Archive for Tax Credit
January 16, 2013 John R. Dundon II Adoption, Alternative Minimum Tax (AMT), Cancelled Debt, Capital Gain, Charitable Contribution, Child Tax, Employment Tax, Estate Tax, Excise Tax, Generation Ski[[ing Transfer Tax, Social Security Tax, Tax Credit, Tax Guidance & Preparation, Tax Relief The American Taxpayer Relief Act of 2012 makes permanent many otherwise expiring tax provisions. The following is my summary of what I believe to be relevant provisions:
Ordinary income above a certain threshold is taxed at a higher rate. The thresholds are: taxable income of $400,000 (for an unmarried taxpayer), $425,000 (for a head of household), and $450,000 (for a taxpayer who is married and filing jointly).
The current maximum 15% tax rate on long-term capital gains and qualified dividends is extended for individuals who have taxable income up to $400,000 (for a unmarried taxpayer), $425,000 (for a head of household), and $450,000 (for a taxpayer who is married and filing jointly). For capital gain and dividend income above the applicable threshold, the rate increases to 20%. With the new 3.8% Medicare surtax for unmarried and head of household taxpayers with modified adjusted gross income (“MAGI”) over $200,000 and married taxpayers with MAGI over $250,000, the capital gain and qualified dividend rate has become more complex.
The 3.8% “Medicare surtax” effective January 1, 2013, under the health care reform law passed in 2010 is still being deployed. This new tax applies to certain types of investment income for unmarried taxpayers with MAGI above $200,000 and married couples above $250,000. The tax applies to the lesser of the individual’s net investment income or MAGI in excess of the threshold amounts. In addition, high-income earners will be subject to an additional payroll tax of 0.9% on wages received in excess of those threshold amounts.
The $5 million estate, gift and generation-skipping transfer (GST) tax exemptions are now permanent and adjusted for inflation from 2011. It also makes permanent the “portability” provision between spouses, which allows a surviving spouse to use a deceased spouse’s unused exemption on lifetime gifts and/or transfers at death. GST exemption, however, is not portable. For 2013, the exemption amount is projected to be $5.25 million. The Act sets the rate for all transfers in excess of the exemption amount (for all three taxes) at 40%. The federal credit for state death taxes is now permanently repealed. However, an estate may continue to deduct state estate or inheritance taxes for purposes of computing the federal estate tax. A variety of beneficial GST tax provisions that were scheduled to expire have been made permanent, including the automatic allocation of a taxpayer’s GST exemption to certain transfers, provisions permitting the “qualified severance” of a trust into two trusts, one of which is exempt from the GST tax and one of which is not; and relief for a late allocation of GST exemption.
The alternative minimum tax (AMT) patch, which historically had been passed each year by Congress to lessen the burden of AMT on millions of middle-income households is now permanent and will be adjusted for inflation. Under the Act, the AMT exemption amount for 2012 is $50,600 for unmarried taxpayers and heads of household, $78,750 for taxpayers who are married and filing jointly, and it is indexed for inflation going forward. The 2013 exemption amounts are projected to be $51,900 for unmarried taxpayers and heads of household, and $80,750 for married taxpayers filing jointly.
The personal exemption phase-out (“PEP”) provision, which had been suspended under prior law, returns. It phases out the personal exemption for taxpayers with adjusted gross income (“AGI”) over $250,000 (for an unmarried taxpayer), $275,000 (for a head of household), and $300,000 (for a taxpayer who is married and filing jointly).
A past law often referred to as the “Pease provision” which limited itemized deductions for high-income taxpayers is reinstated. The Pease provision was suspended for 2010 through 2012 allowing taxpayers to deduct 100% of their itemized deductions regardless of their income subject to other applicable restrictions. The Pease provision applies to AGI above the following thresholds: $250,000 (for an unmarried taxpayer), $275,000 (for a head of household), and $300,000 (for a taxpayer who is married and filing jointly). The Pease provision phases out itemized deductions by the lesser of (i) 3% of the excess of AGI over the threshold or (ii) 80% of the otherwise allowable deductions. While the Act did not directly address the mortgage interest or charitable deductions, the Pease provision has the effect of limiting the amount of these deductions that a taxpayer may take if his or her income exceeds the applicable threshold.
