EA1 Study Unit 8.1-8.2 Tax Credits and Payments

Tax Credits & Policy

• Tax credits are used to achieve goals like encouraging energy conservation or providing tax relief to low-income taxpayers
• A $1 tax credit reduces gross tax liability by $1
• Many types of nonrefundable and refundable tax credits exist
• Most credits are nonrefundable, such that credits cannot produce refunds once the tax liability reaches zero

Nonrefundable Personal Credits:

• Foreign Tax Credit
• Lifetime Learning Credit
• Child and Dependent Care Credit
• Child Tax Credit
• Credit for Other Dependents
• Retirement Savings Contribution Credit
• Credit for the Elderly or Disabled
• Adoption Credit
• Residential Mortgage Interest Credit
• Minimum Tax Credit
• Residential Energy Credit
• Clean Vehicle Credit

Refundable Credits:

• American Opportunity Tax Credit
• Additional Child Tax Credit
• Earned Income Credit
• Health Insurance Premium Tax Credit

Foreign Tax Credit (FTC)

• A taxpayer can elect either a credit or a deduction for taxes paid to other countries or U.S. possessions
• Generally, the FTC is applied against gross tax liability after nonrefundable personal credits
• The FTC, as modified, may offset AMT liability
  • The FTC is not creditable against the accumulated earnings tax (AET) or the personal holding company (PHC) tax
• Pass-through entities apportion foreign taxes among the partners, shareholders (of an S corporation), or beneficiaries (of an estate)
  • The taxpayers then elect and compute a credit or deduction on their personal returns
• For a non-U.S. person, the FTC is allowed only for foreign taxes paid on income effectively connected with conduct of a trade or business in the U.S. and against U.S. tax on the effectively connected income
  • Nonresident aliens and foreign corporations are included under this provision
• Qualified foreign taxes (QFTs) include foreign taxes on income, war profits, and excess profits
  • QFTs must be analogous to the U.S. income tax
    • They must be based on a form of net annual income, including gains
    • Concepts such as realization should be incorporated into the tax structure
  • Foreign taxes paid on foreign earned income or housing costs excluded as excessive cannot be credited or deducted
• A domestic corporation owning at least 10% (voting) of a foreign corporation is deemed to have paid the foreign taxes paid by the foreign corporation on income that it distributed to the domestic corporation as a dividend

FTC Limit

• The maximum amount of tax that may be credited is computed using the following formula:

FTC = (U.S. income tax before FTC) X (Foreign earned taxable income / Worldwide taxable income)

• The limit must be applied separately to nonbusiness interest income and all other income
• The amount used for TI in the numerator and denominator is regular TI with adjustments
• The credit is limited by foreign taxes paid or accrued during the tax year
• Claimed on Form 1116, Foreign Tax Credit, unless certain conditions are met, it may be claimed on Schedule 3 (Form 1040), line 1.
  • The taxpayer is an individual
  • The only foreign source income for the year is passive income reported on a qualified payee statement (e.g., Form 1099-DIV, Form 1099-INT, Schedule K-1 or K-3)
  • The QFTs for the year do not exceed $300 ($600 for a joint return)
• Foreign tax paid in excess of the FTC limit may be carried back 1 year and forward 10, in chronological order and is treated as foreign tax paid subject to the FTC limit
  • The carryover cannot be applied in any year when a deduction for foreign taxes is taken instead of the FTC
• A credit (or deduction) cannot be taken for foreign income taxes paid on income excluded from U.S. tax under the foreign earned income exclusion
• A choice must be made to take either a credit or a deduction for all qualified foreign taxes

Education Credits

• Education credits may be elected by low- and middle-income individuals for education expenses incurred by students in higher education or vocational training -The American Opportunity Tax Credit is partially refundable, but the Lifetime Learning Credit is nonrefundable -Neither credit is allowed by married taxpayers who file separately; i.e., they must file a joint return

American Opportunity Tax Credit (AOTC)

