Chapter13 - Chapter 13 The Alternative Minimum Tax and Tax...

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Unformatted text preview: Chapter 13 The Alternative Minimum Tax and Tax Credits 1 January 17, 1969 155 With Incomes Over $200,000 Pay Zero Tax in 1967 20 Millionaires Among Those Paying No Tax .Washington D.C., January 17, 1969. In hearings before Congressional officials today, former Secretary of the Treasury Joseph W. Barr testified that 155 people with adjusted gross income above $200,000 paid no tax in 1967. According to IRS statistics, the number of individual income tax returns filed in 1967 was 71.7 million, and the number with adjusted gross income above $200,000 was 15,669. Although only 1 out of every 500,000 persons were able to avoid tax —fewer than one of every hundred taxpayers with income over $200,000—members of Congress present expressed concern. Statement of Joseph W. Barr, January 17, 1969, in Hearings on the 1969 Economic Report of the President before the Joint Economic Committee. Note in 1969 more people wrote to Congress to complain about the 155 people who paid no income tax than had written about the Vietnam war. Alternative Minimum Tax §§ 55-59 4 AMT: What Is It? + − x − Regular taxable income Loopholes (tax preferences) Broader base Exemption Alternative minimum taxable income Rate Tentative AMT Regular tax Alternative minimum tax 5 Russell B. Long, U.S. Senator • A tax loophole is “something that benefits the other guy. If it benefits you, it is tax reform.” • Russell Billiu Long (November 3, 1918 – May 9, 2003) was an American politician who served in the United States Senate as a Democrat from Louisiana from 1948 until 1987. 6 July 1, 2005 The Nontaxpaying Affluent Grew by 15% in One Year July 1, 2005 By DAVID CAY JOHNSTON The number of affluent individuals and married couples who paid no federal income taxes jumped more than 15 percent in 2002, to 5,650, new government data showed yesterday. The chances of having a large income but not paying taxes on any of it are growing, according to the data, issued in the Internal Revenue Service's annual report to Congress on well-to-do Americans who live tax free. About one in every 436 high-income Americans paid no taxes in 2002, up from one in 531 in 2001 and one in 1,010 in 2000. 7 Alternative Minimum Tax Regular taxable income Adjustments and preferences Alternative minimum taxable income Exemption Tax base Rate (26% & 28% individuals; 20% corporations) Tentative alternative minimum tax Regular tax Alternative minimum tax + – x – 8 AMT Rates • Rates for individuals, estates, trusts AMT base over $0 175,000 but not over $175,000 the tax liability is 26% $45,500 + 28% of the amount over 0 $175,000 • Rates for C corporations – 20% of AMTI 9 AMT Exemption • Purpose of exemption • Exemption phase-outs – Reduce by 25¢ for each $1 of AMTI over threshold Exemption Phase-out Taxpayer Amount Threshold MFJ Single C Corps 70,950 46,700 40,000 150,000 112,500 150,000 Phase-out Complete 433,800 299,300 310,000 10 AMT Exemption Example MFJ AMTI = $225,000 Exemption AMTI Threshold given Phaseout Exemption $58,000 225,000 - 150,000 75,000 X 25% (18,750) $39,250 11 AMT History 1969: Add-on minimum tax enacted – Regular tax plus additional tax on certain preferences 1976: Preferences broadened 1979: Preferences narrowed and CG rates reduced. Political compromise was to add AMT. (AMT is calculated differently than regular tax. The greater of AMT or regular tax is used) 12 AMT History 1982: Repeal of add-on minimum tax 1984: Expansion of preferences 1986: AMT expanded – Rates for individuals changed from 20% to 21% – Preferences expanded – Phase-out of exemptions for high income individuals 13 AMT History cont. 1986: AMT expanded – Rates for individuals changed from 20% to 21% – Preferences expanded – Phase-out of exemptions for high income individuals 1991: Rates changed to 24% 1993: New two-tiered rate (26% and 28%) for individuals, estates and trusts 14 AMT History • Effect of TRA ‘86: More individual TPs pay AMT – AMT tax brackets and exemptions not indexed for inflation – Formerly, AMT rate = 20%; top individual rates = 50%; a 30% spread before AMT starts – Now, top effective AMT rate = 28% and top individual rate = 35% (not counting phase-out of lower rates) A 13 % spread, and adjustments were expanded. 15 AMT History • Effect of TRA ‘97: – Even more individuals pay AMT because of new credits that do not reduce the gross AMT • By 2010, approximately 1/3 of all individual tax returns will pay an AMT • Reform of AMT an acknowledged necessity 16 Projected Effects of Individual AMT 17 Projected Effects of Individual AMT 18 Cost of Repealing Regular Tax vs. AMT Source: Treasury Department 19 Who is Subject to the AMT? • Individuals, estates and trusts are subject to the Individual AMT • Large corporations are subject to the corporate AMT – “Small” corporations with < $5,000,000 in average annual gross receipts for 3 year period are not subject to corporate AMT. – If gross receipts later exceed $7,500,000, the “small” corporation becomes subject to the AMT 20 Alternative Minimum Tax: Typical Adjustments • Add back – – – – – Exemptions State and local income, property and sales taxes Miscellaneous itemized deductions Interest on home-equity loans Tax-exempt interest on muni bonds issued to fund a private activity • More must pay