The payroll tax “holiday” enacted in 2010 expired. Under the payroll tax holiday, the 6.2% social security tax paid by all wage earners was temporarily cut to 4.2%. The expiration of the holiday will cause wage earners to pay 2% more in social security taxes on all wages up to $113,700.
The ability to exclude from income gain on the sale of certain qualified small business stock (QSBS) is extended, as long as the stock was held for more than five years before sale. The exclusion is generally 50%, but was increased to 75% for QSBS acquired after February 17, 2009, and before September 28, 2010; and to 100% for QSBS acquired after September 27, 2010, and before January 1, 2012. The Act extends the 100% gain exclusion to QSBS acquired after September 27, 2010 and before January 1, 2014. Note that the QSBS exclusions are generally limited to the greater of (i) $10 million of gain or (ii) ten times the taxpayer’s cost basis in the stock sold in that year. In addition, gain subject to the 100% exclusion rule is not a preference item for alternative minimum tax purposes.
The ability of a taxpayer age 70½ or older to exclude up to $100,000 from gross income for distributions made directly from a traditional or Roth IRA to a qualified charity is extended. This provision expired after 2011; it is now extended for 2012 and 2013. The Act contains two time-sensitive provisions giving taxpayers flexibility with respect to the 2012 tax year. First, if a taxpayer took a required minimum distribution (“RMD”) in December of 2012, he or she can elect to treat some or all of that RMD as a qualified charitable contribution to the extent that the distribution (up to $100,000) is transferred in cash to a qualifying charitable organization before February 1, 2013, and meets the other charitable rollover requirements. Second, a qualified charitable contribution made in January of 2013 may be treated as having been made on December 31, 2012.
A deduction for a charitable gift of long-term capital gain property is generally limited to 30% of the donor’s adjusted gross income (AGI). However, for the years 2006 through 2011, a special provision allowed a deduction of up to 50% of the donor’s AGI for contributions of “qualified conservation property.” The Act extends this provision through December 31, 2013.
There are various other individual and business tax provisions that were set to expire including: earned income credit; adoption credit and assistance; child and dependent care credit; mortgage debt cancellation relief; mortgage insurance premiums deduction; marriage penalty relief; and bonus depreciation.
2012 federally declared disaster areas issued by the department of Homeland Security can be useful if you are uncertain or require specific verification.
The most important thing to remember about the non-business energy property credit and the residential energy efficient property credit is that not all energy-efficient improvements qualify so be sure you have the manufacturer’s tax credit certification statement IN YOUR TAX FILE JUST IN CASE YOU GET AUDITED. Also be sure to understand if the product’s certification meets the standards as some manufacturers seem to very liberally throw around the phrase “energy efficient.” The IRS has offered guidance in these regards and the certification can usually be found on the manufacturer’s website or with the product packaging.
If you’re eligible, you can claim both of these credits on IRS Form 5695 Residential Energy Credits regardless if you itemize your deductions on Schedule A or not. The differences between these credits is worth noting though.
The Non-business Energy Property Credit is generally intended for homeowners who install energy-efficient improvements. The 2011 credit is 10 percent of the cost of qualified energy-efficient improvements, up to $500. Qualifying improvements include adding insulation, energy-efficient exterior windows and doors and certain roofs. The cost of installing these items does not count. You can also claim a credit including installation costs, for certain high-efficiency heating and air conditioning systems, water heaters and stoves that burn biomass fuel. The credit has a lifetime limit of $500, of which only $200 may be used for windows. If you’ve claimed more than $500 of non-business energy property credits since 2005, you can not claim the credit for 2011. As it currently stands qualifying improvements must have been placed into service in your principal residence located in the United States before Jan. 1, 2012.
Residential Energy Efficient Property Credit helps individual taxpayers pay for qualified residential alternative energy equipment, such as solar hot water heaters, solar electricity equipment and wind turbines. The credit, which runs through 2016, is 30 percent of the cost of qualified property. There is no cap on the amount of credit available, except for fuel cell property. Generally, you may include labor costs when figuring the credit and you can carry forward any unused portions of this credit. Qualifying equipment must have been installed on or in connection with your home located in the United States; geothermal heat pumps qualify only when installed on or in connection with your main home located in the United States.
