Examples from Ch12 – Flashcards

Paul and Peggy, husband and wife, are both employed outside the home. Their combined salaries are $50,000. However, after paying for child care expenses of $2,000 on behalf of their daughter, Polly, the pre-tax economic benefit from both spouses working is $48,000. The child care expenses are, in a sense, business-related, because they would not have been incurred if both spouses did not work outside the home. If no tax benefits are associated with the child care expenditures, $50,000 is subject to tax. Another couple, Alicia and Diego, also have a child, John. Diego stays at home to care for John (the value of those services is $2,000) while Alicia earns a $48,000 salary. Because the value of Diego's services rendered is not subject to tax, only Alicia's earnings of $48,000 are subject to tax.

Jane is a single parent who depends on the government's "safety net" for survival—she receives benefits under the Temporary Assistance to Needy Families program in the amount of $15,000 per year. However, she very much wants to work. Jane has located a job that will pay $15,500 per year and has found an individual to care for her child at no cost. But, with the $1,185.75 ($15,500 × 7.65%) withholding for Social Security and Medicare taxes, the economic benefit from working is less than remaining reliant on the government ($14,314.25 versus $15,000).

Congress wants to encourage a certain type of expenditure. One way to accomplish this objective is to allow a tax credit of 25% for such expenditures. Another way is to allow an itemized deduction for the expenditures. Abby's tax rate is 15%, while Bill's tax rate is 35%, and both itemize deductions. Carmen does not incur enough qualifying expenditures to itemize deductions. The following tax benefits are available to each taxpayer for a $1,000 expenditure. Abby - Bill - Carmen Tax benefit if a 25% credit is allowed: $250 - $250 - $250 Tax benefit if an itemized deduction is allowed: 150 - 350 - -0- As these results indicate, tax credits provide benefits on a more equitable basis than do tax deductions. Equally apparent is that the deduction approach in this case benefits only taxpayers who itemize deductions, while the credit approach benefits all taxpayers who make the specified expenditure.

Refundable Credits •Taxes withheld on wages •Earned income credit Nonrefundable Credits •General business credit, which includes: -Tax credit for rehabilitation expenditures -Work opportunity tax credit -Research activities credit -Low-income housing credit -Disabled access credit -Credit for small employer pension plan startup costs -Credit for employer-provided child care •Credit for elderly or disabled •Foreign tax credit •Adoption expenses credit •Child tax credit •Credit for child and dependent care expenses •Education tax credits •Energy credits •Credit for certain retirement plan contributions •Small employer health insurance credit

Ted, who is single, reported taxable income of $21,000 in 2015. His income tax liability is $2,689. Ted's employer withheld income tax of $3,200. Ted is entitled to a refund of $511; the credit for tax withheld on wages is a refundable credit.

Tina is single, age 27. Her taxable income is $1,320, and the tax on this amount is $132. Tina's tax credit for child care expenses is $225. This credit can be used to reduce her net tax liability to zero, but it will not result in a refund, even though the credit ($225) exceeds Tina's tax liability ($132). The child care credit is nonrefundable.

Elijah's tax liability before credits is $1,000. He qualifies for two tax credits: a $400 Credit A (nonrefundable) and an $800 Credit B (refundable). The order in which the credits are applied affects Elijah's tax refund for the year. If Refundable Credit is Applied First Precredit tax liability- $1,000 Credit B- (800) Remaining tax due- $200 Credit A (as limited)- (200) Tax due/(Refund)- $-0- If Nonrefundable Credit is Applied First Precredit tax liability- $1,000 Credit A- (400) Remaining tax due- $600 Credit B- (800) Tax due/(Refund)- $(200)

Floyd's general business credit for the current year is $70,000. His net income tax is $150,000, the tentative minimum tax is $130,000, and Floyd's net regular tax liability is $150,000. He has no other tax credits. Floyd's general business credit allowed for the tax year is computed as follows. Net income tax- $150,000 Less: The greater of • $130,000 (tentative minimum tax) • $31,250 [25% x (150,000 - 25,000)]- (130,000) Amount of general business credit allowed for tax year- $20,000 Floyd now holds $50,000 ($70,000 ? $20,000) of unused general business credits that may be carried back or forward to other tax years.