attention to the AMT – Certain credits do not reduce TAMT – Regular tax rate brackets are indexed (making lower brackets larger each year) but AMT rates are not 21 AMT Formula for Individuals & Corporations Regular Taxable Income + AMT adjustments - AMT NOL (not the same as regular NOL) = AMT adjusted taxable income + AMT Preferences = Alternative Minimum Taxable Income (AMTI) - Statutory exemption = AMTI base 22 AMT Formula for Individuals & Corporations x = AMTI base AMT tax rate (26%, 28%; 20% for corps) Subtotal AMT Foreign tax credit Tentative AMT Regular tax liability (pre-credits; w/o ITC recap) reduced by Foreign tax credit, nonrefundable personal tax credits Lesser of business credits or 25% of Tentative AMT - Minimum tax (if < 0, min. tax not applicable) - Refundable credits = AMT Due or Refund 23 AMT Adjustments • Adjustments involve timing differences – Positive or negative • Major Adjustments – Depreciation: Must Use ADS • Real estate: 40 yr. SL • Personalty: 150% DB/SL or SL; MACRS lives used after 1998 • No adjustment for § 179 limited expensing – NOLs: must recompute under AMT • AMT NOL is limited to 90% of AMTI – Gain or loss on asset dispositions: use AMT basis – Rates on AMT LTCG and dividends are same as for regular tax – Long-term contracts: use percentage of completion for ALL long-term contracts – Mining exploration and development costs: capitalize and amortize over 10 yr. period 24 AMT Adjustments (cont.) • Adjustments for individuals – Itemized deductions NOT allowed for AMT • Taxes • Miscellaneous itemized deductions • Interest expense on 2nd mortgage • Medical expenses <10% of AGI – No standard deduction – Deduction cutback allowed – No personal or dependency exemptions – Incentive stock options • Include difference between FMV and option price upon exercise of the option (basis adjustments required) – 7% of gain on § 1202 stock 25 Adjustments for Corporations Only • The “ACE” adjustment – ACE = Adjusted Current Earnings of C corp • AMTI plus/minus more adjustments – Computation Step 1: Compute ACE (special formula) Step 2: Adjusted current earnings - AMTI = Base x 75% ACE adjustment 26 AMT Preferences • AMT preferences reflect permanent differences • Major Preferences: – – – – Percentage depletion > cost basis IDC > 65% net oil and gas income Some tax-exempt interest Accelerated depreciation on certain property placed in service before 1987 – One-half of the exclusion of gain on disposal of qualified small business stock 27 Depreciation Adjustments: Example • Place 5 year asset in service • Cost $250,000 • Use MACRS • First Year Adjustment: MACRS: 250,000 x ½ yr. x 2 x 1/5 = 50,000 37,500 12,500 AMT depr: 250,000 x ½ yr. x 1.5 x 1/5 = Positive adjustment 28 Section 179 Limited Expensing • No adjustment for AMT 29 Adjustments: Example • T’s is married with 4 children. His itemized deductions and exemptions for regular tax and AMT are as follows: AMT Deductions 1. Medical exp. 2. 3. 4. 5. > 7.5% of AGI > 10% of AGI State & local income taxes Property taxes Home mortgage interest Tax prep, unreimbursed employee business expenses Total 6. Exemptions (6 x $3,650) Reg. Tax 1,250 5,000 3,000 10,000 2,750 22,000 21,900 43,900 0 0 0 10,000 0 0 10,000 AMT Therefore, positive AMT adjustment = 42,900 - 10,000 = 32,900 AND None of the AMT due to these adjustments produces an AMT credit 30 AMT Example • T’s is married with 4 children. His itemized deductions and exemptions for regular tax and AMT are as follows: Regular tax Medical > 7.5% Medical > 10% State income taxes Property taxes Home mortgage interest Unreimbursed employee business expense Exemptions (6 x $3,650) Total AMT deductions AMT adjustment $ 1,250 0 5,000 3,000 10,000 2,750 21,900 43,900 (10,000) 33,900 31 AMT 0 0 0 0 10,000 0 0 10,000 AMT Example • T’s is married with 4 children. His itemized deductions and exemptions for regular tax and AMT are as follows: Regular tax Medical > 7.5% Medical > 10% State income taxes Property taxes Home mortgage interest Unreimbursed employee business expense Total itemized Exemptions (6 x $3,650) Total AMT deductions AMT adjustment $ 1,250 0 7,000 6,000 12,000 2,750 29,000 21,900 50,900 (10,000) 40,900 0 10,000 32 AMT 0 0 10,000 0 AMT Calculation: Example (cont.) T, married, has gross income of $120,000, 4 kids & itemized deductions of $29,000 and exemptions for $21,900 AMT Calculation Taxable Income Adjusted For: + Itemized Deductions + Personal Exemption Adj. Taxable Income Tax Preferences AMTI Exemption AMTI Base AMT Rate Tentative AMT Less: Regular Tax AMT 99,100 19,000 21,900 140,000 0 140,000 (70,950) 69,050 X 26% 17,953 (11,400) 803 33 Regular Tax Calculations (2009) Gross Income: Itemized Deductions Personal Exemption Taxable Income Regular Tax $150,000 (29,000) ( 21,900) $ 99,100 $ 17,150 Minimum Tax Credit • Credit allowed for amount of AMT paid in previous years (with some adjustments) Hmmm… I pay the AMT one year and then get it back as a credit the next year? 34 Minimum Tax Credit • Limitations on use of credit. – MTC may reduce the regular tax to the extent the regular tax exceeds the tentative minimum tax. – In effect, the MTC does not reduce the regular tax below the tentative minimum tax for the carryover year. – The MTC may be carried over indefinitely but may not be carried back. 35 Minimum Tax Credit Example • Credit allowed for amount of AMT paid in previous years (with some adjustments) • May not reduce regular tax liability below the tentative minimum tax for the year. In 20x1, B pays $10,000 of AMT. In 20x2, X’s regular tax liability is $50,000, and her minimum tax liability is $46,000. 