[REG] Tax credits
1. Tax credits reduce taxpayer's tax liability, classified into two categories: refundable/ non-refundable tax credits
| Nonrefundable tax credits | Child and dependent care credit, Elderly and permanently disabled credit, Lifetime learning credit, American opportunity credit(60% nonrefundable), Retirement savings contribution credit, foreign tax credit, General business credit, Adoption credit |
| Refundable tax credits | Earned Income Credit(EIC), Child Tax Credit(70%), Amerian opportunity credit(40%) |
2. Foreign tax credit
- Foreign tax paid either 1) deducted(sch A) without limitation or 2) claimed as a credit
- Limitation: lessor of foreign taxes paid or Foreign source income / WW income * US tax
- unused credits due to limitation / due to non-refundable credit limitation> carried back 1yr, carried over 10yrs
* 미국보다 tax rate이 높으면, 미국국세청에서 받을 금액이 작아진다. 따라서 limitation 적용한다.
* US tax on WWI (US income tax before foreign credit)
3. Child and dependent Care credit
1) Qualified Expense
- rate: 20% to 35%(decrease by 1% for each $2K of AGI over $15K, but not reduce below 20%)
- Both spouses, gainfully employed or looking for work
- married, must MFJ
- households (live more than 50%)
- Qualifying individuals: dependent under 13 / spouse incapable of self-care
- non-qualifying expenses(elementary school, payments to dependent relative)
2) Maximum amount of expenses
- least of ① Actual expenses / ② 3K per child / 6K for two or more ③ Lessor of either spouse's income
- Spouse, student/ incapable of self-care > earned $250/M for one, $500/M for more than two
- Daycare center, babysitter(mother, dependent가 아니라면 가능함)
3) AGI over $438K > Credit 0%
4) example
4. Education Credits
1) American Opportunity Tax Credit (AOTC)
- $2,500 per each eligible student(40% refundable credit)
- first 4yrs of post-secondary education
- phased out for MFJ with AGI bet 160K-180K
- not available for students convicted of a felony drug offense in the calendar year for which expenses are incurred
- for the first 4 years of the postsecondary education program
- 100% of the first $2K and 25% of the next $2K of tuition and related expenses
2) Lifetime Learning Credit (LLC)
- up to $2K(20% of first 10K) per return
- Qualified tuition and related expenses(but not course materials), unlimited number of years
- phase out for MFJ with AGI bet 160K-180K
- first 10K of tuition and related expenses
| Opportunity credit | Lifetime learning credit | |
| Eligibility | First 4years | Unlimited |
| Tax credit | $2,500 per student | $2,000 per student |
| Phase-out for MFJ | 160K -180K | 160K -180K |
3) Coverdell education savings account
- contributions non-deductible (Max $2K annually), earnings&distribution not taxable(if used for qualified exp)
* distribution directly to the beneficiary> taxable + 10% penalty
* rolled over tax-free to another family member with no penalty
- beneficiary may be any child under the age of 18
- no limit to the number of beneficiaries
- Phase-out range: (married) 190K-220K
- any amounts remaining, when the beneficiary reaches 30 must be distributed
4) Section 529 plan(qualified tuition plans)
- Purchase tuition credits /cash contributions for the beneficiary for payment of qualified higher education expenses.