This example illustrates the use of general business credit carryovers. General business credit carryovers 2012 $4,000 2013 $6,000 2014 $2,000 Total carryovers- $12,000 2015 general business credit = $40,000 Total credit allowed in 2015 (based on tax liability) $50,000 Less: Utilization of carryovers 2012 $(4,000) 2013 $(6,000) 2014 $(2,000) Remaining credit allowed in 2015 $38,000 Applied against 2015 general business credit =(38,000) 2015 unused amount carried forward to 2016 =$2,000

Juan spent $60,000 to rehabilitate a building (adjusted basis of $40,000) that had been placed in service in 1932. He is allowed a $6,000 (10% × $60,000) credit for rehabilitation expenditures. Juan then increases the basis of the building by $54,000 [$60,000 (rehabilitation expenditures) ? $6,000 (credit allowed)]. If the building were a historic structure, the credit allowed would be $12,000 (20% × $60,000), and the building's depreciable basis would increase by $48,000 [$60,000 (rehabilitation expenditures) ? $12,000 (credit allowed)].

If the Property Is Held for --- The Recapture Percentage Is Less than 1 year --- 100 One year or more but less than 2 years --- 80 Two years or more but less than 3 years --- 60 Three years or more but less than 4 years --- 40 Four years or more but less than 5 years --- 20 Five years or more --- 0

On March 15, 2013, Rashad placed in service $30,000 of rehabilitation expenditures on a building qualifying for the 10% credit. A credit of $3,000 ($30,000 × 10%) was allowed, and the basis of the building was increased by $27,000 ($30,000 ? $3,000). The building was sold on December 15, 2016. Rashad must recapture a portion of the rehabilitation credit, based on the schedule in Exhibit 12.2. Because he held the rehabilitated property for more than two years but fewer than four, 40% of the credit, or $1,200, is added to his 2016 tax liability. The adjusted basis of the rehabilitation expenditures is increased by the $1,200 recapture amount.

Computing the Credit and the Wages Deduction In January 2015, Green Company hires four individuals who are certified to be members of a qualifying targeted group. Each employee works 800 hours and is paid wages of $8,000 during the year. Green Company's work opportunity credit is $9,600 [($6,000 × 40%) × 4 employees]. If the tax credit is taken, Green must reduce its deduction for wages paid by $9,600. No credit is available for wages paid to these employees after their first year of employment.

On June 1, 2015, Maria, a calendar year taxpayer, hires Joe, a certified member of a targeted group. During the last seven months of 2015, Joe is paid $3,500 for 500 hours of work. Maria is allowed a credit of $1,400 ($3,500 × 40%) for 2015. Joe continues to work for Maria in 2016 and is paid $7,000 through May 31, 2016. Because up to $6,000 of first-year wages are eligible for the credit, Maria is allowed a 40% credit on $2,500 [$6,000 ? $3,500 (wages paid in 2015)] of wages paid in 2016. The credit equals $1,000 ($2,500 × 40%). None of Joe's wages paid after May 31, the end of the first year of employment, are eligible for the credit.

In April 2015, Blue Company hired four individuals who are certified as long-term family assistance recipients. Each employee is paid $9,000 during 2015. Three of the four individuals continue to work for Blue in 2016, earning $11,000 each during the year. Blue's work opportunity tax credit is $14,400 [(40% × $9,000) × 4 employees] for 2015 and $15,000 [(50% × $10,000) × 3 employees] for 2016. In each year, Blue reduces its deduction for wages paid by the amount of the credit for that year.

George incurs the following research expenditures. In-house wages, supplies, computer time $50,000 Paid to Cutting Edge Scientific Foundation for research 30,000 George's qualified research expenditures are $69,500 [$50,000 + ($30,000 × 65%)].