20x1 regular tax liability $50,000 Tentative MTC $10,000 Limitation (50,000 - 46,000) 4,000 Allowable minimum tax credit (4,000) Total tax due: $46,000 The $6,000 of remaining credit may be carried forward indefinitely 36 Minimum Tax Credit (MTC) Example • 19x1: Minimum tax credit $40,000 • 19x2: Regular tax $70,000, tentative AMT $50,000 • MTC credit: w/out limit MTC credit $40,000 reduces $70,000 regular tax to $30,000 which would be below the tentative AMT of $50,000 • MTC cannot reduce regular tax below tentative AMT. Thus MTC available in 19x2 is $20,000 which reduces his tax to $50,000--the AMT he would otherwise pay 19x2 Tentative AMT Regular tax liability before MTC Minimum tax credit Regular tax after credit AMT if credit for full $40,000 were allowed Regular tax liability Minimum tax credit Limitation Regular tax Tentative AMT Maximum credit Total tax due $50,000 (30,000) $20,000 $70,000 $70,000 (50,000) Note if full MTC allowed, still AMT $70,000 (40,000) (20,000) $50,000 37 Minimum Tax Credit • Credit computation – Only allowed for the AMT attributable to timing preferences & adjustments (deferral items) – AMT for “exclusion” items is not creditable such as • • • • • Itemized deductions or standard deduction Personal exemption Percentage depletion treated as a preference Tax exempt interest treated as a preference Preference for gain on § 1202 stock 38 Minimum Tax Credit • Credit computation AMT actually paid - AMT computed only with exclusion items AMT attributable to timing items and allowed as a credit • Example: – T paid an AMT attributable to his deduction for exemptions, state income taxes and depreciation AMT actually paid - AMT w/ only exemptions & state taxes added back AMT attributable to depreciation & allowed as a credit 39 Minimum Tax Credit Computation AMT actually paid − AMT w/ only exclusion items AMT credit due to timing items Exemptions Standard deduction Itemized deductions Percentage depletion pref Tax-exempt interest pref § 1202 preference 40 AMT Credit • Problem – Exercise ISO, pay AMT on spread, creating AMT adjustment – Credit to be used on tax created later on sale of stock at profit. – Problem: stock became worthless and therefore never sold for a regular tax gain and thus large unusable credits • Example: Jeff Chou generated a $1.9 million federal AMT liability when he exercised $6.5 million worth of Cisco options in 2000, just before the stock crashed. • Starting 2008, allowed to use long-term unused credit in two years 41 4-1a Unused Minimum Tax Credit Refundable credit – Allowed for portion of “long-term unused minimum tax credit” • Defined: MTC available at start of the 3rd tax yr preceding current yr • For 2008, available credit would be that at beginning of 2005 – Credits are treated as allowed on a FIFO basis – Available for 2007 through 2012 – Refundable credit amount is the greater of • 50% of the long-term unused credit for the year or • The amount (if any) of the AMT refundable credit determined for the preceding year 42 Unused Minimum Tax Credit • Example – M has a $2,000,000 long-term unused minimum tax credit. It may be used as follows: Used 2007 Balance becomes usable in 2008 2008 50% x $2,000,000 2009 50% x $1,000,000 = $500,000 or Amount unused last year $1,000,000 $1,000,000 $1,000,000 Unused Balance $2,000,000 1,000,000 0 43 Credits: Overview • Reduce tax liability $1 for $1 • Advantages – Arguably more equitable • Refundable vs. nonrefundable • Recent increase in number of credits! 45 Credits: Reduction • Credits reduce “regular tax liability” • Regular tax liability does not include – AMT • However certain nonrefundable personal credits do offset the AMT – Certain other taxes • Basis reduction – To eliminate double benefit (deduction and credit), basis is often reduced 46 General Business Credit • • Consists of over 30 credits Investment Credit § 46 – (Includes: § 47 rehab, § 48: energy, coal project credit, and gasification project credit) § 30B Alternative motor vehicle credit § 30C Alternative fuel vehicle refueling credit § 40 Alcohol Fuels Credit § 41 Research Credit § 42 Low Income Housing Credit § 43 Enhanced Oil Recovery Credit § 44 Disabled Individual Access Credit § 45 Renewable Electricity Production credit 47 1. 2. 3. 4. 5. 6. 7. 8. General Business Credit 9. § 45 Electricity Production credit 10. § 45A Indian Employment credit 11. § 45B Employer Social Security Credit 12. § 45C Credit for Clinical Testing of Certain Drugs 13. § 45D New Markets Tax Credit 14. § 45E Small employer Pension Plan Start Up Costs 15. § 45F Employer Provided Child Care Credit 16. § 45G Railroad Track Maintenance Credit 48 General Business Credit (cont.) 17. 18. 19. 20. 21. 22. 23. § 45H § 45I § 45J § 45K § 45L § 45M § 47 Production of low sulfur diesel fuel Production of oil and gas from marginal wells Production from advanced nuclear power facilities Production of fuel from non-conventional source New Energy Efficient Home Credit Energy Efficient Appliance Credit Rehabilitation Credit 49 General Business Credit (cont.) 24. 25. 26. 27. 28. 29. 30. 