• Provides a maximum credit of $2,500 per student for each of the first 4 years of post-secondary education -Each year, the $2,500 credit consists of 100% of the first $2,000 of qualified expenses and 25% of the next $2,000 of qualified expenses. -The credit applies to the first 4 years of higher education received by the taxpayer, the taxpayer's spouse, and/or the taxpayer's dependents -The credit applies to tuition fees, books, and other required course materials
  • It is not allowed for room and board, insurance, student health fees, transportation costs, activity fees, or any fees/expenses not related to academic instruction
• Qualified education expenses paid in 2024 for an academic period that begins in the first 3 months of 2025 can be used in figuring an education credit for 2024
• The credit cannot be claimed if: - An exclusion for an education IRA or a state tuition program is claimed for the same expenses - The student has been convicted of a federal/state felony offense consisting of possessing/ distributing a controlled substance -The student is not taking at least one-half of the normal full-time workload for at least one academic period that begins during the calendar year in which the credit is claimed
• The MAGI phase-out range is $80,000-$90,000 for single taxpayers or $160,000-$180,000 for joint filers
• Up to 40% of the credit is refundable: -When the original tax equals/exceeds $2,500, the entire amount is used to lower the tax bill and no credit is refunded -When the original tax is less than $2,500, and the tax is lowered to zero, the remaining credit is partially (40%) refundable
  • No refund of the credit is allowed if the student is a child subject to the “kiddie tax," covered in Study Unit 1, Subunit 5
• To calculate: -Step 1: Calculate the maximum AOTC for each student (max = $2,500/student if at least $4,000 qualified expenses).
  • Step 2: Add the maximum AOTCs for each student to determine the max AOTC.
  • Step 3: If MAGI is $160,000 (MFJ) or $80,000 (others) or less, the max AOTC equals the result of Step 2. If MAGI is $180,000 (MFJ) or $90,000 (others) or more, the AOTC is $0. If MAGI is between thresholds, AOTC is computed as: Maximum AOTC for $180,000 (if joint return) or $90,000 (all others) – MAGI all students (Step 2) x $20,000 (if joint return) or $10,000 (all others)
  • Step 4: Compare the result of Step 3 to federal income tax liability. If the federal income tax liability is greater, Step 3 is a nonrefundable AOTC. If not, the tax liability becomes a nonrefundable AOTC. The refundable portion is 40% of the excess Step 3 over income tax liability.

Lifetime Learning Credit

• Provides a credit of 20% of qualified tuition expenses paid by the taxpayer for any year the AOTC is not claimed for the same student
  • The maximum credit allowed per year is $2,000.
  • This is based on 20% of up to $10,000 of qualified tuition and fees paid for the taxpayer, the taxpayer’s spouse, and/or the taxpayer’s dependents.
• The credit is figured on a per-taxpayer basis, whereas the AOTC is allowed per student
• Available for an unlimited number of years and can be used for both graduate/undergraduate-level courses
• Eligible expenses include tuition and fees required for enrollment, but credits cannot be used for room and board, activity fees, athletic fees, insurance expense, or transportation -The Lifetime Learning Credit is phased out for AGI between $80,000 and $90,000 for single filers or $160,000 and $180,000 for those filing jointly
• The tuition statement (1098-T) provided to the taxpayer/student must include the name, address, and TIN of the taxpayer/student

Credits for Children and Dependents

-There can be four credits that are available for children/dependents:

• Child and Dependent Care Credit
• Child Tax Credit
• Additional Child Tax Credit
• Credit for Other Dependents

Child and Dependent Care Credit

-It is available for offsetting child/dependent care expenses and is reported on Form 2441, being nonrefundable -Requirements for the credit include satisfying employment and household costs

• Employment: Child and dependent expenses must be incurred to enable the taxpayer to be gainfully employed while the expenses can be incurred when the claimant is employed or actively seeking employment
• Household: The taxpayer must provide more than half of the cost of maintaining a household for someone under 13 or who is a physically/mentally incapacitated spouse/dependent and must have lived with the taxpayer for more than half of the year -An individual may still be classified as a qualifying person if they are the child of divorced/separated parents, and although the taxpayer cannot claim them as a dependent, they would still be the qualifying person as long as they are -Under the age of 13 or unable to care for themselves, and: -The taxpayer is their custodial parent - The custodial parent is the one who the child lives with consistently for the majority of nights, or if there were even splits of nights due to the child residing with both parents, then the parent with the higher adjusted gross income is the one who may claim.
• Qualifying employment expenses include the following: -Household services, daycares, babysitting, etc. -Outside services such as day care that must be in qualified facilities -Outside expenses for someone who is incapacitated can only qualify if they are in the taxpayer's home for more than 8 hours per day -Sending a kid to school who is under kindergarten is also a qualifying expense
• Taxpayers have a limit to expenses depending on what their taxes are (smaller of the two in married taxpayers) -If one of the spouses is a student, he/she is considered to have worked $250 a month if one is being claimed, or $500 if two or more. -Care cannot exceed $3000 if one is claimed, or $6000 if two or more are claimed. -The credit equals around 35% of expenses paid during the year -1% gets deducted from the rates for every $2,000 increase in AGI over $15,000 -If AGI exceeds $43,000 then the credit is 20%
• A taxpayer identification number must be provided.

