Income Taxation & Strategy

Chapter 9:
Tax Credits

Adjunct Professor Nagendra K. Singh, EA, CFP®

Prepared by Sharif A. Muhammad & Nagendra K. Singh. All rights reserved.

 Gross Income
OUR TaxAbove
Formula
&
Below the line
less
(For AGI &
The simplest way
Exclusions we can think of an income
From AGI)
tax calculation is
with these 3 steps:
1. Income - Deductions = Taxable Income
2. Taxable Income * Tax Rate = Tax Liability
3. Tax Liability - Credits - Payments = Tax Due (or Refund)

All inputsNon-Refundable Withholdingin& yellow. The rest we

we need are in are underlined
& Refundable Estimated
can look up or calculate. Payments

Prepared by Nagendra K. Singh. All rights reserved.

DEDUCTIONS VS. CREDITS

Deductions
• Reduce the income tax base (income subject to tax)

Credits
• Reduce the income tax liability
• In a 33% tax bracket, $1 credit is worth a $3 deduction
• Gives equal benefit regardless of marginal tax bracket

© Money Education Income Tax Planning 3

REFUNDABLE CREDITS VS.
NONREFUNDABLE CREDITS

Refundable Credits
• Paid out to taxpayer even if the amount of the tax credit
is larger than the tax due

Nonrefundable Credits
• Can only be used to offset tax liability
• If credit exceeds tax liability, excess is lost
• Exception: some nonrefundable credits have
carryover (back +/or forward) provisions

© Money Education Income Tax Planning 4

REFUNDABLE CREDITS

Taxpayer already paid the tax for this refundable credit:

● Federal Income Tax Withheld from Forms W-2 and 1099
● Estimated Tax Payments
● Federal Income Tax Refunds Applied from Prior Years
● Excess Social Security Taxes Withheld
● Credit for Excise Taxes on Non-Highway Fuels
Taxpayer is eligible based on certain criteria for this refundable credit:
● Earned Income Credit
● Child Tax Credit (partially refundable)
● Health Coverage Tax Credit
● American Opportunity Tax Credit (partially refundable)
Prepared by Nagendra K. Singh. All rights reserved.
EARNED INCOME TAX CREDIT
Qualifications
• Must have earned income (employee or self-employed)
• AGI must not exceed phaseout amount
• Different phase-outs based on filing status and number of qualify children
• Investment income < $11,600 (for 2024)
• If qualifying child, must meet:
• Relationship, age, and residency tests
• If no qualifying child:
• Taxpayer (or spouse if married) must be at least age 25

Amount of tax credit published annually in Publication 596 based on:

● Filing status
● Number of children
● AGI
© Money Education Income Tax Planning 6
 MULTIPLE CHOICE
How is the amount of the Earned Income Credit determined?
A. It's a fixed amount for all eligible individuals.
B. It depends on the taxpayer’s age, income type and amount,
filing status and number of qualifying children.
C. It's solely based on the number of dependents claimed on the
tax return.
D. It's zero for taxpayers without any dependent children.

Prepared by Nagendra K. Singh. All rights reserved.

NONREFUNDABLE CREDITS

1. Foreign Tax Credit

2. Child and Dependent Care Credit
3. Credit for the Elderly or Disabled
4. Education Credits
a. American Opportunity Tax Credit (partially refundable)
b. Lifetime Learning Credit
5. Retirement Savings Contributions Credit
6. Child Tax Credit (partially refundable)
7. Residential Energy Credits
a. Energy Efficient Home Improvement Credit
b. Residential Clean Energy Credit
8. Qualified Adoption Credit
9. General Business Credit

© Money Education Income Tax Planning 8

CARRYBACK/FORWARD OF
NONREFUNDABLE CREDITS

Since these credits cannot be refunded, the taxpayer will lose

them if they are not able to use them UNLESS there is a
Carryback/forward provisions as follows:

• Foreign Tax Credit: 1 year back and/or 10 years forward

• Qualified Adoption Credit: 5 years forward
• Residential Clean Energy Credit: ∞ carry forward
• General Business Credit: 1 year backand/or 20 years forward