31. § 48 Energy Credit (also certain coal and gas projects) § 48A Qualifying Advanced Coal Project Credit § 48B Qualifying Gasification Project Credit § 51 Work Opportunity Credit § 51A Welfare to Work Credit §1396 Empowerment Zone Employment Credit §1400P Hurricane Katrina §1400R Hurricane Rita and Wilma Credits 50 General Business Credit • Limitation – $25,000 + 75% of net regular tax liability > $25,000 – Example • Tax $65,000; Credit $80,000 • $25,000 + [75% ($65,000 - $25,000 = $40,000) = $30,000] • Max usage = $55,000 of the $80,000 – Ordering rules – Credits arising before 1998: • Unused credit can be carried back 3 and forward 15 years – Credits arising after 1997 • Carried back 1 year and forward 20 years – If credit expires and basis was reduced, deduction for amount of basis reductions 51 Investment Credit • Investment credit [§ 46] – Old basic credit repealed • ITC currently consists : – Rehab credit (§ 47) – Energy credit (§ 48) 52 Rehabilitation Credit (§ 47) • Credit for rehabilitation of – Residential & nonresidential buildings built before 1936 – Certified historic structures • Only for “substantial” rehab expenditures – Must exceed larger of • Property’s basis (e.g., cost) or • $5,000 • Credit rate depends on type of structure – Commerical placed in service prior to 1936: 10% – All certified historic structures: 20% • Depreciation – Must use SL – Basis must be reduced by credit 53 Rehabilitation Credit: Example Buy 71 yr old building for $300,000 built in 1935 Rehab costs $600,000 (> larger of cost or AB) Historic Qualified expenditures Rate Credit $600,000 X 20% $120,000 Not Historic $600,000 X 10% $60,000 54 Rehabilitation Credit: Requirements • • All historic structures qualify if certified Other buildings 1. > 50% of existing external walls retained in place as external walls 2. > 75% of external walls retained in place as internal or external walls 3. > 75% of the existing internal structural framework retained in place 55 Rehabilitation Credit (§ 47) • Recapture for rehab, energy credits if sale or change in use, etc. – Portion of the credit that must be recaptured and paid as additional tax is shown below. Recapture % • Number of full years property is used 0 1 2 3 4 5 or more 100% 80 60 40 20 0 56 Rehabilitation Credit (§ 47) • As part of the investment and general business credit, the credit is limited to $25,000 plus 75% of the taxpayer’s tax liability exceeding $25,000 57 Rehabilitation Credit and PAL Rules • • • • • • Credit may be subject to the passive loss rules If no material participation or activity is a rental, the credit may limited to the tax attributable to any passive income that the taxpayer may have A disallowed passive activity credit can be used when passive activities produce taxable income and tax currently or at some later time. A sale of the property producing the credit does not trigger use of the credit but may trigger income and tax that could be offset by the credit. If the basis of the property was reduced by tax credits that the taxpayer could not use, the taxpayer may elect to add back the suspended credit to the basis of the property when it is sold. Upon the death of the taxpayer, any suspended credits are lost. 58 Rehabilitation Credit and PAL Rules • Rehab credits related to rental real estate are eligible for the $25,000 rental real estate allowance available under the passive loss rules The taxpayer is allowed a credit equivalent to the amount of the $25,000 allowance to which the taxpayer is entitled. – ($25,000 less phaseout) x marginal tax rate • • The credit allowance related to rehabilitation expenditures and low-income housing does not begin to phase out until AGI exceeds $200,000 59 Rehabilitation Credit and Rental Real Estate • If both losses and credits, – $25,000 allowance is first applied to losses, then to tax credits for rehabilitation or low income housing. – If losses absorb $25,000 allowance, none of the credit may be available. – In contrast, if the taxpayer has not used his $25,000 allowance, the credit should be available. 60 Example • A married taxpayer has AGI of $150,000 and is in the 31% marginal tax bracket. This year he purchased rental real estate that is considered a certified historic structure for $50,000. He incurs expenses to rehabilitate the structure of $200,000. The expenditures qualify for the credit since they exceed the larger of $5,000 or the property’s basis of $50,000. The amount of the credit is $40,000 (20% x $200,000). • Assuming the real estate activity is passive, the credit is subject to the passive loss rules. Therefore, the credit can normally be used only to the extent of any tax arising from passive income. However, the credit is eligible for the rental real estate exception. Under this exception, the taxpayer can claim a credit equivalent to the deduction that normally is allowed [($25,000 less any phase-out) x the taxpayer’s marginal tax rate]. 