each $2,000 (or

fraction thereof) AGI exceeds $15,000–Minimum credit rate is 20% if AGI

exceeds $43,000–Credit is not refundable

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Dependent Care Credit-JaneJune 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?

Number of dependents 1Childcare Costs $5,000

Earnings - Parent 1 $45,000Earnings - Parent 2

Total wages $45,000

Max. subject to creditCredit rate

Credit

Dependent Care Credit

Number of dependents 1Childcare Costs $5,000

Earnings - Parent 1 $45,000Earnings - Parent 2

Total wages $45,000

Max. subject to credit $3,000Credit rate 20%

Credit $600

Dependent Care Credit

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Education Credits-1 Two elective (possibly refundable) tax credits for college tuition & fees for the taxpayer, spouse, or dependents – (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)

–Lifetime Learning Credit – 20% of up to $10,000 spent for tuition & fees (max. $2,000 per taxpayer (family))

–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)

Example 57 in text100% of 25% of

Exp. subject to credit First $2000 Next $2,000Our Education Cost 2,000 1,200 4,500

Credit percentage 100% 25% 20%

Amount $2,000 $300 $900

Credit before phaseout 2,300 900

Phase OutAdjusted Gross Income $110,000 $110,000

Threshold starts at $160,000 $109,000

Threshold range $20,000 $20,000

AGI above Threshhold $0 $1,000Reduction % 0% 5%

Percent allowed 100% 95%

Credits allowed $2,300 $855

Cost of books allowed for Hope, but not for LLC

AOTC (Hope) Life-Time Learn. Credit

expense of $10,00020% of maximum

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Excess FICAWhat 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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Rate Co. 1 Co. 2 TotalWages $40,000 $84,000 $124,000FICA 6.20% 2,480 5,208 $7,688Medicare 1.45% 580 1,218 $1,798

3,060 6,426 9,486Correct Totals:

Rate Wages TaxFICA 6.20%Medicare 1.45%Refund - See Form 1040-Line 69

Excess FICA (2017)

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Rate Co. 1 Co. 2 TotalWages $40,000 $84,000 $124,000FICA 6.20% 2,480 5,208 $7,688Medicare 1.45% 580 1,218 $1,798

3,060 6,426 9,486Correct Totals:

Rate Wages TaxFICA 6.20% 117,000 7,254Medicare 1.45% 120,000 1,740 8,994Refund - See Form 1040-Line 69 $492

Excess FICA (2017)

FilingReturns

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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– 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’s tax), a penalty may be charged, unless balance due is less than $1,000

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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 – $10,150 in 2014 for a single individual – $20,300 in 2014 for married filing jointly

• Returns should be filed if1) Net self-employment income is $400 or more2) 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

The End