Energy Efficient Home Credit is applied for using IRS Form 8908. This form is used by eligible contractors to claim a credit for each qualified energy efficient home sold or leased to another person during the tax year for use as a residence.
Energy Efficient Appliance Credit is applied for using IRS Form 8909. Manufacturers of qualified energy efficient appliances including eligible dishwashers, clothes washers, and refrigerators) use this form to claim the energy efficient appliance credit. The credit is part of the general business credit reported on Form 3800, General Business Credit.
For tax years 2010 to 2013, the maximum credit for eligible small business employers under the Small Business Health Care Tax Credit is 35 percent of premiums paid and for eligible tax-exempt employers the maximum credit is 25 percent of premiums paid. Beginning in 2014, the maximum credit will go up to 50 percent of qualifying premiums paid by eligible small business employers and 35 percent of qualifying premiums paid by eligible tax-exempt organizations.
Start by determining if your organization qualifies for the credit by assessing whether it has less than 25 full-time equivalent employees that earn an average wage of less than $50,000 a year and your organization pays at least half of employee health insurance premiums. If your organization meets this criteria it is referred to as a “qualifying business.” Next use IRS Form 8941 Credit for Small Employer Health Insurance Premiums. Last use IRS Form 3800, General Business Credit, to claim the credit.
Tax-exempt organizations can use IRS Form 8941 to calculate the credit and then claim the credit on IRS Form 990-T, Exempt Organization Business Income Tax Return.
If your organization couldn’t use the credit in 2011 there may be eligible to claim it in future years. Eligible small employers can claim the credit for 2010 through 2013 and for two additional years beginning in 2014.
According to IRS Publication 970 the modified version of the Hope Credit is now referred to as the American Opportunity Tax Credit (AOTC) and extended through 2012. The AOTC is available for the first four years of post-secondary education. It has been expanded so that qualified tuition and related expenses now include expenses for course books, supplies, and equipment needed for a course of study, whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance. Additionally:
• The credit is equal to 100% of the first $2,000 spent and twenty-five percent of the next $2,000 per student each year. The full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualifying expenses for an eligible student.
• Forty percent of the credit is refundable, so even those who owe no tax can get up to $1,000 of the credit for each eligible student as cash back.
• You cannot claim the tuition and fees tax deduction in the same year that you claim the AOTC or the Lifetime Learning Credit. You must choose to either take the credit or the deduction, whichever is more beneficial.
The Lifetime Learning Credit helps parents and students pay for post-secondary education. The Lifetime Learning Credit is a tax credit for any person who takes college classes. It provides a tax credit of up to $2,000 on the first $10,000 of college tuition and fees. You can claim the Lifetime Learning Credit on your tax return if you, your spouse, or your dependents are enrolled at an eligible educational institution and you were responsible for paying college expenses. Unlike the Hope Credit, the person need not be enrolled at least half-time. Even if you took only one class, you may take advantage of the Lifetime Learning Credit.
There is no limit on the number of years the Lifetime Learning Credit can be claimed for each student. However, you cannot claim the AOTC and Lifetime Learning Credit for the same student in one year. The Lifetime Learning Credit in my opinion may be particularly helpful to graduate students, students who are only taking one course, and those who are not pursuing a degree.
Generally, you can claim the Lifetime Learning Credit if all three of the following requirements are met:
1. You pay qualified education expenses of higher education.
2. You pay the education expenses for an eligible student. The eligible student is yourself, your spouse, or a dependent for which you claim an exemption on your tax return.
3. If you are eligible to claim the Lifetime Learning Credit and also eligible to claim the AOTC for the same student in the same year, you can choose to claim either credit, but not both.
If you pay qualified education expenses for more than one student in the same year, you can choose to take credits on a per-student, per-year basis. This means that you can claim the AOTC for one student and the Lifetime Learning Credit for another student in the same year. Both Credits are claimed on IRS Form 8863 and answers to additional questions can be found here.