61 Example (cont.) • AGI exceeds $150,000 so none of the losses from the activity, if any, could be deducted under the $25,000 allowance. The credit would be $ $7,750 (31% tax rate * $25,000). The balance of the credit, $32,250, may be carried over and treated as if it occurred in such year. Assuming the same facts for the following year, the taxpayer could claim a credit of $7,750. Note that this credit allowance begins to phase-out once the taxpayer’s AGI exceeds $200,000. Thus if AGI was $240,000, the amount of the $25,000 deduction allowance available is $5,000 [$25,000 - (($240,000 - $200,000 = $40,000) x 50% = $20,000)] and the allowable credit would be $1,400 ($5,000 x 28%). Depreciation must be computed using the straight-line method (this is the normal method) over a 27.5 year life on a basis of $210,000 ($50,000 + $200,000 - $40,000). • • 62 Credits Benefiting Environment • • • • • Energy credit Alternative Vehicle Credit Alcohol fuels credit Enhanced oil recovery credit Etc. 63 Energy Credit §48 • Credit for purchase of certain ‘‘energy property’’ – Equipment that uses solar energy to generate electricity, to heat or cool (or provide hot water for use in) a structure, to provide solar process heat and in certain cases to illuminate a room – Equipment to produce, distribute, or use energy from geothermal deposit – Qualified fuel cell property – Qualified microturbine property – Qualified small w ind energy property Credit is a percentage of cost of energy property – 10 percent for qualified microturbine property – 30 percent for solar energy property and qualified fuel cell property • Depreciation – Basis of energy property must be reduced by ½ of the amount of the energy credit. – Recapture rules for rehab credit apply 64 Hiring Credits • Incentives for hiring – Employees with certain characteristics – Employees who live and work in targeted federal zones. 65 Hiring Credits • Credits for hiring – Work Opportunity Credit – Welfare to Work Credit – Native American Indian Employment Credit – Empowerment Zone Programs – Renewal Community Programs 67 Work Opportunity Credit (§§ 51, 52) • Credit for hiring targeted groups – – – – – – – – – – – Recipients of a state law providing assistance for needy families with minor Children Qualified veterans Qualified ex-felons High-risk youth Vocational rehabilitation referrals Qualified summer youth employees Qualified food stamp recipients Qualified SSI recipients Unemployed veterans Disconnected youth 68 Work Opportunity Credit (§§ 51, 52) • Credit amount – 40% of first $6,000 of first-year wages paid to a qualified individual – Lower credit if qualified summer youth • 40% of first $3,000 • Age 16 or 17 that are members of economically disadvantaged families and have not worked previously for the employer – Max credit is $2,400 per employee ($1,200 youth) – Reduce wage deduction by amount of credit – General business credit limitation applies 69 Welfare to Work Credit (§ 51A) • Credit for hiring those transitioning off welfare • Eligible employee – Long-term family assistance recipients (e.g., receives aid under AFDC program) during first 2 years of employment • Credit amount – 35% of first $10,000 of wages in first year – 50% of first $10,000 of wages in second year • Maximum credit per employee over the two year period is $8,500 70 Empowerment Zone Employment Credit • • • • § 1391 Help rebuild distressed urban and rural areas Empowerment zone benefits Credit for 20% of first $15,000 wages – Residents of zone – Max credit $3,000 per year • Interaction with work opportunity credit – First $6,000 for WOC @ 40%, then $9,000 of EZEC 71 § 45A Indian Employment Credit • Credit for hiring certain native Americans – Employees must be Native Americans – Must live and work on the reservation – Amount • 20% of up to $20,000 of wages and insurance 72 Alcohol Credit (§ 40) • • • • Credit for alcohol used to make gasohol before 1/1/2011 Credit is $.60 per gallon Must include amount of credit as income Gasohol – Gasoline extender made from a mixture • • Gasoline (90%) and Ethanol (10%); often obtained by fermenting agricultural crops or crop 73 Research & Experimentation Credit • § 41 R&E credit – 20% of “incremental” R&E expenditures – R&E expenditures include 1. Qualified research expenditures 2. Basic research payments – Limitations apply • Deduction for R&E reduced by credit 74 Research & Experimentation Credit • Qualified research expenditures – In-house research expenses (e.g., wages, supplies, rental of equipment, overhead) – 65 percent of contract research expenses • 100% for contract research paid to small business, university or federal lab • Eligible expense – Same definition as for § 174 deduction 75 Research & Experimentation Credit • Qualified research expenditures: same criteria as for deduction – Research and development in the experimental or laboratory sense, including • • Development of an experimental or pilot model, plant process, formula, invention, or similar property Improvement of such types of property already in existence. – Must be technological in nature and relate to establishing a new or improved function, or improving the performance, reliability, or quality of a product • Denied for lengthy list of expenses 76 Research & Experimentation Credit • Basic Research Expenditures – Incremental amount of basic research payments made to universities and other qualified organizations. – Basic research means any original investigation for the advancement of scientific knowledge not having a specific commercial purpose – Special computation to obtain amount of qualifying expenses 77 Research & Experimentation Credit • Formula Qualified R&E expenditures − Base amount Incremental expenditures x 20% R&E Credit Base amount = Fixed base percentage x Avg gross receipts 4 prior yrs Fixed based percentage = Total research expenses past 4 yrs* Total gross receipts past 4 yrs* *Use