Jack, a calendar year taxpayer, incurs qualifying research expenditures of $200,000 at the beginning of the year. If Jack's base amount is $120,000, the incremental research activities credit is $16,000 [($200,000 ? $120,000) × 20%].

Assume the same facts as in Example 15, which shows that the potential incremental research activities credit is $16,000. The current-year deduction and corresponding credit are computed as follows. Credit Amount - Deduction Amount • Full credit and reduced deduction $16,000 ? $0 - $16,000 $200,000 ? $16,000 --- $184,000 • Reduced credit and full deduction $16,000 ? [(100% × $16,000) × 35%] - 10,400 $200,000 ? $0 --- 200,000 • Full credit and capitalize and elect to amortize costs over 60 months $16,000 ? $0 - 16,000 ($200,000/60) × 12 --- 40,000

Orange Corporation pays $75,000 to a university for basic research. Orange's base amount for the basic research credit is $50,000. The basic research activities credit allowed is $5,000 [($75,000 ? $50,000) × 20%]. The $50,000 base amount for basic research is treated as research expenses for purposes of the regular incremental research activities credit.

Sarah spends $1 million to build a qualified low-income housing project that is completed on January 1 of the current year. The entire project is rented to low-income families. The credit rate for property placed in service during January is 7.38%. Sarah claims a credit of $73,800 ($1,000,000 × 7.38%) in the current year and in each of the following nine years.

Red, Inc., an eligible business, makes $11,000 of capital improvements to business realty that had been placed in service in June 1990. The expenditures are intended to make Red's business more accessible to the disabled and are considered eligible expenditures for purposes of the disabled access credit. The amount of the credit is $5,000 [($10,250 ? $250) × 50%]. Although $11,000 of eligible expenditures are incurred, only the excess of $10,250 over $250 qualifies for the credit. The depreciable basis of the capital improvement is $6,000, because the basis is reduced by the amount of the credit [$11,000 (cost) ? $5,000 (amount of the credit)].

Maple Company decides to establish a qualified retirement plan for its employees. In the process, it pays consulting fees of $1,200 to a firm that provides educational seminars to Maple's employees and assists in making necessary changes to the payroll system. Maple may claim a credit for the pension plan startup costs of $500 ($1,200 of qualifying costs, limited to $1,000 × 50%), and its deduction for these expenses is reduced to $700 ($1,200 ? $500).

During the year, Tan Company constructed a child care facility for $400,000 to be used by its employees who have preschool-aged children in need of child care services while their parents are at work. In addition, Tan incurred salaries for child care workers and other administrative costs associated with the facility of $100,000. As a result, Tan's credit for employer-provided child care is $25,000 [($400,000 + $100,000) × 25%]. Correspondingly, the basis of the facility is reduced to $300,000 ($400,000 ? $100,000), and Tan's deduction for salaries and administrative costs is reduced to $75,000 ($100,000 ? $25,000).

Qualification for Credit Maria, age 30, reports earned income for the year of $6,000. She is single and has no children. Maria can qualify for an earned income credit.

Willa, age 20, reports earned income for the year of $6,000. She is single and has no children. Willa does not qualify for an earned income credit until she reaches age 25.

Yellow, based in the United States, sells widgets in Peru. Profits for the year in that country total $2 million. Yellow is subject to a 34% U.S. income tax rate, and a 20% marginal income tax rate applies to Yellow in Peru. Thus, attributable income taxes for this double-taxed income are $680,000 for the U.S. tax and $400,000 for the Peru tax. Yellow pays the full $400,000 tax to Peru. Its U.S. tax on this income is $680,000 minus the $400,000 foreign tax credit (lesser of $400,000 foreign tax paid or $680,000 attributable U.S. tax), or $280,000. The FTC allows a full recovery of the $400,000 tax paid to Peru.

Continue with the facts of Example 24, except that the applicable Peru tax rate is 40%, for an $800,000 liability. Yellow pays the full $800,000 tax to Peru. Its U.S. tax on this income is $680,000 minus the $680,000 foreign tax credit (lesser of $800,000 foreign tax paid or $680,000 attributable U.S. tax), or $0. The FTC overall limitation did not allow a full recovery of the $800,000 Peru liability. The widget profits are subject to a $120,000 double tax this year, even after the FTC is applied. The $120,000 excess amount is carried back 1 tax year and then forward 10 years.

