Chap007

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 07
Individual Income Tax Computation
and Tax Credits

7-2
Learning Objectives
1. Determine a taxpayer’s regular tax liability and
identify tax issues associated with the process.
2. Compute a taxpayer’s alternative minimum tax
liability and describe the tax characteristics of
taxpayers most likely to owe the alternative
minimum tax.
3. Calculate a taxpayer’s employment and self-
employment taxes payable and explain tax
considerations relating to whether a taxpayer is
considered to be an employee or a self-employed
independent contractor.

7-3
Learning Objectives (cont’d)
4. Describe the different general types of tax credits,
identify specific tax credits, and compute a
taxpayer’s allowable child tax credit, child and
dependent care credit, earned income credit,
American opportunity credit, lifetime learning
credit, and earned income credit.
5. Explain taxpayer filing and tax payment
requirements and describe in general terms how to
compute a taxpayer’s underpayment, late filing,
and late payment penalties.

7-4
Federal Income Tax Computation
 Regular tax computation dependent upon:
 Filing status
 Married filing jointly
 Qualifying widow or widower (also called Surviving
spouse)
 Married filing separately
 Head of household
 Single
 Progressive tax rates
 Tax rate schedules
 Tax tables

7-5
 Tax brackets or marginal tax rates on
ordinary income
 10%, 15%, 25%, 28%, 33%, and 35%
 Marriage penalty or benefit
 Who is likely to have penalty?
 Both spouses receive income
 Who is likely to have benefit?
 One spouse receives income

7-6
 Exceptions to ordinary tax rates
 Long-term capital gains (net capital gains)
 Generally 15% but can be as high as 28% or as low
as 0%
 Two different tax rates on one gain is possible
 Dividends
 Qualified dividends generally taxed at 15% but could
be taxed as low as 0%.
 Two different tax rates on one dividend is possible

7-7
Alternative Minimum Tax
 Items commonly added back to regular taxable
income in computing AMT income
 Personal and dependency exemptions
 State income taxes
 Real property taxes
 Home-equity loan interest expense (if proceeds not
used to improve home)
 Miscellaneous itemized deductions in excess of 2%
floor

7-8
 AMT is a tax based on an alternative more
inclusive tax base than regular taxable income.
 Meant to ensure that taxpayers are paying some
minimum level of tax.
 Who is most likely to pay it and why?
 High state taxes
 Multiple children
 Capital gains

7-9
 Why is it becoming so prevalent?
 Exemption amount and phase-out threshold not
indexed for inflation
 Individual tax rates have been decreasing.
 AMT rates 26% or 28% vs. individual ordinary
rates 10%, 15%, 25%, 28%, 33%, 35%

7-10
Employment and Self-
Employment Taxes
 FICA taxes consist of two components:
 Social Security tax – 12.4% (10.4% in 2011)
 Wage base limited to $106,800 in 2011
 Medicare tax – 2.9%
 No wage base limitation

7-11
Employment FICA Taxes
 Employee
 Must pay FICA taxes on compensation from
employer (4.2 % Social Security tax rate; 1.45%
Medicare tax rate)
 Multiple employers during year
 Employer
 Pays FICA tax on employee’s compensation
(6.2% Social Security tax rate; 1.45% Medicare
tax rate)
 & withholds FICA tax from employee’s pay check

7-12
Employment Taxes
 Self-employed taxpayers
 Responsible for entire FICA tax (employee and
employer share)
 Steps to computing SE tax
 Compute net Schedule C income (generally) and
multiply by .9235
 This equals net earnings from self-employment
 Determine Social Security tax 10.4% and
Medicare tax 2.9%
 $106,800 limit applies to Social Security portion

7-13
Employment Taxes
 If net earnings from self-employment < $400,
no SE tax.
 How does $106,800 Social Security earnings
limit apply when have both wages and SE
earnings in the same year?
 Wages use up limit first– taxpayer favorable or
unfavorable? Why?