Child Tax Credit (CTC)

• The Child Tax Credit (CTC) is for taxpayers who have a qualifying child, in addition to the Child and Dependent Care Credit and the Earned Income Credit
• The maximum CTC is $2,000 and it is nonrefundable

Additional Child Tax Credit (ACTC)

• This is for people that can't receive the whole amount of CTC with said credit being at minimum 15% of the person's income (excess of $2,500) capped out at $1,700 per child A taxpayer is eligible for a child tax credit if the child: Must be the the taxpayer's son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, half-brother, half-sister, or a descendant of any of them (for example, the taxpayer's grandchild, niece, or nephew) Must have been under the age of 17 Cannot have provided more the half of their own support. Must have lived with the taxpayer for more than half of the year.
• The child is considered to have lived with the taxpayer for more than half of 2024
• If the child was born or died in 2024 and the taxpayer's home was the child's home for more than half the time s he was alive during the year.
• Temporary absences by the taxpayer or the child for special circumstances, such as school, vacation, business, medical care, military, service, or detention in a juvenile facility, count as time the child lived with the taxpayer. -Exceptions exist for kidnapped children and children of divorced or separated parents.
• Is claimed as a dependent on the taxpayer’s return
• Does not file a joint return for the year (or files it only to claim a refund of withheld income tax or estimated tax paid)
• Was a U.S. citizen, a U.S. national, or a U.S. resident alien; and
• Has a Social Security number (SSN) issued before the due date of the return -An adopted child is always the taxpayer's own child and includes for those who lawfully claim a child legally

Credit for Other Dependents

• $500 nonrefundable credit for dependents other than qualifying children and to a qualifying child if said child is missing the SSN.

• The Credit is phased out with the AGI reaching $400,000 for those filing jointly or $200,00 for all others -$50 dollars gets deducted for every 1,000 dollars over the AGI. You must consist of 12 months in credits to use it.

Retirement Savings Contributions Credit

The saver's credit gets taken for Roth IRA, 401(k), SIMPLE IRA, SARSEP, 403(b), 501(c)(18), or any voluntary retirement plans, otherwise those are not covered. (Govt plans too)

• Rollovers don't count, while eligible constributions can be reduced if certain distributions were taken recently.
• Taxpayer is eligible only if 18 or older, can't be a dependent, and is not attending full time schooling for more than 5 months (Technical or trade schools also count ) -$2,000 is the most for anyone (4,000 if married together, based on the gross income)

2024 Saver's Credit:

1. 50% credit rate = AGI of $46,000(married), $34,500(head of house) or $23,000(Single or other)
2. 20% credit rate = AGI of $46,000-$50,000(married), $34,500-$37,500(head of house) or $23,000-$25,000(Single or other)
3. 10% credit rate = AGI of $50,000-$76,500(married), $37,500-$57,375(head of house) or $25,000-$38,250(Single or other)
4. No Credit is given if it's over = = AGI of $76,500(married), $57,375(head of house) or $38,250(Single or other)

Credit for the Elderly or Disabled

• Non refundable Credit that requires someone who is disabled or over the age of 65
• Credit is 15% of an certain base being $5000,$7500(Married-both over 65), 3750 (Married Filing Seperatly) - Limited at Disability as well -Also taxed on non-tax Social Security, Annutiy benefits or the amount of AGI over $5,000

1. The taxpayer CANNOT take credit if...Single, Head of Household, Qualifying Widow(er) is $17,500 or Married filing separately of 12,500 or over.
2. The taxpayer CANNOT take credit if...Married Filing Jointly is over $20,000 to 25,000,000 Non-tax Soc Security benfits equal 5,000 3.Marries Filing Separately can still receive credits, but they have to have had lived away from their partners for all of 2024.

Adoption Credit

• Nonrefundable that must be considered for for adoption expenses -Eligible child is who is is self or under the age of 18, self caring.
• Court costs, adoptition fees, etc count. unless a surrogate or state or federal law is violated. Taxpayers can't have had an an adoption from his or her spouse, or they are incurring child care. Then it won't count at al. -Adption is 16,810(Per qualified child), adjusted based on the special needs someone require and phase out occurs.