In late 2014, Sam and Martha pay $5,000 in legal fees, adoption fees, and other expenses directly related to the adoption of an infant daughter, Susan. In 2015, the year in which the adoption becomes final, they pay an additional $18,000. Sam and Martha are eligible for a $13,400 credit in 2015 (expenses of $23,000, limited by the credit ceiling, paid in the two tax years).

Assume the same facts as in the previous example, except that Sam and Martha's AGI is $226,010 in 2015. As a result, their available 2015 credit is reduced from $13,400 to $5,025 {$13,400 ? [$13,400 × ($25,000/$40,000)]}.

Juanita and Alberto are married and file a joint tax return claiming their two children, ages 6 and 8, as dependents. Their AGI is $122,400. Juanita and Alberto's maximum child tax credit is $2,000 ($1,000 × 2 children). Because Juanita and Alberto's AGI is in excess of the $110,000 threshold, the credit reduction equals $650 [$50 × 13 (rounded from 12.4)], and the couple's child tax credit is $1,350.

Wilma is an employed mother of an 8-year-old child. She pays her mother, Rita, $1,500 per year to care for the child after school. Wilma pays her daughter Eleanor, age 17, $900 for the child's care during the summer. Of these amounts, only the $1,500 paid to Rita qualifies as employment-related child care expenses.

Adjusted Gross Income Over - But Not Over --- Applicable Rate of Credit $ 0 $15,000 35% 15,000 17,000 34% 17,000 19,000 33% 19,000 21,000 32% 21,000 23,000 31% 23,000 25,000 30% 25,000 27,000 29% 27,000 29,000 28% 29,000 31,000 27% 31,000 33,000 26% 33,000 35,000 25% 35,000 37,000 24% 37,000 39,000 23% 39,000 41,000 22% 41,000 43,000 21% 43,000 No limit 20%

Nancy, who has two children under age 13, worked full-time while her husband, Raji, was attending college for 10 months during the year. Nancy earned $22,000 and incurred $6,200 of child care expenses. Raji is deemed to be fully employed and to have earned $500 for each of the 10 months (or a total of $5,000) that he was in school. Because Nancy and Raji report AGI of $22,000, they are allowed a credit rate of 31%. Nancy and Raji are limited to $5,000 in qualified child care expenses ($6,000 maximum expenses, limited to Raji's $5,000 earned income). Therefore, the couple is entitled to a tax credit of $1,550 (31% × $5,000) for the year.

Assume the same facts as in Example 30, except that of the $6,200 paid for child care, Nancy was reimbursed $2,500 by her employer under a qualified dependent care assistance program. Under the employer's plan, the reimbursement reduces Nancy's taxable wages. Thus, Nancy and Raji report AGI of $19,500 ($22,000 ? $2,500), and their credit rate increases to 32%. The maximum amount of child care expenses for two or more dependents of $6,000 is reduced by the $2,500 reimbursement, resulting in a tax credit of $1,120 [32% × ($6,000 ? $2,500)].

Return to the facts of The Big Picture. Recall that Tom and Jennifer Snyder are married and file a joint tax return. The Snyders report modified AGI of $158,000. They have two children, Lora and Sam. The Snyders paid $7,500 of tuition and $8,500 for room and board for Lora (a freshman) and $8,100 of tuition plus $7,200 for room and board for Sam (a junior). Lora and Sam are full-time students and are Tom and Jennifer's dependents. Lora's tuition and Sam's tuition are qualified expenses for the American Opportunity credit. For 2015, Tom and Jennifer may claim a $2,500 American Opportunity credit for both Lora's and Sam's expenses [(100% × $2,000) + (25% × $2,000)]. This totals to a $5,000 American Opportunity credit on the Snyders' return.

