Tax Chapter7TaxComputationsandCredits
I. Rate Schedules See inside cover of book
A.Marriagepenalty/benefitdifferentliabilityresultsfromusingdifferentschedules
B.ExceptionstoBasicTaxComputation
1. Preferentialratesforcapitalgainsanddividendscertaincapitalgains
anddividendstaxedat15%
1)Capitalgainstaxedatpreferentialratemustbe:
1. Gainfromcapitalasset
a. Anassetotherthan
i. Accountsreceivablefromsaleofgoodsorservices
ii. Inventoryandotherassetsheldforsaleasordinarybusiness
iii. Assetsusedinatradeorbusiness,includingsupplies
2. Longterm
a. Heldformorethanayear
2)Qualifieddividends
3Stepstocomputetaxliabilityfrompreferentialrateincome
1) Splittaxableincomeintotheportionthatissubjecttothepreferentialrate
andtheportiontaxedattheordinaryrates.
2) Computethetaxseparatelyoneachtypeofincome.Notethattheincome
thatisnottaxedatthepreferentialrateistaxedattheordinarytaxrates
usingthetaxratescheduleforthetaxpayersfilingstatus.
3) Addthetaxontheincomesubjecttothepreferentialtaxratesandthetax
ontheincomesubjecttotheordinaryrates.Thisisthetaxpayersregular
taxliability
Ifpreferentialamountwouldhavebeentaxedat10%or15%asordinaryincome,
thenitistaxedat0%insteadofthe15%preferentialamounttoinsuresometax
benefit.
2.KiddieTaxAssignmentofincomedoctrine
Applicabletochildrenwhoare:
a)underage18atyearend;
b)childis18atyearendbutearnedincomedoesnotexceedhalfofhersupport;or
b)underage24andafulltimestudentatyearend,andearnedincomedoesnotexceedmore
thanonehalfoftheirsupport(excludingscholarships).
II.AlternativeMinimumTax(AMT) - Parallel tax system
INDIVIDUALS
EconomicIncome
UnrealizedIncome
=RealizedIncome(61)
Exclusions&deferrals
=GrossIncome
DeductionsforAGI
=AdjGrossIncome(AGI)
DeductionsfromAGI
1.Max(itemizedorstandard)*
2.Exemptions*
=TaxableIncome(A)
xTaxRates**
=GrossTax
Credits
=RegularTax(B)
+Excess(ifany)ofAMT
overtheregularrax
(D)
=FederalIncomeTaxLiability
AMT
=TaxableIncome(A)
+/AdjustmentstoTI
+TaxPreferenceItems
=TentativeAMTI
StatutoryExemption
=AMTI
xTaxRate***
=MinTaxbeforeCredits
AMTtaxcredits
=TentativeMinTax
RegularTax
(B)
=AlternativeMinimumTaxLiability(if
>0)(D)
*PhaseoutsapplyasAGIincreases.
**Taxratedependsonfilingstatus.
***Individuals=26%onfirst$175,000ofAMTIand28%onamountsexceeding
$175,000ofAMTI.
A. AMT tax liability [careful with terminology!]
-
Adjustments timing differences
o From AGI deduction limitations - understand Exhibit 7-3
-
Preferences items that are never allowed for AMT purposes
-
AMT Exemptions Depends on filing status of taxpayer (Exhibit 7-4)
AMTExemptions
FilingStatus
Chapter7
Exemption
Phaseoutbegins
Phaseout
2
atthislevelof
AMTI
Marriedfiling
jointly
Marriedfiling
separately
Headofhousehold
&Single
completeforthis
levelofAMTI
$70,950
$150,000
$433,800
34,475
75,000
216,900
46,700
112,500
299,300
-
AMTI=Alternativeminimumtaxableincome(taxbase)
-
Allowabletaxcredits
-
TentativeMinimumTax
-
AMT
TaxableIncome
+personalexemptions
+standarddeduction(iftaken)
+/otheradjustments
+taxexemptinterestfrombonds
+realandpersonalpropertytaxesdeductedasitemized
deductions
+stateincomeorsalestax
+homeequityinterestexpenseifnotusedtoacquireor
substantiallyimprovethehome
+miscellaneousdeductionsinexcessof2%floor
stateincometaxrefundsincludedintaxableincome
gainorlossonsaleofdepreciableassets
=AMTI
AMTExemption(phasedout$.25foreverydollaroverthreshold)
=AMTbase
(x)AMTtaxrate
26%onfirst$175,000ofAMTbase
28%onAMTbaseinexcessof$175,000
=TentativeMinimumTax
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EXAMPLE1:JoisasingletaxpayerwhosetentativeAMTIequals
$200,000.WhatisJosexemption?