© Money Education Income Tax Planning 9

NONREFUNDABLE CREDITS

1. Foreign Tax Credit

2. Child and Dependent Care Credit
3. Credit for the Elderly or Disabled
4. Education Credits
a. American Opportunity Tax Credit (partially refundable)
b. Lifetime Learning Credit
5. Retirement Savings Contributions Credit
6. Child Tax Credit (partially refundable)
7. Residential Energy Credits
a. Energy Efficient Home Improvement Credit
b. Residential Clean Energy Credit
8. Qualified Adoption Credit
9. General Business Credit

© Money Education Income Tax Planning 10

 FOREIGN TAX CREDIT

• Intended to avoid
double taxation
• If foreign tax is paid, can claim:
• Foreign tax credit, or
• Below-the-line itemized deduction for foreign taxes paid
• BUT NOT BOTH
• Method selected applies to all foreign taxes paid during the year.

• Limitations:
• No credit for income excluded from U.S. income (How does happen?)
• Unused credit carried back 1 year; carried forward 10 years

© Money Education Income Tax Planning 11

Prepared by Nagendra K. Singh. All rights reserved.
FOREIGN TAX CREDIT
The foreign tax credit is not
intended to reduce U.S. taxes
on U.S. source income because the following limitation is in place…

If the U.S. imposes taxes at a If the U.S. imposes taxes at a

higher rate than the foreign lower rate than the foreign
country, all of the foreign taxes country, not all of the foreign
will be allowed as a credit taxes will be allowed as a credit
against the U.S. income tax. against the U.S. income tax.

© Money Education Income Tax Planning 12

Prepared by Nagendra K. Singh. All rights reserved.
FOREIGN TAX CREDIT
CALCULATION

U.S. has higher rate: U.S. has lower rate:

Walt, a U.S. citizen, has taxable Walt, a U.S. citizen, has taxable
income of $100,000 in Bulgaria. income of $100,000 in France.
● U.S. tax = $19,000 ● U.S. tax = $19,000
● Bulgaria tax = $15,000 ● French tax = $25,000
Walt would claim a foreign tax Walt would claim a foreign tax
credit of only $15,000. credit of only $19,000.
End up paying total of $19,000 End up paying total of $25,000
● U.S. tax = $4,000 ● U.S. tax = $0
● Bulgaria tax = $15,000 ● French tax = $19,000
© Money Education Income Tax Planning 13
Prepared by Nagendra K. Singh. All rights reserved.
FOREIGN TAX CREDIT
CALCULATION
But what if taxpayer has both
domestic and foreign income?

Wendy’s income sources:

● foreign income of $100k
● U.S. income of $25k
Wendy’s tax obligations:
● Owes $35k in foreign tax on that $100k
● Owes $22k in U.S. tax on $125k Worldwide income
Wendy will be allowed to claim a foreign tax credit of $17,600.
= Foreign income / Worldwide income x U.S. tax
= $100,000/$125,000 x $22,000
= $17,600
© Money Education Income Tax Planning 14
Prepared by Nagendra K. Singh. All rights reserved.
 MULTIPLE CHOICE
What is the purpose of the Foreign Tax Credit for individuals?
a) To encourage individuals to invest in foreign businesses
b) To provide a tax deduction for all foreign taxes paid
c) To reduce double taxation on income generated abroad
d) To exempt individuals from paying any U.S. taxes on foreign income

Prepared by Nagendra K. Singh. All rights reserved.

NONREFUNDABLE CREDITS

1. Foreign Tax Credit

2. Child and Dependent Care Credit
3. Credit for the Elderly or Disabled
4. Education Credits
a. American Opportunity Tax Credit (partially refundable)
b. Lifetime Learning Credit
5. Retirement Savings Contributions Credit
6. Child Tax Credit (partially refundable)
7. Residential Energy Credits
a. Energy Efficient Home Improvement Credit
b. Residential Clean Energy Credit
8. Qualified Adoption Credit
9. General Business Credit