Return to the facts of The Big Picture. Assume that Tom and Jennifer's 2015 modified AGI is $172,000, instead of $158,000. The Snyders are eligible to claim a $2,000 (rather than $5,000) American Opportunity credit. Their available credit is reduced because AGI exceeds the $160,000 limit for married taxpayers. The percentage reduction is computed as the amount by which modified AGI exceeds the limit, expressed as a percentage of the phaseout range, or [($172,000 ? $160,000)/$20,000)], resulting in a 60% reduction. Therefore, the maximum available credit is $2,000 ($5,000 × 40% allowable portion).

Return to the facts of The Big Picture. Now assume that Tom and Jennifer's 2015 modified AGI is $122,000. In addition, assume that Tom is going to school on a part-time basis to complete a graduate degree and pays qualifying tuition and fees of $4,000. As the Snyders' modified AGI is below $160,000, a $5,000 American Opportunity credit is available to them relative to the two children (i.e., $2,500 each for Lora and Sam). In addition, Tom's qualifying expenses are eligible for the lifetime learning credit. The potential lifetime learning credit ($800 = $4,000 x 20%) is reduced because modified AGI exceeds the $110,000 limit for married taxpayers. As modified AGI exceeds the limit by $12,000 and the phaseout range is $20,000, the lifetime learning credit is reduced by 60%. Therefore, the Snyders' lifetime learning credit is $320 ($800 × 40% after the phaseout), and total education credits amount to $5,320 ($5,000 American Opportunity credit + $320 lifetime learning credit).

Joint Return Head of Household All Other Cases = Applicable Percentage Over-Not Over Over-Not Over Over-Not Over $0. $36,500 | $0 . $27,375 | $0 . $18,250 | =50% 36,500 . 39,500 | 27,375 . 29,625 | 18,250 . 19,750 | = 20% 39,500 . 61,000 | 29,625 . 45,750 | 19,750 . 30,500 | = 10% 61,000 - | 45,750 - | 30,500 - | =0%

Earl and Josephine, married taxpayers, each contribute $2,500 to their respective § 401(k) plans offered through their employers. The AGI reported on their joint return is $45,000. The maximum amount of contributions that may be taken into account in calculating the credit is limited to $2,000 for Earl and $2,000 for Josephine. As a result, Earl and Josephine may claim a credit for their retirement plan contributions of $400 [($2,000 × 2) × 10%]. They would not qualify for the credit if their AGI had exceeded $61,000.