amounts for 1984 – 1988 if qualified research in 3 of these 4 yrs 78 Employer Provided Child Care Credit • Credit – 25% of the cost of qualified child care expenditures – 10% of qualified child care resource and referral – Maximum credit is $150,000 per year • Qualifying expenditures include costs of – Building, acquiring, rehabilitating or expanding property that is used as part of a qualified child care facility of the taxpayer for its employees – Operating such facilities – Contract with a qualified child care facility • Basis of property reduced by amount of credit 79 Low Income Housing Credit • For low income housing that is constructed, rehabilitated or acquired after 1986 • Credit claimed over a 10 yr period – Annual credit: about 9% of basis of low income units – If Federal subsidies were used to finance the project, credit is limited to about 4% annually – Exact percentage determined by IRS monthly • Percentages are calculated to yield, over a 10 year period, credit amounts with a present value equal to 70% of basis of new buildings • Other requirements • If use credit, must depreciate the structure using the straight-line method 80 § 44 Disabled Access Credit • Eligible small business may claim a credit equal to 50% of “eligible access expenditures” • Maximum credit – 50% of expenditures in excess of $250 but not exceeding $10,250 – Maximum credit is $5,000 § 44 Disabled Access Credit • Eligible small business: – Gross receipts < $1 million OR – No more than 30 full-time employees • Credit for eligible access expenditures – Costs to comply with Americans with Disabilities Act of 1990 • Qualified expenditures include: – Removing access barriers – Qualified interpreters or other methods of making aurally delivered materials available to person with hearing impairments – Help for those visually impaired – Modifying equipment Disabled Access Credit • Arevalo: Court disallows credit for pay phones – Pay phones were modified by (1) lengthening the cords and/ or reducing the height to make the pay phones accessible to the wheelchair bound and/or (2) installing volume controls to make them more useful to the hearing impaired. • IRS warns of scam arrangements Alternative Motor Vehicle Credit • § 30B alternative motor vehicle credit 1. 2. 3. 4. Hybrid vehicle Fuel cell vehicle Advanced lean burn technology vehicle Alternative fuel vehicle Alternative Motor Vehicle Credit 1. Hybrid vehicle credit – Conventional fuel engine + rechargeable energy storage system – Sliding credit amount ($400 - $2,400) • • Based on city MPG compared with other cars of the same weight and amount of fuel saved Credit for the Toyota Prius is $3,150, sells for about $24,000 Alternative Motor Vehicle Credit redit ord $650 c c Honda Ac Ford Escape $ 4-wheel driv e 2,600 $1,950 Alternative Motor Vehicle Credit • Credits available for business or personal use – No credit for any cost deducted per § 179 and no double benefit • Vehicle must be new (not used) • Credits available for vehicles placed in service after 2005 • Available to lessor, not lessee (?) • Seller claims credit on sale to government or taxexempt entity (opportunity for dealership) Alternative Motor Vehicle Credit 2. Advanced lean burn vehicle credit – Conventional internal combustion engines but direct fuel injection to obtain greater efficiency – > 125% fuel efficiency (vs. 2002 stds.) – Credit is the same as for hybrid vehicles Alternative Motor Vehicle Credit 3. Fuel cell vehicle credit – Car powered by fuel cell • • Electric motors like batteries. Create their own electricity through an electrochemical reaction between hydrogen and oxygen taken from the air – Credit: up to $12,000 but cost could exceed well over $100,000 Alternative Motor Vehicle Credit 4. Alternative fuel vehicle credit – Only burns natural gas, LP, hydrogen or 85% methanol – Credit • • Percentage of additional cost of energy efficient components Amounts capped based on weight – For example, a vehicle weighing under 8,500 pounds could qualify for a credit of up to $4,000 • Reduced credit if uses conventional fuel also Other Selected Credits • Renewable Electricity Production Credit – § 45 credit production of electricity from qualified wind energy & other renewable resources from facilities placed in service after 2003 and before 2006 • Enhanced Oil Recovery Credit – § 43 credit for 15% of enhanced oil recovery costs – Must expand a domestic oil recovery project that uses certain secondary or tertiary recovery methods — such as the injection of liquids, gasses, or other matter — to increase crude oil production, • Orphan Drug Credit – § 45C credit for 50% of qualified clinical testing expenses for certain drugs for rare diseases or conditions 91 Other Selected Credits • Retirement Plan Start-up Costs of Small Employers – § 45E credit for 50% of start-up costs to create or maintain new employee retirement plan – Available only for small employers • 100 or fewer employees – Limited to $500 per year – Only qualified costs for first 3 years of plan 92 Other Selected Credits • Energy Efficient Appliance Credit for Manufacturers – § 45M credit for producing energy efficient dishwashers, clothes washers, refrigerators – Credit depends on appliance type and energy it saves – Max credit • $100 per dishwasher or clothes washer • $175 per refrigerator – Must be produced by taxpayer in U.S. – Only for those