© Money Education Income Tax Planning 16

CHILD AND DEPENDENT
CARE CREDIT (1 OF 2)
General Qualifications
• Must have employment-related care costs for either:
• Dependent under age 13 [SO WHAT HAPPENS AT 13?]
• Dependent or spouse physically/mentally incapable of self-care
• Married taxpayers must file a joint return

Credit Amount
• Eligible care costs multiplied by the applicable percentage
• Applicable percentage ranges from 20% to 35% based on AGI
• AGI under $15k receive 35% applicable credit
• AGI over $43k receive 20% applicable credit
• AGI in between $15k and $43k varies between 35% and 20%

© Money Education Income Tax Planning 17

Prepared by Nagendra K. Singh. All rights reserved.
CHILD AND DEPENDENT
CARE CREDIT (2 OF 2)

• Covers costs for care of qualified individual within taxpayer’s home

or outside home.
• If outside home, dependent or spouse incapable of self care must
spend at least 8 hours a day within taxpayer’s home.
• Amount of costs that qualify is the lesser of
• Earned income, or
• Actual costs, or
• $3,000 for one qualified individual, and $6,000 for two or more
qualified individuals.
• Special Rules
• Both parents (if filing jointly) must be working, looking for work,
unable to work (disabled) or attending school full-time.

© Money Education Income Tax Planning 18

Prepared by Nagendra K. Singh. All rights reserved.
 MULTIPLE CHOICE
What is the maximum amount of qualifying expenses eligible for the Child
and Dependent Care Credit for a taxpayer who pays for the care of three
of his dependent children?
a) $1,000
b) $3,000
c) $6,000
d) $9,000

Prepared by Nagendra K. Singh. All rights reserved.

 MULTIPLE CHOICE
Which of the following is not a requirement to claim the Child and
Dependent Care Credit?
a) Pay for the care of dependent child under age 13
b) Both taxpayers need to have earned income or be full-time students
c) Can be used for the care of someone who is not the taxpayer’s child
d) Taxpayers AGI must be low enough to qualify for the credit

Prepared by Nagendra K. Singh. All rights reserved.

NONREFUNDABLE CREDITS

1. Foreign Tax Credit

2. Child and Dependent Care Credit
3. Credit for the Elderly or Disabled
4. Education Credits
a. American Opportunity Tax Credit (partially refundable)
b. Lifetime Learning Credit
5. Retirement Savings Contributions Credit
6. Child Tax Credit (partially refundable)
7. Residential Energy Credits
a. Energy Efficient Home Improvement Credit
b. Residential Clean Energy Credit
8. Qualified Adoption Credit
9. General Business Credit

© Money Education Income Tax Planning 21

CREDIT FOR ELDERLY AND DISABLED

General Qualifications
• Age 65 or older, or
• Under age 65 and permanently and totally disabled

Credit Amount
• Calculated on Schedule R
• Amount reduced for taxpayers with Social Security
benefits or AGI in excess of specified amounts
• IRS will figure for taxpayer if necessary

© Money Education Income Tax Planning 22

NONREFUNDABLE CREDITS

1. Foreign Tax Credit

2. Child and Dependent Care Credit
3. Credit for the Elderly or Disabled
4. Education Credits
a. American Opportunity Tax Credit (partially refundable)
b. Lifetime Learning Credit
5. Retirement Savings Contributions Credit
6. Child Tax Credit (partially refundable)
7. Residential Energy Credits
a. Energy Efficient Home Improvement Credit
b. Residential Clean Energy Credit
8. Qualified Adoption Credit
9. General Business Credit

© Money Education Income Tax Planning 23

EDUCATION TAX CREDITS

2 Education Credits:
• American Opportunity Tax Credit
• Lifetime Learning Credit

Common Elements:
• Available for taxpayer, spouse, and/or dependents
• Available for qualifying tuition and related expenses
• Room and board costs are not eligible
• Same AGI phaseout limitations
• Course materials (including books, supplies, and equipment needed
for a course of study) are considered qualified related expenses for
the American Opportunity Tax Credit
■ BUT not for the Lifetime Learning Credit unless required by
and paid to the education institution as a condition of
enrollment or attendance