According to Internal Revenue Code Section 21, the maximum tax credit as of this posting date remains at $1,050 (35% of $3,000) for one qualifying individual and $2,100 (35% of $6,000) for two or more. This credit is for expenses paid for the care of your qualifying children under age thirteen, or for a disabled spouse or dependent, to enable you or your spouse (if Married Filing Jointly) to work or look for work.
A qualifying person is a dependent child, age twelve or younger and/or your spouse or other certain individuals who are physically or mentally incapable of self-care.
In order to qualify you (or your spouse if MFJ) must have earned income from wages, salaries, tips, other taxable employee compensation, or net earnings from self-employment.
Additionally:
1. Payments for care can not be made to a spouse or dependent.
2. You are precluded from the credit if your filing status is Married/separate.
3. The qualifying person must have lived in the home with you for more than 6 months.
4. You may use up to $3,000 of expenses paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals to figure the credit.
5. Qualifying expenses must be reduced by the amount of any dependent care benefits provided by your employer that are excluded from income.
Most importantly:
If an individual is paid to come to your home and care for your dependent or spouse, you pretty much by default become a household employer liable for employment tax reporting and payment obligations. Check out IRS Publication 926.
1. Business activity alone is not the only factor used in determining qualification for the Domestic Production Activity Deduction (DPAD). The actual deduction reported on IRS Form 8903 (Line 22) is the lesser of 9% of the qualified production activities income (QPAI) or 50% of W-2 wages. So basically in order to qualify you must have W-2 wages.
2. Under [Reg § 1.199-3(m)(2)(iii)] improvements to land and capitalized to land such as landscaping are considered construction activities only if they are performed in connection with other activities associated with the erection or substantial renovation of real property. Landscaping alone in and of itself does not usually rise to the threshold criteria for consideration of construction related expense.
According to Cary A. Nievinski v. Commissioner TC Summary Opinion 2011-10 even though IRS Form 5405 and IRS Publication 4819 provide only general instructions and do not address all the rules and limitations applicable to the first-time home buyer credit, the apparent failure of some IRS publications to explain the “no-purchase-from-family” limitation of the first-time home buyer credit has no effect on the authority of §36(c). Failure to understand this does not provide a legal basis to allow you to claim the first time home buyer tax credit.
The First Time Home Buyer Credit (FTHBC) Account Look-up tool is now up and running on the IRS website. This tool provides information that helps taxpayers accurately report their FTHBC repayment obligations on their federal tax return. To access this tool, go to:
http://www.irs.gov/individuals/article/0,,id=252351,00.html
Taxpayers need to enter their Social Security Number, date of birth, and complete address. Taxpayers will be able to check on the original amount of the credit, annual repayment amount, total amount paid (with the most recent account update) and the total balance left to be paid.
A qualifying child for the child tax credit is someone who meets the qualifying criteria of seven tests: age, relationship, support, dependent, joint return, citizenship and residence.
1. Age test To qualify, a child must have been under age 17 – age 16 or younger – at the end of 2011.
2. Relationship test To claim a child for purposes of the Child Tax Credit, the child must be your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister or a descendant of any of these individuals, which includes your grandchild, niece or nephew. An adopted child is always treated as your own child. An adopted child includes a child lawfully placed with you for legal adoption.
3. Support test In order to claim a child for this credit, the child must not have provided more than half of his/her own support.
4. Dependent test You must claim the child as a dependent on your federal tax return.
5. Joint return test The qualifying child can not file a joint return for the year (or files it only as a claim for refund).
6. Citizenship test To meet the citizenship test, the child must be a U.S. citizen, U.S. national or U.S. resident alien.
7. Residence test The child must have lived with you for more than half of 2011. There are some exceptions to the residence test, found in IRS Publication 972, Child Tax Credit.
The credit is limited if your modified adjusted gross income is above a certain amount. The amount at which this phase-out begins varies by filing status. For married taxpayers filing a joint return, the phase-out begins at $110,000. For married taxpayers filing a separate return, it begins at $55,000. For all other taxpayers, the phase-out begins at $75,000. In addition, the Child Tax Credit is generally limited by the amount of the income tax and any alternative minimum tax you owe.
If the amount of your Child Tax Credit is greater than the amount of income tax you owe, you may be able to claim the Additional Child Tax Credit.