produced in excess of average amount of production during prior 3 years – Only property placed in service after 2005 and before 2011 93 Tax Credit for Home Contractors (§ 45L) • Amount of credit per dwelling – $2,000 for “50% home” or “50% manufactured home” – $1,000 for “30% manufactured home” • Annual energy consumption limits – 50% or 30% below comparable dwelling – Reduces regular tax but not AMT – Credit available for carryover (but not back to pre-2006 years) – To expire after 2009 Individual Credits • Refundable Credits – Earned Income Tax Credit (EITC) – Child Tax Credit • Nonrefundable Credits – May reduce “regular” tax only 95 Residential Energy Credits 96 Residential Energy Credits (§25C) $1,500 total credit per taxpayer for 2009 & 2010 • • • • Qualified energy efficient improvements and Residential energy property Only taxpayer’s principal residence (not second home) Credit for 10% of cost for “bldg. envelope:” – Insulation, exterior doors and windows (including skylights), pigmented metal roof – $200 max. credit on windows • Credit for 100% of cost of energy efficient property – heat pumps, efficient central air conditioners or water heaters • To expire in 2011 Good time for a little fixing up your house! Residential Energy Credits § 25D • 30% credit for photovoltaic, solar hot water, and fuel cell property – Maximum credit $2,000 – To expire in 2016 Savers Credit § 25B • Credit for low and middle income taxpayers for contributions to qualified retirement plans • Maximum credit of $2,000 • See Chapter 18 99 Foreign Tax Credit § 27 • Credit for taxes paid to foreign country – Alternatively, may claim a deduction – If elect earned income exclusion, taxes paid on such income cannot be claimed as credit – Credit cannot exceed U.S. tax that would have been paid on same income – Formula approach 100 Earned Income Tax Credit (EITC) • Purpose: – Relieve burden of social security taxes for low income individuals • Credit amount – “Earned income” (wages, salaries, tips, and other taxable income) x percentage varying based on number of “qualifying children” • Phase-out at low levels 101 Earned Income Credit: Calculation Maximum credit Applicable % x Earned Income (not > ceiling) – Phase-out Applicable % x (larger of (EI or AGI) – threshold) Earned income credit 102 Exhibit 13-14 Earned Income Credit: Calculation 2008 Qualifying children 0 1 2 or more Credit Percent 7.65% 34.00% 40.00% Ceiling on Earned Income Amounts $ 5,720 8,580 12,060 Max Credit 438 2,917 4,824 But phased out… 103 Exhibit 13-14 Earned Income Credit: Phase-Out Qualifying children 0 1 2 or more Phase-out Percentage 7.65% 15.98% 21.06% Phase-out Begins 7,160 15,740 15,740 Phase-out Complete 2,880 33,995 38,646 104 Earned Income Credit: Calculation 2008 • Example 41 – – – – – H and W, married filing jointly Dependent son, 3 years old Earned income: H $20,000, M $0 Investment income $1,475 AGI $21,475 ($20,000 + $1,475) $2,917 ( 437) $2,480 105 Max credit (Earned income $8,580 x 34%) Reduction for AGI over threshold (AGI $21,475 - $18,740 = 2,735 x 15.98%) Earned income credit Earned Income Tax Credit (EITC) • Eligibility (2008) – Not allowed if “disqualified income” > $2,950 • Interest, dividends, tax-exempt interest, net rents, net capital gains, excess passive income – Social security number reported 106 EITC: Eligibility • Taxpayers without Children 1. Taxpayer or spouse least 25-64 2. Not a dependent 3. The taxpayer has a principal residence in the U.S. for more than one-half taxable year. 107 EITC: Eligibility • Taxpayers with Qualifying Child 1. Relationship • Child, step-, foster-, adopted child… or a descendant of such child (e.g., grandchild) • Married child only if dependent 1. Age • < 19 years or • < 24 years old and a full-time student or • Permanently & totally disabled any time during yr 1. Residency. – Same principal place of abode as taxpayer for > 1/2 of taxable year and abode in the U.S. 108 Child Tax Credit § 24 • $1,000 per qualifying child • “Qualifying Child” – Child or descendant < age 17, who may be claimed as a dependent and is a citizen or resident of U.S. • Credit is phased out $50 for each $1,000 or fraction thereof TP’s AGI exceeds thresholds: – $75,000 single or head of household – $110,000 MFJ – $55,000 MFS • Refundable under complex formula 109 Child and Dependent Care Credit • Purpose – Relieve burden for two-earner families who must pay for dependent care – Available for “Employment Related Expenses” related to care of a dependent for which the TP maintains a household • Qualifying Dependents: – Dependent children under 13 – Incapacitated dependents – Incapaciated spouses 110 Child and Dependent Care Credit (§ 129) Expenses for care Lesser of • Amount paid • Earned income • $3,000 or $6,000 x 20% - 35% Credit • Earned income limitation – If married, limited to lower of two spouses' income – If full time student, impute income • ($250/mth for 1 child, $500 for > 1) 111 Child and Dependent Care Credit (§ 129) • Credit % depends on AGI – Cut down between $15,000 - $43,000 1% x AGI - $15,000 =Cutdown (max 15%) $2,000 – If AGI < $15,000: 35%; – If AGI > $43,000: 20% • Every $1 of exclusion reduces expenses for care by $1 112 Child and Dependent Care Credit (§ 129) • Full time? Part time? Student? Volunteer? – Expenses must enable full/part-time employment (or fulltime student) and not volunteer • Only