© Money Education Income Tax Planning 24

AMERICAN OPPORTUNITY TAX CREDIT

• Maximum per eligible student is $2,500 per year for first 4 years of
postsecondary education.
• 100% of first $2,000 of qualifying expenses, plus
• 25% of next $2,000 of qualifying expenses

• Most taxpayers will be required to treat the credit as

• 60% of it is non-refundable
• 40% of it is refundable

• Student must:
• Pursue an undergraduate degree or recognized credential
• Take at least 1/2 of full-time course load
• Have a Tax ID number issued prior to the due date of the
return on which the credit is claimed
• Not have any felony drug conviction

© Money Education Income Tax Planning 25

LIFETIME LEARNING TAX CREDIT

• Maximum per taxpayer is 20% of qualifying expenses (up to $10,000 per

year).
• Cannot be claimed for the same student in the same year as the
American Opportunity Tax Credit is claimed.

• Student must take one or more courses. (No requirement for at least 1/2
of full-time course load)

• Not limited to undergraduate degree (hence the name lifetime learning)

• Felony conviction for possessing or distributing a controlled substance

does not impact the Lifetime Learning Tax Credit

© Money Education Income Tax Planning 26

LIMITATIONS: EDUCATION TAX CREDITS

American Opportunity and Lifetime Learning Tax Credits are phased out
for MAGI (not indexed for inflation) of:
• $160,000 - $180,000 for married filing jointly, and
• $80,000 - $90,000 for others
▪ MAGI = AGI + excluded foreign income + excluded income from
U.S. possessions

NO double tax benefit for education expenses:

• Cannot claim a credit for amounts spent with money that was
excluded from income, ex:
▪ scholarships
▪ employer-paid education assistance
▪ 529 plan withdrawals
© Money Education Income Tax Planning 27
 MULTIPLE CHOICE
Which of the following is a requirement to claim the Life Learning Credit
AND the American Opportunity Tax Credit?
a) Misc fees required by the university are eligible for the credit
b) Student must be taking at least 1/2 of full-time course load
c) Student must be pursuing an undergraduate degree
d) Student must not have a felony drug conviction

Prepared by Nagendra K. Singh. All rights reserved.

 MULTIPLE CHOICE
What is the maximum possible credit amount for the American Opportunity
Tax Credit for one student?
a) $1,000
b) $2,000
c) $2,500
d) $5,000

Prepared by Nagendra K. Singh. All rights reserved.

NONREFUNDABLE CREDITS

1. Foreign Tax Credit

2. Child and Dependent Care Credit
3. Credit for the Elderly or Disabled
4. Education Credits
a. American Opportunity Tax Credit (partially refundable)
b. Lifetime Learning Credit
5. Retirement Savings Contributions Credit
6. Child Tax Credit (partially refundable)
7. Residential Energy Credits
a. Energy Efficient Home Improvement Credit
b. Residential Clean Energy Credit
8. Qualified Adoption Credit
9. General Business Credit

© Money Education Income Tax Planning 30

RETIREMENT SAVINGS CREDIT (1 OF 2)
aka THE SAVERS CREDIT
• Taxpayers with MAGI below certain thresholds receive
a credit for retirement savings (In addition to the
tax-benefit they may have already received for their
retirement contribution). This violates which
• Fully phased out at: of our basic tenets?
▪ $76,500 of MAGI for MFJ (2024)
▪ $57,375 of MAGI for HOH (2024)
▪
$38,250 for all others (2024)
• MAGI includes
▪ Excluded foreign income and housing costs
▪ Income for residents of American Samoa and Puerto Rico
• 18 or older
• Makes a qualified retirement savings contribution
• Traditional IRA or Roth IRA
• Elective deferrals into a 401k, 403b, 457 qualified plan
© Money Education Income Tax Planning 31
 RETIREMENT SAVINGS CREDIT (2 OF 2)
aka THE SAVERS CREDIT

Maximum of $2,000 of total contributions is used

Tax Credit = Contribution x Percentage*
*based on AGI & Filing Status, can 10%, 20% or 50% (See IRS Form 8880)
Maximum Credit is $2,000 for joint filing status or $1,000 for others