- the program must be established and maintained by a state/ state agency, eligible education institution
| Item | General Rule | Limit | Income phase-out |
| Income Exclusion | |||
| US savings bond series EE | exclude int income | Must pay educational exp |
AGI $91,850-$106,850 (MFJ $137,800-167,800) |
| ER-paid education exp | exclude from income | Up to $5250 per year Dependent |
No income limit |
| Scholarships | exclude from income | Only tuition, books, fees, not room and board | No income limit |
| Adjustments | |||
| Educator expenses | Deduct as above-the-line adjustment | $300 | No income limit |
| Coverdell education savings account | Nondeductible | $2,000 | AGI $95K-110K (MFJ 190K-220) |
| Student loan int deduction | Deduct as above-the-line adjustment | $2,500 | AGI $75K-90K (MFJ 155K-185) |
| Credits | |||
| American Opportunity Tax credit | First four years: partially refundable | $2,500 per person tuition, fees, course materials |
AGI $80K-$90K (MFJ $160K-180K) |
| Lifetime learning credit | After first four years: nonrefundable | $2,000 per taxpayer tuition, fees, course materials |
AGI $80K-$90K (MFJ $160K-180K) |
| Miscellaneous | |||
| 529 plan (qualified tuition program) |
No deduction No income |
Vary by state | None |
5. Retirement savings contributions credit(low/moderate income taxpayers)
- Tax credit of up to $2K for MFJ($1K for one) for contributions made to IRAs/ most retirement plans
| Credit rate | Single | MFJ | Max Credit |
| 50% | $0-$21,750 | $0-$43,500 | $2K*50%=1000 |
| 20% | $21,751-$23,750 | $43,501-$47,500 | $2K*20%=400 |
| 10% | $21,751-$36,500 | $43,501-$73,000 | $2K*10%=200 |
| 0% | over $36,500 | over $73,000 | $2K*0%=0 |
- at least 18 years old, not a full-time student, not dependent of another taxpayer
- no carryover is allowed
6. Child tax credit(아이가 있으면 해줌)
- $2K(70% refundable credit) per qualifying child under 17
- reduced by $50 for each 1K AGI more than 400K MFJ
- refundable amount: lesser of
tax credit over liability / earned income over $2500*15% / $1600 per child
7. Credit for other Dependents
- family tax credit is $500 per dependent other than a qualifying child
- may include children aged 17 and above
8. Credit for the Elderly and the disabled
- Taxpayer who is 65 or older
- taxpayer who is disabled
- Single: {5K - (AGI - 7.5K)*50%- tax-exempt income}*15%
- MFJ: {7.5K - (AGI -10K)*50% - tax-exempt income}*15%
9. Credit for Adoption Expenses
- adoption expenses credit, up to $15,950
- A child under 18 who is incapable of self-care
- not available: adopting the child of a spouse/ surrogate parenting arrangement
- non-refundable credit up to $14,400 of qualifying adoption, when adoption becomes final
- phase-out AGI bet 239,230 and 279,230
- Excess credit CF 5yrs
10. General business credit
- GBC comprised various credits(investment credit, work opportunity tax credit,alternative fuels credit, increased research credit, low-income housing credit, Qualified child care expenditures, welfare-to-work credit, employer-provided child care credit, small employer retirement plan start-up costs credit, alternative motor vehicle credit)
- nonrefundable credits
- CB 1y, CO 20yrs
- limitation: tax over 25K * 25%
- credit is available for the first 3yrs of the plan
1) Work opportunity credit: available to ER, hire EE from the targeted group
credit: 40% of the first 6K of first year's wages, 40% of the first 3K of certain summer youth
Qualified groups: disabled, 18 to 24-year-olds from poor families, Vietnam veterans from economically disadvantaged areas, food stamp recipients
2) Small employer retirement plan start-up costs credit
- no more than 100 EEs, received at least $5K in the preceding year
+ at least one plan participant is a non-highly compensated EE
- ordinary and necessary costs to set up and administer the plan + EE education
- either deduct or credit for those costs
- credit is the greater of
| 100%, first $1K of start-up cost for ER with 50 or fewer EEs | lesser of $250 for each EE who is eligible for the plan or $5000 |
3) Small business health care tax credit
- credit of up to 50% of the employer's cost of the plan premiums > credit for ER
when ER contributes at least 50% of the cost of the health coverage on behalf of EE, health plan through SHOP(small business health options program)
- credit is not refundable, unused amount carried back 1yr, carry over 20yrs
- cost for family members, owners with greater than 2%, and shareholders owning more than 5% are excluded
4) Nonrefundable tax credit
- Energy-efficient home improvement credit
- Residential clean Energy Credit
- Clean Vehicle credit
- Alternative Fuel Refueling Property Credit
11. Earned Income Credit(refundable credit)
- individuals with investment income over $11K cannot claim the credit
- refundable tax credit for low-income workers with a child under 19 / full-time students under 24 / disabled
- Must file MFJ
- Based on 12M income
- disqualified income X
- Qualifying child is not a requirement to be eligible for the EIC, but EI level is higher
