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Module 28 Individual Tax Computation, Credits, and Alternative Minimum Tax

Module 28 Individual Tax Computation, Credits, and Alternative Minimum Tax. Menu. Filing requirements Computation of regular tax liability Tax credits of individuals Estimated tax payments Alternative minimum tax. Filing Requirements. Key Learning Objectives Determination of filing status

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Module 28 Individual Tax Computation, Credits, and Alternative Minimum Tax

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  1. Module 28Individual Tax Computation, Credits, and Alternative Minimum Tax

  2. Menu • Filing requirements • Computation of regular tax liability • Tax credits of individuals • Estimated tax payments • Alternative minimum tax

  3. Filing Requirements Key Learning Objectives • Determination of filing status • Who must file a return • Which return should be filed

  4. Filing Status • Married, joint • Married, separate • Head of household • Single • Dependent on another's return

  5. Head of Household Rules • Be relative from “short list” • Provide > 50% of cost of household • Relative must • (a) Be a qualifying dependent or • (b) Live in same household • If child need (b) but not (a) • If parent need (a) but not (b) • Other qualifying relative need (a) & (b)

  6. In Class Exercise (1)Determining Filing Status • The taxpayer (single, 52, with good sight) • 20-year-old son lives with him • Son does not pay room and board • Son is a full-time graduate student and earns $8,000 as a TA • What information is missing to determine dependency question? • On facts, what is father’s filing status?

  7. Solution: In Class Exercise (1)Determining Filing Status • What information is missing to determine dependency question? • Son is <24 and full time student, so GI not issue • You need to know if father paid >50% of support • Did Son or anyone else spend money on Son’s support? • If yes, Dad must spend at least $1 more

  8. Solution: In Class Exercise (1)Determining Filing Status (con’t) • On facts, what is father’s filing status? • Head of Household • Father pays 100% of cost to run home • Son must live with father • Son need not be dependent, so missing information is not needed

  9. In Class Exercise (2)Determining Filing Status • Lucy is single, 67 years of age • She provides more than one-half the support for Ethel, who is Lucy's best friend • Ethel is 70 years old, single, and lives legally in Lucy's home for the entire year • Ethel is a citizen of the United States and has income from Social Security of $6,000 • What is Lucy's total standard deduction and how many exemptions can she claim?

  10. Solution: In Class Exercise (2)Determining Filing Status • What is Lucy's total standard deduction ? • Filing status = single • Ethyl is not a relative so Head of Household is not available • $ of SD = 4,400 + 1,100* = 5,500 • * Increase for age > 65 • How many exemptions can she claim? • Two, one for herself and one for Ethyl

  11. Gross Income (GI) Testfor Filing • Must file if GI exceeds • Sum of personal exemptions only standard deduction (SD), and add on for age only • If dependent no PE but get add-on for blindness and age

  12. Must File to Pay Self-Employment Taxes • Need to file even if GI test not met if • SE (Sch. C) income >$400 • Remember SE tax rate can be as high as 15.3% of each dollar

  13. Which Form to File • 1040 EZ • 1040A • 1040

  14. Computation of Regular Tax Liability Key Learning Objectives (1) • Calculating tax using • Tax tables • Tax rate schedules • Marriage penalty • Special tax calculation for a child < age 14

  15. Tax rates--Determined by Filing Status • If taxable income <$100,000 use tables • Otherwise, use tax rate schedules • Special rules for dependents under 14 years of age

  16. In Class Exercise Determining Tax Liability-- • Marge has $102,000 of taxable income • Marge is not married • Her 12-year-old daughter lives with Marge's former husband • He signed Form 8332 releasing exemption, so Marge gets to claim the daughter • Excerpt from 2000 Tax Table on next slide

  17. Excerpt from 2000 Tax Table

  18. Solution: In Class Exercise Determining Tax Liability--2000 • Tax liability = $26,301 • Marge must file as single since child does not live with her, even though she gets the exemption • Information given was taxable income, so no adjustment was needed for deductions from AGI

  19. In Class Exercise Determining Tax Liability--2000 • Use the tax rate schedules on previous slide to calculate tax liabilities for the following taxpayers: • Single, TI = 128,228 • Married, joint, TI = 139,100 • Head of Household, TI = 145,104

  20. Solution: In Class ExerciseSingle, Tax Liability • TI 128,228 • TAX 34,432 • (128,228 - 63,550) * .31 + 14381.50

  21. Solution: In Class ExerciseMarried Joint, Tax Liability • TI 139,100 • TAX 34,242 • (139,100 - 105,950) * .31 + 23965.50

  22. Solution: In Class ExerciseHead, Tax Liability • TI 145,104 • TAX 37,689 • (145,104 - 90,800) * .31 + 20854.50

  23. Taxation if Claimed on Another's Return • Calculate taxable income • Determine if subject to “Kiddie Tax” • Calculate tax liability

  24. If Claimed By AnotherCalculate Taxable Income • For all dependent filers calculate taxable income using this rule AGI - SD** = TI • **SD = standard deduction • Assumes taxpayer does not itemize • No personal exemption allowed

  25. If Claimed By AnotherCalculate Taxable Income • SD will be between $700 & $4,400 (2000) • SD > $700 is a function of • earned income • plus $250 • SD limited in total to $4,400 plus • any increases for age or blindness

  26. If Claimed By AnotherDetermine if Kiddie Tax Applies • <13 years old AND • Unearned income >$1,400** • Then must use Kiddie Tax (KT) rules • ** Twice the dependent SD • $700 in 2000 • If dependent filer itemizes, amount could be different

