1

Tax Credits / Alternative Minimum Tax Federal Tax I Fall 2012
OVERVIEW: This handout summarizes the Tax Credits and Alternative Minimum Tax topics in chapter 7 of your textbook. These are the last topics we will be covering this semester, and as previously discussed I am providing this handout supplementing the material contained in your text due to the time we lost because of Storm Sandy. The material on Tax Credits is contained on pages 7-23 – 7-34 (11 pages) of your textbook. The material on AMT (Alternative Minimum Tax) is covered on pages 7-8 – 7-14 (7 pages). So this is only 18 pages of chapter 7. We covered the rest of chapter 7 earlier this semester prior to exam 2. Tax Credits: As you will recall from very early in the semester, tax credits are a direct dollar for dollar reduction of our income tax liability. We looked at the value of a tax credit compared to the value of a tax deduction. Tax credits can either be nonrefundable or refundable. A nonrefundable credit will reduce a taxpayer’s tax liability, but never below zero. A refundable credit, on the other hand, will go even further. If the credit is large enough to reduce a taxpayer’s tax liability to zero, the excess credit will be refunded to the taxpayer (i.e. treated as additional tax paid in. Example 1: Tom has a tax liability of $ 3,000, a nonrefundable credit of $ 4,000, and federal tax withheld of $ 1,500. Calculate Tom’s refund: Tax Liability Less: credit Net tax Less Withholding Refund $ 3,000 ( 3,000) 0 ( 1,500) ( 1,500)

$ 1,000 unused credit is lost

Example 2: Same as example 1 except the $ 4,000 is a refundable credit: Tax Liability Less: credit Net tax Less: Withholding Ref. Credit Refund $ 3,000 ( 3,000) 0 ( 1,500) ( 1,000) ( 2,500)

$ 1,000 unused credit is refundable

1

2

There are numerous tax credits available to Individuals and Businesses, Many of these are