Example: Hamed is single and his AGI is $30k. If he contributes $3,000 to his Roth
IRA then his Retirement Savings Credit will be $200.
Amount of Tax Credit = Contribution x Percentage based on AGI & Filing Status
Amount of Tax Credit = lessor of ($2,000 or $3,000) x 10%
Amount of Tax Credit = $200

© Money Education Income Tax Planning 32

Prepared by Nagendra K. Singh. All rights reserved.
 MULTIPLE CHOICE
All of following retirement account contributions are eligible for the
Retirement Savings Contributions Credit EXCEPT…
a) Contributions to an employer-sponsored 401(k) plan
b) Contributions to a Roth IRA
c) Contributions to a Health Savings Account (HSA)
d) Contributions to a governmental 457 plan

Prepared by Nagendra K. Singh. All rights reserved.

NONREFUNDABLE CREDITS

1. Foreign Tax Credit

2. Child and Dependent Care Credit
3. Credit for the Elderly or Disabled
4. Education Credits
a. American Opportunity Tax Credit (partially refundable)
b. Lifetime Learning Credit
5. Retirement Savings Contributions Credit
6. Child Tax Credit (partially refundable)
7. Residential Energy Credits
a. Energy Efficient Home Improvement Credit
b. Residential Clean Energy Credit
8. Qualified Adoption Credit
9. General Business Credit

© Money Education Income Tax Planning 34

CHILD TAX CREDIT
• $2,000 credit per qualifying child
• Refundable up to $1,700 (for 2024)
• Qualifications:
• Married taxpayers must file jointly (i.e. separate filers lose out)
• Credit amount is $2,000 per eligible child
• Eligible children are:
▪ Under age 17, [SO WHAT HAPPENS AT 17?]
▪ U.S. citizen, U.S. national, or resident, and
▪ Claimed as dependent on taxpayer’s tax return
▪
Have a Tax ID number issued before the due date of the return
• Credit is phased out by $50 for each $1,000 of AGI above specified
levels. (Not indexed for inflation.)
• $400,000 for joint filers
• $200,000 for head of household
• $200,000 for single
© Money Education Income Tax Planning 35
OTHER DEPENDENT (FAMILY) CREDIT
$500 tax credit for someone who was a qualified dependent but
did not meet the child tax credit rules.
• Not available for the taxpayer or spouse

© Money Education Income Tax Planning 36

 MULTIPLE CHOICE
Which statement accurately reflects the rules of the Child Tax Credit:
a) The credit is not available in the year of the child’s birth because they
were not alive for the full year.
b) The children must be U.S. citizens, but their parents do not need to be.
c) The credit is partially refundable, allowing for a refund even if the
couple has no federal income tax liability.
d) Taxpayer (and spouse if applicable) must have earned income to
qualify for the credit.

Prepared by Nagendra K. Singh. All rights reserved.

NONREFUNDABLE CREDITS

1. Foreign Tax Credit

2. Child and Dependent Care Credit
3. Credit for the Elderly or Disabled
4. Education Credits
a. American Opportunity Tax Credit (partially refundable)
b. Lifetime Learning Credit
5. Retirement Savings Contributions Credit
6. Child Tax Credit (partially refundable)
7. Residential Energy Credits
a. Energy Efficient Home Improvement Credit
b. Residential Clean Energy Credit
8. Qualified Adoption Credit
9. General Business Credit

© Money Education Income Tax Planning 38

ENERGY EFFICIENT HOME IMPROVEMENT CREDIT
Encourage taxpayers to make certain energy efficient improvements to their
PRIMARY residence

Amount of tax credit is generally 30% of the amount spent with the following
additional specific limitations:

© Money Education Income Tax Planning 39

Prepared by Nagendra K. Singh. All rights reserved.
NONREFUNDABLE CREDITS

1. Foreign Tax Credit

2. Child and Dependent Care Credit
3. Credit for the Elderly or Disabled
4. Education Credits
a. American Opportunity Tax Credit (partially refundable)
b. Lifetime Learning Credit
5. Retirement Savings Contributions Credit
6. Child Tax Credit (partially refundable)
7. Residential Energy Credits
a. Energy Efficient Home Improvement Credit
b. Residential Clean Energy Credit
8. Qualified Adoption Credit
9. General Business Credit