expenses for a qualifying individual – Dependent < 13 – Spouse or dependent if either is incapable of self-care 113 Child and Dependent Care Credit (§ 129) • Qualifying expenses – Care: babysitter, maid, nanny, nursery school, kindergarten but not 1rst grade or higher – Not food or clothing • Outside services – < 13 yes, but not overnight summer camp – Others must stay in home 8 hours per day 114 Problem 13-40: Dependent Care Credit Expenses for care Incurred Limits Statutory Earned income Spouse lower income 5,200 6,000 V 17,000 J 21,200 5,200 35% x 23% 1,196 115 Imputed amount Allowed Credit Percentage Cut-down (AGI 38,200 – 15,000 = 23,200 23,200/2,000 = 11.6% round up (12%) Credit Problem 13-41: Dependent Care Credit Expenses for care Incurred Limits Statutory Earned income Spouse lower income 6.000 3,000 B 23,000 M 0 10 mths x 250 (1 child) = 2,500 Imputed amount Allowed Credit Percentage 2,500 35% (4%) Cut-down (AGI 23,000 – 15,000 = 8,000) 8,000/2,000 = 4% round up x 31% 775 116 Credit Adoption Credit I’m worth more than $12,150! Adoption Credit 119 Adoption Credit A Summary and Forecast Of Federal and State Tax Developments MORE TAXPAYERS CLAIM the adoption credit. The IRS says 47,698 returns took the credit for 1999, up 17% from the prior year. Tax Report 120 Adoption Credit (§ 23) • Credit for adoption expenses • 2009 credit limit: $ 12,150 PER CHILD • AGI phase-out range for all taxpayers: – 2009: $182,180 to $222,180 • IRS guidance on when foreign adoptions final (Rev. Proc. 2005-31) • Offsets AMT Employer-Provided Adoption Assistance • Exclusion – Exclude amounts paid or expenses incurred by an employer for qualified adoption expenses • Maximum exclusion $12,150 per child • Phase-out once A.G.I. exceeds $182,180 – Ratably over a $40,000 range – Eliminated when A.G.I. reaches $210,820 122 Foster Care Payments (§ 131) • Exclude ‘‘qualified foster care payments’’ received from government or agency licensed to make payments • Requirements – Must be eligible foster care providers. 123 Education Credits (§ 25A) • Hope Scholarship & Lifetime Learning Credits • Elective credits for educational expenses – If student is eligible for both credits in same year, either credit may be chosen, but not both 124 Hope Scholarship Credit • Credit available for college expenses • Amount – – – – Maximum $2,500 per student per year 100% of first $2,000 of qualified expenses paid 25% of next $2,000 in qualified expenses Credit is per student • For example, 3 kids in college could get $7,500 credit – Allowed for 4 years of post-secondary education – Phase-out • Married joint ($160,000 - $180,000) • Other taxpayers ($80,000 - $90,000) – Generally refundable 125 Hope Scholarship Credit • Eligible expenses: – Tuition & related expenses • Those required for enrollment or attendance at an eligible educational institution – Educational institution • Virtually all colleges as well as vocational schools – Tuition • Includes fees (e.g., student activity fees) – Related expenses • Books supplies and equipment – Reduction for aid • Expenses must be reduced by any educational assistance (e.g., scholarships, employer provided assistance) 126 Hope Scholarship Credit • Other requirements – Only expenses for the taxpayer, the taxpayer’s spouse or dependent • Dependent cannot claim credit • Parent or other person claiming the child as a dependent can claim the credit – Must be at least a ½ time student – No double benefit allowed • Cannot deduct expenses and qualify for the credit based on the same expenses • Cannot a Hope credit in the same year that expenses for student are deducted 127 Hope Scholarship Credit • Refundable – 40% refundable thus receive up to $1,000 even if no taxes are owed – Exception: • None of the credit is refundable if the taxpayer generally would be subject to the kiddie tax – Under age 18 (or a student who is at least age 18 and under age 24) – Earned income does not exceed one-half of his or her own support – Has at least one living parent and – Does not file a joint return. 128 Lifetime Learning Credit • Additional credit for educational expenses • Amount – 20% of up to $10,000 of expenses paid per year by a TP for self, spouse, and dependents; – Limitation is per return not per student – Phase-out different than Hope Credit (2009-2010) • Married: $96,000 - $116,000; Single $48,000 - $58,000 • Availability – Available in all years, including post-graduate education – Not required to be a 1/2 time student 129 Lifetime Learning Credit • Qualifying expenses – Includes those for Hope Credit and more – Must be offered by a qualifying education institution – Undergraduate and graduate expenses (M.B.A. J.D) – Need not be a degree program – Extends to continuing education courses 130 Other Nonrefundable Individual Credits • Credit for the Elderly and Permanently Disabled – Few individuals are eligible • Credit for Interest on Certain Home Mortgages – For first-time home buyers. Requires a state on local government- issued “mortgage credit certificate” 131 ...
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This note was uploaded on 03/23/2010 for the course ACCT 402 taught by Professor Toleno during the Spring '10 term at Providence College.

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Chapter13 - Chapter 13 The Alternative Minimum Tax and Tax...

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