  27. If Claimed By AnotherCalculate Tax • If KT n/a use normal rules • If KT applies (1) Am't taxed at parent's rates is Unearned - $1,400 (2) Remainder taxed at lowest rates for dependent’s filing status (3) Total tax = sum of 1 & 2

  28. In Class Exercise 1: Dependent Filer Tax Calculation • Taxpayer is claimed on another's return and has the following income: • Salary = 3,750 • Taxable Interest = 5,000 AGI = 8,750 PE = 0 SD (salary + 250) = (4,000) TI = 4,750

  29. Solution In Class Exercise 1:Dependent Filer Tax Calculation • If filer is >13 the tax = $716 (Table) • If filer <13 use KT rules Unearned income (5,000 - 1,400) = 3,600 Remaining T/I = (4,750 - 3,600)= 1,150 TI 4,750 Parents 's MTR = 31% TL = 3,600 x .31 + 1,150 (table) 1,116 + 174 = $1,290

  30. In Class Exercise 2:Dependent Filer Tax Calculation • Taxpayer is claimed on another's return and has the following income: • Salary = -0- • Taxable Interest = 9,000 AGI = 9,000 PE = 0 SD = (700) TI = 8,300

  31. In Class Exercise 2:Dependent Filer Tax Calculation • If filer is >13 the tax = $1,249(Table) • If filer <13 use KT rules Unearned income (9,000 - 1,400) = 7,600 Remaining TI (8,300 - 7,600)= 700 TI 8,300 Parent's MTR is 28% TL = 7,600 x .28 + 700 (per table) 2,128 + 107 = 2,235

  32. In Class Exercise 3:Dependent Filer Tax Calculation • Taxpayer is claimed on another's return and has the following income: • Salary = 5,000 • Taxable Interest = 9,000 AGI = 14,000 PE = 0 SD = (4,400) TI = 9,600

  33. In Class Exercise 3:Dependent Filer Tax Calculation • If filer is >13 the tax = $1,444(Table) • If filer <13 use KT rules Unearned income (9,000 - 1,400) = 7,600 Remaining TI (9,600 - 7,600)= 2,000 TI 9,600 Parent's MTR is 28% TL = 7,600 x .28 + 2,000 (per table) 2,128 + 302 = 2,430

  34. In Class Exercise 4:Dependent Filer Standard Add-on • Taxpayer is LEGALLY BLIND, claimed on another's return and has following income: • Salary = -0- • Taxable Interest = 9,000 AGI = 9,000 PE = 0 SD = (1,800) * TI = 7,200 *Calculate SD using limits, THEN add bump for age/blindness

  35. In Class Exercise 4:Dependent Filer Tax Calculation • If filer is >13 the tax = $1,084(Table) • If filer <13 use KT rules BUT here taxable income (7,200) is less than unearned (9,000) so all income is taxed at parents’ MTR Parent's MTR is 36% TL = 7,200 x .36 + 0 (per table) 2,592 + 0 = 2,592

  36. Computation of Regular Tax Liability Key Learning Objectives (2) • Self employment tax • Domestic service employment tax

  37. Tax Credits of Individuals Key Learning Objectives (1) • Refundable vs. nonrefundable credits • Taxes withheld • Social security tax overpayments • Earned income credit • Child and dependent care credit

  38. Tax Credits of Individuals Key Learning Objectives (2) • Mortgage certificate credit • Elderly and disabled person credit • Foreign tax credit

  39. Estimated Tax Payments Key Learning Objectives • Who must pay • Regular installment method • High income installment method • Annualized installment method

  40. Estimated Tax Payments & Withholding • All taxpayers must pay "as you go" • Withholding automatic if W2 income • All other income • Pay by voucher • Pay quarterly

  41. Due Dates & Extensions • Individual returns generally due • April 15 • Must file written request to extend

  42. Penalties & Interest • File return, even if no money • Contact IRS for payment schedules • Ignoring is never good strategy • Penalties sometimes abated for cause • Interest only abated if IRS is grossly late

  43. Alternative Minimum Tax of Individuals Key Learning Objectives • Calculation formula • AMT preferences and adjustments • Exemptions • Tax rates • AMT credit • Carryover of credit

  44. AMT Background • Policy reason • History of individual provisions • Compliance burden

  45. AMT Concepts • Parallel tax system • AMT is a separate tax system • Differences will exist between regular taxable income and AMTI • Prepayment system • AMT accelerates income and defers deductions • Minimum tax credit available for future years

  46. Individual AMT FormulaAMT Tax Base Taxable income + NOL deduction + Tax preferences +/- Adjustments Tentative AMTI - AMT NOL (90% limit) AMTI - Exemption AMT Base

  47. Individual AMT Formula AMT Tax Calculation ATM Base x 26 / 28% Tentative minimum tax before FTC Minus AMT FTC (90% limit) Tentative minimum tax Minus regular tax (after FTC) AMT (if positive)

  48. Common Adjustments: Deductions From AGI • Exemptions** • ** Tax form does this by picking up taxable income before exemptions are deducted • Standard deduction OR • Lessor of medical or 2.5% of AGI • 100% of taxes paid • Also delete refund included in income

  49. Common Adjustments: Deductions From AGI (con’t) • Equity interest on home • Difference between regular and AMT investment interest expense • 100% of remaining misc. 2% deductions

  50. In Class Exercise: AMT Adjustments From AGI • What is the AMT adjustment relating to the following deductions from AGI? • Exemptions 5,400 • Taxes 15,000 • Interest on home mortgage • Acquisition 13,000 • Equity 4,560 • Charitable contributions 1,300

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