© Money Education Income Tax Planning 40

RESIDENTIAL CLEAN ENERGY CREDIT
Encourage taxpayers to switch to alternate energy sources to power their PRIMARY
or SECONDARY residence

Amount of tax credit is generally 30%* of the amount spent with the following
additional specific limitations:

*Reduces to 26% in 2033 and 22% in 2034

© Money Education Income Tax Planning 41
Prepared by Nagendra K. Singh. All rights reserved.
 MULTIPLE CHOICE
Which of the following types of energy systems is will not qualify for a
tax credit on a taxpayer’s secondary residence?
a) Solar water heating
b) Geothermal heat pumps
c) Wind energy systems
d) Biomass fuel heating systems

Prepared by Nagendra K. Singh. All rights reserved.

NONREFUNDABLE CREDITS

1. Foreign Tax Credit

2. Child and Dependent Care Credit
3. Credit for the Elderly or Disabled
4. Education Credits
a. American Opportunity Tax Credit (partially refundable)
b. Lifetime Learning Credit
5. Retirement Savings Contributions Credit
6. Child Tax Credit (partially refundable)
7. Residential Energy Credits
a. Energy Efficient Home Improvement Credit
b. Residential Clean Energy Credit
8. Qualified Adoption Credit
9. General Business Credit

© Money Education Income Tax Planning 43

ADOPTION EXPENSE CREDIT

• Credit for qualified adoption expenses incurred in adoption of eligible child.

Examples of expenses: adoption fees, court costs, attorney fees, travel
•
expenses
• Maximum credit is $16,810 for 2024.
• Credit is phased out ratably for modified AGI between $252,150 and
$292,150 for 2024.
• Eligible child is one that is:
• Less than 18 years of age, or

• Physically or mentally handicapped

• Nonrefundable credit
• Excess may be carried forward for five years

• Timing of claiming credit

• For domestic adoption - in year expenses are paid

• For foreign adoption - only after successful completion of adoption

© Money Education Income Tax Planning 44

NONREFUNDABLE CREDITS

1. Foreign Tax Credit

2. Child and Dependent Care Credit
3. Credit for the Elderly or Disabled
4. Education Credits
a. American Opportunity Tax Credit (partially refundable)
b. Lifetime Learning Credit
5. Retirement Savings Contributions Credit
6. Child Tax Credit (partially refundable)
7. Residential Energy Credits
a. Energy Efficient Home Improvement Credit
b. Residential Clean Energy Credit
8. Qualified Adoption Credit
9. General Business Credit

© Money Education Income Tax Planning 45

GENERAL BUSINESS CREDIT
Comprised of MORE THAN 30 non-refundable business credits
combined into one amount (See Exhibit 9.16)

© Money Education Income Tax Planning 46

GENERAL BUSINESS CREDIT

Some of the more noteworthy General Business Credits:

• Work Opportunity Tax Credit
• Low-Income Housing Credit
• Disabled Access Credit
• Small Employer Pension Plan Startup Costs Credit

Unused credit is carried back 1 year, then forward 20 years

© Money Education Income Tax Planning 47

CREDIT SEQUENCING

Prepared by Sharif A. Muhammad & Nagendra K. Singh. All rights reserved.

 Start your participation quiz… now!
THIS WEEK’S UPCOMING ASSIGNMENTS

ASSIGNMENT DUE DATE DESCRIPTION

Discussion Post Monday Calculation Based:
night Iris - Unexpected Income

Discussion Post Monday Calculation Based:

night Alya- Reviewing Her
Return

Reading Tuesday Chapter 8

night (Go back to it)

Quiz Tuesday Chapter 8

night (Go back to it)

Practice Optional Several True/False &

Exam #1a Multiple Choice Questions

© Money Education Income Tax Planning 49

Prepared by Nagendra K. Singh. All rights reserved.