EXAMPLE2:TP=taxpayer.Giventhefollowinginformation,answer
andAMTminimumtaxcredit?
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EXAMPLE3:Jody,asingleindividualreportsthefollowingforYearX1:
Depreciation(allMACRS)
IfusingADS,depreciation
InterestIncomefromCorporateBonds
Standarddeduction
=$37,500
2005TPsregulartaxliability=$38,000,TentativeMinimumTax=$30,000
For2002,2003,2004and2005,whatisTPsAMT,totaltaxliability
thequestionsbelow:
2002TPsregulartaxliability=$38,000,TentativeMinimumTax=$42,000
2003TPsregulartaxliability=$42,000,TentativeMinimumTax=$42,000
2004TPsregulartaxliability=$39,000,TentativeMinimumTax
Personalexemption
Taxableincome
Regulartaxliability
$30,000 ADJ
20,000 AJD
6,000 N/A
5,000 ADJ
3,200 ADJ
$150,000
30,000
ForYearX1,whatisTPsAMT?Totaltaxliability?
AMTminimumtaxcredit?
Chapter7
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III.EmploymentandSelfEmploymentTaxesreviewintext,alreadydiscussedin
lecture
SocialSecurity12.4%onfirst$106,800ofincome
Medicare2.9%ontaxbase
EmployeeFICATaxescompanymustpayhalfofSocialSecurityand
Medicaresoemployeesonlypay6.2%offirst$106,800and1.45%ofall
wages.
SelfEmploymentTaxesTaxableincomemultipliedby92.35%(1006.2
1.45)istaxbaseforfullSocialSecurityandMedicaretaxes.
IV.TaxCredits
CategoriesNonrefundablepersonal,Refundablepersonal,Business
A. Nonrefundablepersonal
Children
1. ChildCreditCredit$1,000perchild
Childmustbe<17&citizenorresidentofU.S
Eliminatedviaphaseouts
2. DependentCareCreditcertain%ofupto$3,000(1child)or$6,000
(2children)expendituresonchildcare
Education
3. AOCCredit100%of1st$2,000oftuition,feesandthen25%of2nd
$2,000(maximumcreditis$2,500in2010).
Onlyappliesduring1stfouryearsofpostsecondaryeducation
Mustbeatleasthalftimestudent
Perstudentcreditperyearfamilywithmultiplestudentscanclaimmultiple
hopecredits
4.Lifetimelearningcredit20%for$10,000oftuition,feesfor
undergraduateorgraduateeducation(maximumcreditis$2,000).
Perfamilycreditperyearitdoesntmatterhowmanystudentsareinthe
family,themostthecreditcanbeeachyearis$2,000perfamily
Studentdoesnotneedtobepursuingadegree,butcansimplybeenrolledin
classesthathelpthestudentacquireorimprovejobskills
Canbeclaimedforasmanyyearsaspossible
ParentscanonlyclaimeithertheHopeortheLifetimeCreditforthesame
student
5.Phaseouts
AOC:phasedoutratablyforTPswithmodifiedAGIbetween$80,000to
$90,000(single)or160,000180,000(MFJ)
Lifetime:phasedoutratablyforTPswithmodifiedAGIbetween$50,000to
$60,000(single)or100,000120,000(MFJ)
B.Refundablepersonalcredits
C.Businesstaxcredits
D.ForeignTaxCreditU.S.Citizensworkingabroadowetaxesabroadandat
home
Orderingofcredits
CreditType
Chapter7
OrderApplied
ExcessCredit
7
NonrefundablePersonal
Business
RefundablePersonal
First
Second
Third
Lost
Carryback&forward
Refunded
V.TaxPrepaymentsandFilingRequirementsReviewintext
A. Prepayments
April1522.5%oftaxliabilityor25%ofpreviousyearsTL
June1545%oftaxliabilityor50%ofpreviousyearsTL
September1567.5%oftaxliabilityor75%ofpreviousyearsTL
January1590%oftaxliabilityor100%ofpreviousyearsTL
B.Underpaymentpenaltiesnotapplicableif:
1) Paid90%ofcurrenttaxliability
2) Paid100%ofpreviousyearstaxliabilityifAGI150,000
3) Paid110%ofpreviousyearstaxliabilityifAGI>$150,000
Mustpaypenaltyforeachquarterofunderpaymentamountmultipliedbyfederal
interestrate+3%andthenmultipliedby
C.Filingrequirements
LateFilingPenalty5%oftaxliabilityforeachmonthlateupto
25%;forfraudulentfailuretofile15%permonthupto
75%
LatePaymentPenaltyiftaxpayerfilesanextensionbutdoesnot
payfulltaxliability,mustpaypenaltyof.5%ofamount
owedpermonthlateupto25%;upto75%iffraudulent.
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