7-14
Employee vs. Independent
Contractor
 Determining whether taxpayer is employee or
independent contractor
 Primary question: who has control over how, when,
where work is performed?
 Tax differences
 Amount of FICA or SE taxes payable
 Deductibility of expenses
 For AGI
 From AGI
 One-half of self-employment taxes

7-15
Tax Credits
 Reduce tax liability dollar for dollar
 Consist of three categories
 Nonrefundable personal
 Refundable personal
 Business

7-16
Nonrefundable Personal
 Child tax credit
 $1,000 for each qualifying child under age 17 at end of year
 Partially refundable in certain situations
 Phase-out amount not percentage
 Child and Dependent care credit
 Dependent under age of 13 (or disabled dependent)
 Percentage of qualifying expenditures
 Maximum qualifying expenditures: $3,000 one qualifying
person, $6,000 two or more qualifying persons
 Percentage depends on AGI (see Exhibit 7-9)

7-17
 American opportunity credit (formerly Hope
scholarship credit)
 For first four years of post-secondary education
 For eligible expenses and institutions only
 Applied per student
 Taxpayer, spouse, taxpayer’s dependents
 Amounts paid by dependents treated as paid by taxpayer
 100% of first $2,000 of eligible expenses and 25% of next
$2,000 (maximum credit is $2,500)
 Phase-out based on AGI
 40% of credit is refundable

7-18
 Lifetime learning credit
 Eligible expenses (tuition) for post-secondary
education
 Includes professional or graduate school
 Includes continuing education
 Applied per taxpayer
 MFJ return is one taxpayer
 20% of up to $10,000 of eligible expenses
 Phase-out based on AGI

7-19
 Education credits
 If deduct for AGI educational expenses for
someone, no education credit allowed for that
person
 Could take American opportunity credit for one
dependent and for AGI deduction for another

7-20
Refundable Personal
 Earned income credit
 Negative income tax
 Must have earned income
 Must have at least one qualifying child or must be
at least 25 years old and less than 65 and not a
dependent of another
 See Exhibit 7-10

7-21
Tax Credits
 Business credits
 Promote certain behaviors
 If credit exceeds tax, carry back one year and
carry forward 20 years
 Foreign tax credit
 Hybrid business and personal – nonrefundable; carry
back one year and carry forward 10 years

7-22
Prepayments and Filing Requirements
 Taxes must be paid-as-you-go
 Withholdings
 Treated as made equally throughout the year
 Estimated tax payments
 Due on April 15th,
, June 15th
, September 15th
, and
January 15th
of the following year

7-23
 Underpayment penalties
 Safe-harbor requirements
 90% of current tax liability or
 100% of previous year’s tax liability (110% with
higher AGI > $150,000) – 25% at each estimated
filing deadline

7-24
 Underpayment penalties
 Applied on quarterly basis
 90%/4 = 22.5% of current year liability must be paid
in by deadline or
 100%/4 = 25% of previous year’s liability must be
paid in by deadline
 Penalty based on amount of underpayment at
each quarter x federal short term rate + 3%

7-25
 Filing requirements
 Generally, must file if gross income > standard deduction
+ personal exemption amounts
 If married filing separately must file if gross income >
personal exemption amount
 Lower thresholds for those claimed as dependent on
another’s tax return
 Due dates
 April 15th
 Extend filing up to six months
 May not extend due date for paying taxes

7-26
 Late filing penalty
 5% of tax owed per month up to 25% if not fraudulent; 15%
of tax owed per month up to 75% if fraudulent
 No penalty if no tax is due
 Late payment penalty
 If don’t pay entire tax owed by due date of return
 .5% of amount due up to 25% maximum if not fraudulent
 15% of amount due per month up to 75% if fraudulent
 Combined late filing and late payment penalties may
not exceed maximum amounts for either one

Chap007

Chap007

Recommandé

Contenu connexe

Tendances

Tendances(20)

Similaire à Chap007

Similaire à Chap007(20)

Plus de iDocs

Plus de iDocs(20)

Dernier

Dernier(20)

Chap007