Credit - Computation - Comments Tax withheld on wages (§ 31) Amount is reported to employee on Form W-2. Refundable credit. Earned income (§ 32) Amount is determined by reference to Earned Income Credit Table published by IRS. Refundable credit. A form of negative income tax to assist low-income taxpayers. Earned income and AGI must be less than certain threshold amounts. Generally, one or more qualifying children must reside with the taxpayer. Child and dependent care (§ 21) Rate ranges from 20% to 35% depending on AGI. Maximum base for credit is $3,000 for one qualifying individual, $6,000 for two or more. Nonrefundable personal credit. No carryback or carryforward. Benefits taxpayers who incur employment-related child or dependent care expenses in order to work or seek employment. Eligible taxpayers must have a dependent under age 13 or a dependent (any age) or spouse who is physically or mentally incapacitated. Elderly or disabled (§ 22) Usually taken from an IRS table. Nonrefundable personal credit. No carryback or carryforward. Provides relief for taxpayers not receiving substantial tax-free retirement benefits. Adoption expenses (§ 23) Up to $13,400 of costs incurred to adopt an eligible child qualify for the credit. Taxpayer claims the credit in the year qualified expenses were paid or incurred if they were paid or incurred during or after year in which adoption was finalized. For expenses paid or incurred in a year prior to when adoption was finalized, credit must be claimed in tax year following the tax year during which the expenses are paid or incurred. Nonrefundable credit. Unused credit may be carried forward five years. Purpose is to assist taxpayers who incur nonrecurring costs associated with the adoption process. Child (§ 24) Credit is based on number of qualifying children under age 17. Maximum credit is $1,000 per child. Credit is phased out for higher-income taxpayers. Generally a nonrefundable credit. Refundable in certain cases. Purpose is to provide tax relief for low- to moderate-income families with children. Education (§ 25A) American Opportunity credit is available for qualifying education expenses of students in first four years of postsecondary education. Maximum credit is $2,500 per year per eligible student. Credit is phased out for higher-income taxpayers. Credit is designed to help low- to middle-income families defray costs of the first four years of higher education. The credit is partially refundable. Lifetime learning credit permits a credit of 20% of qualifying expenses (up to $10,000 per year) provided American Opportunity credit is not claimed with respect to those expenses. Credit is calculated per taxpayer, not per student, and is phased out for higher-income taxpayers. Nonrefundable credit. Credit is designed to help low- to middle-income taxpayers defray costs of higher education beyond the first four years. Certain retirement plan contributions (§ 25B) Calculation is based on amount of contribution multiplied by a percentage that depends on the taxpayer's filing status and AGI. Nonrefundable credit. Purpose is to encourage contributions to qualified retirement plans by low- and middle-income taxpayers. Foreign taxes paid (§ 27) Foreign-source taxable income/total worldwide taxable income × U.S. tax = overall limitation. Lesser of foreign taxes imposed or overall limitation. Nonrefundable credit. Unused credits may be carried back 1 year and forward 10 years. Purpose is to prevent double taxation of offshore income. Energy credits Various items to encourage individuals and businesses to "go green." The credits are subject to various expiration dates. General business (§ 38) May not exceed net income tax minus the greater of tentative minimum tax or 25% of net regular tax liability that exceeds $25,000. Nonrefundable credit. Components include tax credit for rehabilitation expenditures, work opportunity tax credit, research activities credit, low-income housing credit, disabled access credit, credit for small employer pension plan startup costs, and credit for employer-provided child care. Unused credit may be carried back 1 year and forward 20 years. FIFO method applies to carrybacks, carryovers, and credits earned during current year. Rehabilitation expenditures (§ 47) Qualifying investment times rehabilitation percentage, depending on type of property. Regular rehabilitation rate is 10%; rate for certified historic structures is 20%. Nonrefundable credit. Part of general business credit and therefore subject to same carryback, carryover, and FIFO rules. Purpose is to discourage businesses from moving from economically distressed areas to newer locations. Increased research activities (§ 41) Incremental credit is 20% of excess of computation year expenditures over the base amount. Basic research credit is allowed to certain corporations for 20% of cash payments to qualified organizations that exceed a specially calculated base amount. An energy research credit is allowed for 20% of qualifying payments made to an energy research consortium. Nonrefundable credit. Part of general business credit and therefore subject to same carryback, carryover, and FIFO rules. Purpose is to encourage high-tech and energy research in the United States. Low-income housing (§ 42) Appropriate rate times eligible basis (portion of project attributable to low-income units). Credit is available each year for 10 years. Recapture may apply. Nonrefundable credit. Part of general business credit and therefore subject to same carryback, carryover, and FIFO rules. Purpose is to encourage construction of housing for low-income individuals. Disabled access (§ 44) Credit is 50% of eligible access expenditures that exceed $250, but do not exceed $10,250. Maximum credit is $5,000. Available only to eligible small businesses. Nonrefundable credit. Part of general business credit and therefore subject to same carryback, carryover, and FIFO rules. Purpose is to encourage small businesses to become more accessible to disabled individuals. Small employer pension plan startup costs (§ 45E) Credit equals 50% of qualified startup costs incurred by eligible employers. Maximum annual credit is $500. Deduction for related expenses is reduced by the amount of the credit. Nonrefundable credit. Part of general business credit and therefore subject to same carryback, carryover, and FIFO rules. Purpose is to encourage small employers to establish qualified retirement plans for their employees. Employer-provided child care (§ 45F) Credit is equal to 25% of qualified child care expenses plus 10% of qualified expenses for child care resource and referral services. Maximum credit is $150,000. Deduction for related expenses or basis must be reduced by the amount of the credit. Nonrefundable credit. Part of general business credit and therefore subject to same carryback, carryover, and FIFO rules. Purpose is to encourage employers to provide child care for their employees' children during normal working hours. Small employer health insurance costs (§ 45R) 50 percent of health insurance premiums paid on behalf of employees. The employer can have no more than 25 full-time employees, subject to a wage-level maximum. The employer must pay at least 50% of the employees' total health insurance premiums. Work opportunity (§ 51) Credit is limited to 40% of the first $6,000 of wages paid to each eligible employee. For long-term family assistance recipients, credit is limited to 40% of first $10,000 of wages paid to each eligible employee in first year of employment, plus 50% of first $10,000 of wages paid to each eligible employee in second year of employment. Nonrefundable credit. Part of the general business credit and therefore subject to the same carryback, carryover, and FIFO rules. Purpose is to encourage employment of individuals in specified groups.

