New Developments – Tax Credits For 2015

Harold-Goedde

1. Earned income (EITC).

Taxpayers with no children it is $503, with one child $3,359, two qualifying children $5,548, three qualifying children $6,342 but are subject to AGI phase­outs. The recent tax law makes permanent the increase of $5,000 in the phase­out amount for joint filers scheduled to expire after 2017. The law also makes permanent the increased 45% credit percentage for taxpayers with three or more qualifying children. Under prior law, both increases had been available only through 2017. It also makes permanent the reduced earned income threshold of $3,000. The law makes the following provisions permanent:

(a) Taxpayer Identification Number (TIN) Required. The EITC is denied with respect to any taxable year for which the taxpayer has a TIN that has been issued after the due date for filing the return, including extensions.

(b) Restrictions on Taxpayers Improperly Claiming the EITC. For taxable years beginning after December 31, 2015, if an individual claims the EITC in a taxable year that the individual is denied the credit, and the claim for the credit determined to be due to fraud or reckless or intentional disregard of the rules, that individual may not claim the EITC for the next ten years (if due to fraud) or two years (if due to reckless or intentional disregard of the rules). The credit is refundable for qualifying taxpayers who have earnings above $3,000.This provision had been scheduled to expire after 2017 but has now been made permanent.

2. Child (CTC)

$1,000 per qualifying child under age 17 who qualifies as a dependent. It is refundable to the extent of 15% of taxpayers earned income exceeding $3,000. The credit is not refundable for those who exclude foreign income under Sec. 911. The credit is phased out as MAGI reaches $75,000 ($110,000 for married joint and $55,000 for married filing separate. To claim the credit, the law permanently requires the following:

(a) The credit will be denied if taxpayers do not have a TIN for any taxable year for which the taxpayer has a TIN issued after the due date of the return, including extensions.

(b) Restrictions on taxpayers improperly claiming the CTC. For taxable years beginning after December 31, 2015, if an individual claims the CTC in a taxable year that individual is denied the credit, and the claim for credit is determined to be due to fraud or reckless or intentional disregard of the rules, that individual may not claim the CTC for the next ten years (if due to fraud) or two years (if due to reckless or intentional disregard of the rules).

( c) Due diligence requirement. The law requires tax return preparers to meet the same due diligence requirements for the CTC as those applicable to returns claiming the EITC.

3. Adoption expenses

The credit is for a child under 18, maximum amount is $13,400 but phases out for MAGI between $201,100 and $241,010. The full credit is available for a special needs child even if it costs less. The credit is not refundable.

4. American opportunity education (AOC):

This credit is for undergraduate expenses for tuition and fees reported on form 1098T and books (room and board does not qualify). The maximum amount is $2,000, plus 25% of the next $2,000 of qualifying expenses per student. 40% of the credit is refundable. The credit phases out for MAGI between $80,000 and $90,000 for singles, $160,000 and $1280,000 for married filing jointly. To claim the credit, the law permanently requires the following:

(a) The credit will be denied if taxpayers do not have a TIN for any taxable year for which the taxpayer has a TIN issued after the due date of the return, including extensions.

(b) Restrictions on taxpayers improperly claiming the AOC. For taxable years beginning after December 31, 2015, if an individual claims the CTC in a taxable year that individual is denied the credit, and the claim for credit is determined to be due to fraud or reckless or intentional disregard of the rules, that individual may not claim the CTC for the next ten years (if due to fraud) or two years (if due to reckless or intentional disregard of the

( c) Due diligence requirement. The law requires tax return preparers to meet the same due diligence requirements for the AOC as those applicable to returns claiming the EITC.

5. Lifetime education

This credit is for college education beyond the four years of undergraduate. Other non college courses (such as continuing education not taken as a business expense) also qualify. The maximum amount is 20% of qualified expenses (same as the AOC) up to $10,000. It phases out for MAGI between $55,000 and $65,000 for singles, $110,00 and $130,000 for married filing joint. The credit is not refundable. To claim the credit, the law permanently requires the following:

(a) The credit will be denied if taxpayers do not have a TIN for any taxable year for which the taxpayer has a TIN issued after the due date of the return, including extensions.

(b) Restrictions on taxpayers improperly claiming the lifetime education credit. For taxable years beginning after December 31, 2015, if an individual claims the lifetime education credit in a taxable year that individual is denied the credit, and the claim for credit is determined to be due to fraud or reckless or intentional disregard of the rules, that individual may not claim the lifetime education credit for the next ten years (if due to fraud) or two years (if due to reckless or intentional disregard of the rules).

( c) Due diligence requirement. The law requires tax return preparers to meet the same due diligence requirements for the lifetime education credit as those applicable to returns claiming the AOC.

(a) General: The credit is available for contributions to a traditional and Roth IRA, 401(k), 403(b) [voluntary before and after tax contributions], SEP, SIMPLE 401(k) and IRA, government 457, and other qualified plans. The amount of the credit is a percentage of the first $2,000 of contributions made for the year. The percentages are:

Rate Joint Return Surviving Spouse Head of Household Single Married­-Separate
50% up to 36,500 up to 27,375 up to 18,250
20% up to 36,501­39 27,376-29,625 18,251­-19,750
10% 39,501­-61,000 29,626­-45,750 19,751­-30,500
0% Over 61,000 Over 45,750 Over 30,500

(b) Withdrawals can eliminate the credit. If you withdrew money from a retirement plan for which you received a savers credit, your 2015 eligible contributions must be reduced by the total distributions you (and spouse if joint return) received after 2012. They must be withdrawn before the due date of your 2015 return, including extensions and do not include rollovers. Form 8880 instructions provides details. The credit is not refundable and must be reduced by other nonrefundable credits (CTC, dependent care credit, american opportunity or lifetime learning education).

7. Employers offering health coverage

The full credit is available only if the firm employs 10 or fewer full­time­equivalent employees with average wages of $24,900 ($25,000 for 2016) or less. The credit is reduced if a company has more employees and higher average wages phasing out completely when 25 or more are employed or average pay exceeds $51,800.

8. Energy

Under Sect 256, taxpayers can claim a credit up to $500 for certain energy improvements to a principal residence placed in service before the end of the tax year. The credit is 10% of the cost for energy efficient insulation, windows, doors, roofs, plus 100% of eligible costs for energy efficient heating and cooling equipment subject to a $500 lifetime limit. The new tax law extends the credit through 2017.

Dr. Goedde is a former college professor who taught income tax, auditing, personal finance, and financial accounting and has 25 years of experience preparing income tax returns and consulting. He published many accounting and tax articles in professional journals. He is presently retired and does tax return preparation and consulting. He also writes articles on various aspects of taxation. During tax season he works as a volunteer income tax return preparer for seniors and low income persons in the IRS’s VITA program.

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