The Adoption Credit = 16,810 x[1- [magi- (252/40,000)]]

Unused credits are available up to 5 years

Residential Mortgage Interst Credit.

-Nonrefundable unless QMB are used, with finances that are also tied to it. the interest as well as the rate are also factors

• Taxpayers use 10% to 50% for their calculations.

If the rate ends up exceeding 20% then a 2000 per year limit goes into place Disallowed MCC can be kept for 3 years

Minimum Tax Credit (MTC)

• It Is Nonrefundable
• A credit can be given for alterative mininum with AMT that was paid from before, as long as there were not a regulat tqx liability from previous years. (Form 8801) -If the items were deferral oppsed to exclusion based, you calculate by recompute the latest amount while not factoring in the standard deduction , tax exempt interest ( unless the bond were from certain years),interest expense ,depeltion and taxes.

Gross regulaur tax is used for tax limits

• Refundable - and non-refundable creit are also factors

Earned Income Credit (EIC)

• Is refundable
• Is applicable when your EIC passes through AGI based on thresholds
• An individual is not eligible when he is not including certain identification or such as an (ITINs) either.
• Married can also not get it
• EIC will also have you needing to get the schedule as it Increases to the QC has.
• The IRS may also need more documents to show proof.
• If the one does not have , the QC then he is required to live n the States.

Tests for QC

1. Has to be blood related to either a Son, Stepson or such.
2. Has to be under 19, for the year.
3. And should have lived with the taxpayers for more than half the year

Child Claiming Rules for Parents

A parent the longest for the given year has priority, otherwise the tax payers can decide who will take the credit for it.

If none of these work then those will an eic of such are used to determined QC

QC of Another Person:

People under another, are ineligible.

Earned Incomes, 2024

Incomes of tips ,Wagyes

Not include non taxable (welfare , milatyr )

disqualiies those that have gains, or even non business royalties.

2024 max Amounts

• O QC = 8260(Earned Amt), 632$(Maximum) -Applicable 155% for tax payer
• 1 QC = 12390(Earned Amt), 4213$(Maximum) -Applicable 34% for tax payer
• 2 QC = 17400(Earned Amt), 6960$(Maximum) -Applicable 40% for tax payer
• 3 OC= 17400(Earned Amt), 7830$(Maximum) -Applicable 45% for tax payer decrease maxim amount by AGI from the amount required for those not elligble.

EIC: Phaseout Amounts, 2024:

Beginning & Completed (2024):

• 0 QC - $10,330 - $18,591($25,511)
• 1 QC - $22,720 ($29,610) - $49,084,($56,004)
• 2 QC - $22720 (29640) - $55768, $62688
• 3 QC -$22720 - 59899 .($66819) Those are in repecitve orders

For taxpayers, certain duties to use to determine eligibility: $635 fine.

• These have to new expanded knowledge on the knowledge
• From completion, the preparer must also use the right forms, and the check off must also meet requirements.
• A child who does not with a taxpayer for more than half must be noted as such.

All the forms should be used

Residential Energy Credits

Energy credits are based to where the residence is (improvements )

30% from 2022-2032 will factor- those such as wind power

• The home improvment is 30% with audits involved

Premmium Tax Credit

• With healt coverage may be used with (ptc)

• Can be up to or over at 400%

Based by market values. cap of a percantage based on how your income is.

• If at marketplace for months
• No govenrment for government insurance.
• cant be considered a dependent. if not lawfully present then they cant get this. Also must also file form 8962.

Clean Vehicle Credit

• After 2023 certain car models can make you 7,500 dollars- Certain income requirements .

• Used ones cant have gone over a certain amount tax payer can give it to the dealership.

8,2 Payments

Designed to follow the Tax, so there are is no need to withhold.

• Dates for Calendar year-April (jan Mar) June

• Under payment of 4th installmnet: on or before January 31 one must file tax and pay amount. what considered to be payments

• Applictions based on the year

• if some is under an educational location, one would with earn 250 or500 permonth

• must withhold from having penalties for year.

1. One last year's tax(returns) -An exception of this is if their have been extreme event that had forced these type of situations.

Farmers and Fisher man can use estimated taxes.

Exemption From Withheld can be found on From W 4.

Those 65 and older. If all is itemized, and tax is to be.

Extra Social Credit

The rule is such: to where any credit are able to be claimed, but first an extra credit is issued