In 2015, Keshia earned a salary of $140,000 from Kopps, her employer. Therefore, FICA taxes withheld from her salary are $7,347 ($118,500 × 6.2%) plus $2,030 ($140,000 × 1.45%) for a total of $9,377. In addition to remitting the amount withheld from Keshia's salary to the government, Kopps pays its own tax of $9,377 relative to her salary.

In 2015, Kelly recorded $76,000 of net earnings from a data transfer service that she owns. During the year, Kelly also received $54,000 in wages as an employee of a small video imaging firm. Kelly's self-employment income subject to the Social Security portion (12.4%) is $64,500 ($118,500 ? $54,000), not $76,000. This produces a self-employment tax of $7,998 ($64,500 × 12.4%). All of Kelly's net self-employment earnings are subject to the Medicare portion of the self-employment tax of 2.9%; no income limit applies for that tax.

Jenna, who is single, earns wages of $500,000. Jenna pays $2,900 of Medicare taxes on the first $200,000 of her wages ($200,000 × 1.45%) and $7,050 of Medicare taxes on her wages in excess of $200,000 ($300,000 × 2.35%). In total, her Medicare tax is $9,950. Jenna's additional Medicare tax totals $2,700.

Patrick and Paula file a joint return. During the year, Patrick earns wages of $125,000, and Paula earns wages of $175,000—their total wages are $300,000. Patrick and Paula pay total Medicare taxes of $4,800 [($250,000 × 1.45%) + ($50,000 × 2.35%)]. The couple's additional Medicare tax is $450.

Jill records net investment income of $50,000 and MAGI of $180,000, and she files as a single taxpayer. As Jill's MAGI does not exceed $200,000, Jill need not pay the additional Medicare tax on unearned income.

Assume the same facts as in Example 40, except that Jill reports net investment income of $85,000 and MAGI of $220,000. Now Jill pays a Medicare tax on the lesser of (1) $85,000 (net investment income) or (2) $20,000 (the amount by which MAGI exceeds $200,000). Jill's additional Medicare tax on unearned income is $760 ($20,000 × 3.8%).

Assume the same facts as in Example 41, except that Jill's MAGI is $290,000. Because Jill's MAGI exceeds the threshold amount by $90,000, she pays a Medicare tax on the entire $85,000 of net investment income. As a result, Jill's additional Medicare tax on unearned income is $3,230 ($85,000 × 3.8%).

Assume the same facts as Example 42, except that Jill records MAGI of $325,000 (including $240,000 of wages and $85,000 of net investment income). In this case, in addition to her $3,230 additional Medicare tax on unearned income, Jill also is subject to an additional Medicare tax of $360 ($40,000 × .9%, her wages in excess of $200,000).

Andre, a calendar year and cash basis taxpayer, has spent $3,000 by December 1 on qualifying child care expenditures for his dependent 11-year-old son. The $250 that is due the care provider for child care services rendered in December does not generate a tax credit benefit if the amount is paid in the current year because the $3,000 ceiling has been reached. However, if the payment can be delayed until the next year, the total credit over the two-year period for which Andre is eligible may be increased.