Classroom Chap 8 Individual Income Tax Computation and Credits Fall 2024 PDF

Because learning changes everything. ® As modified by Dr Campbell Chapter 8 Individual Income Tax Computation and Tax Credits © McGraw Hill LLC. All rights reserved. No reproduction or distributi...

Because learning changes everything. ® As modified by Dr Campbell Chapter 8 Individual Income Tax Computation and Tax Credits © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Alternative Minimum Tax Formula 1 Exhibit 8-2 Formula for Computing the Alternative Minimum Tax. Regular Taxable Income Standard deduction if taxpayer deducted the standard Plus: deduction in computing regular taxable income Plus or Minus: Table Otherdivided into two columns adjustments* Equals: summarizes an equation. Alternative minimum taxableColumn income 1 Minus: with AMTthe top cell amount exemption blank, lists the symbols (if any) Equals: and Tax column base for 2AMlists T the statements. Times: AMT rate Equals: Tentative minimum tax Minus: Regular tax Equals: Alternative minimum tax © McGraw Hill LLC 2  Alternative Minimum Tax 1 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? Taxpayers with large amounts of capital gains. © McGraw Hill LLC 3  Alternative Minimum Tax 2 Items commonly added back to regular taxable income in computing AMT income. Tax-exempt interest from private activity bonds. State and local income taxes (subject to $10,000 limit). Real property taxes (subject to $10,000 limit). © McGraw Hill LLC 4 Kiddie Tax KNOW Net unearned income taxed at parents’ marginal rate. “Net unearned income” = unearned income in excess of $2,500 Applies if : Child is under age 18 at year-end Child is 18 at year-end but earned income not greater than half of child’s support, or Child is over age 18 but under age 24 at year-end, is a full-time student during the year, and child’s earned income not greater than half of child’s support (excluding scholarships). © McGraw Hill LLC 8-5  Net Investment Income Tax 3.8 percent tax imposed on lesser of: Net investment income (e.g., interest, dividends, annuities, royalties, rents, passive activity income, net gains from disposing of property, less related allowed deductions) or Excess of modified AGI over $250,000 (MFJ), $125,000 (MFS), and $200,000 (all others). © McGraw Hill LLC 8-6  Employment FICA Taxes Employee. Must pay FICA taxes on compensation from employer (6.2 percent Social Security tax rate; 1.45 percent Medicare tax rate;.9 percent additional Medicare tax rate on salary or wages in excess of $200,000 [$125,000 for married filing separately; $250,000 married filing jointly]). $168,600 limit (2024) applies to Social Security portion. Multiple employers during year. Employer. Pays FICA tax on employee’s compensation (6.2 percent Social Security tax rate; 1.45 percent Medicare tax rate). Withholds FICA tax from employee’s paycheck. © McGraw Hill LLC 7  Employment and Self-Employment Taxes 1 Self-employed taxpayers. Responsible for entire FICA tax (employee and employer share and additional Medicare tax). Tax base is net earnings from self-employment (generally, net Schedule C income and multiply by.9235). Same $168,600 limit (2024) applies to Social Security portion. © McGraw Hill LLC 8  Employment and Self-Employment Taxes 2 If net earnings from self-employment < $400, no self- employment tax. How does the $168,600 Social Security earnings limit apply when receiving both wages and self-employment earnings in the same year? Wages used up limit first! © McGraw Hill LLC 9  Employee versus Independent Contractor KNOW! 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 self-employment taxes payable. Deductibility of expenses. For AGI. From AGI. Employer portion of self-employment taxes. © McGraw Hill LLC 10  Tax Credits Reduce tax liability dollar-for-dollar. Consist of three categories. Nonrefundable personal. Refundable personal. Business. © McGraw Hill LLC 11  Nonrefundable Personal 1 Child Tax Credit. $2,000 for each qualifying child under age 17 at end of year who is claimed as taxpayer’s dependent. Partially refundable; $500 for each other qualifying dependent. Not refundable. Phase-out amount, not percentage. © McGraw Hill LLC 12  Nonrefundable Personal 2 Child and Dependent Care Credit. Dependent under age of 13 (or disabled dependent). Amount of credit is based on amount of taxpayer’s expenditures to provide care for one or more qualifying persons. Percentage qualifying expenditures. Maximum qualifying expenditures: $3,000 for one qualifying person, $6,000 for two or more. Credit Care percentage depends on AGI (see Exhibit 8-9). © McGraw Hill LLC 13  Nonrefundable Personal 3 Exhibit 8-9 Child and Dependent Care Credit Percentage (Partial Table) If AGI is over But not over Then the percentage is $0 15,000 35% 15,000 17,000 34 The following content is 17,000 19,000 arranged like a table. 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 §21. Source: n o i t c e s © McGraw Hill LLC 14  Nonrefundable Personal 4 American opportunity tax credit (AOTC). For first four years of postsecondary education. For eligible expenses and institutions only. Applied per student. Taxpayer, taxpayer’s dependents, third parties on behalf of taxpayer’s dependents. Amounts paid by dependents treated as paid by taxpayer. 100 percent of first $2,000 of eligible expenses and 25% of next $2,000 (maximum credit is $2,500). Phase-out based on AGI. 40 percent of credit is refundable (subject to restrictions). Know in concept; you will not need to calculate! © McGraw Hill LLC 15  Nonrefundable Personal 5 Lifetime learning credit. Eligible expenses (tuition) for any course of instruction to acquire or improve taxpayer’s job skills. Includes professional or graduate school. Includes continuing education. Applied per taxpayer. MFJ return is one taxpayer. 20 percent of up to $10,000 of eligible expenses (maximum of $2,000). Phase-out based on AGI. © McGraw Hill LLC 16  Nonrefundable Personal 7 Note that there are two different ‘Education credits’ plus an alternative – for AGI ‘education expense deduction’. If taxpayer deducts ‘for AGI education expenses’ for someone, THEN no education credit is allowed for that student. It’s either EXPENSES or CREDIT, but not both for the same student! Could take American opportunity tax credit for one dependent and for AGI education deduction for a different dependent. © McGraw Hill LLC 17  Refundable Personal 1 Earned Income Credit. Negative income tax. Must have earned income. Must have at least one qualifying child or satisfy age requirements and not a dependent of another. © McGraw Hill LLC 18  Tax Credits 1 Business Tax Credits (also available for Corporations) Promote certain behaviors. If credit exceeds gross tax, carry back one year and carry forward 20 years. Foreign Tax Credit. Nonrefundable; carry back one year and carry forward up to 10 years. © McGraw Hill LLC 19  Prepayments and Filing Requirements 1 Taxes must be paid as you go. Withholdings. Treated as made equally throughout the year. Estimated tax payments. Due on April 15, June 15, and September 15 of the current year and January 15 of the following year. Underpayment Penalties. Safe-harbor provisions. 90 percent of current tax liability; or, 100 percent of previous-year tax liability (110 percent for individuals with AGI greater than $150,000). © McGraw Hill LLC 20  Prepayments and Filing Requirements 2 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 (110% for taxpayers with AGI > $150,000). Penalty based on amount of underpayment at each quarter × federal short-term rate + 3%. © McGraw Hill LLC 21  Prepayments and Filing Requirements 3 Filing Requirements. Individual taxpayers are required to file a tax return only if their gross income exceeds certain thresholds, which vary based on the taxpayer’s filing status and age. Due dates. April 15. Extend filing up to six months. May not extend due date for paying taxes. © McGraw Hill LLC 22  Prepayments and Filing Requirements 4 Late Filing Penalty. 5 percent of tax owed per month up to 25 percent if not fraudulent; 15 percent of tax owed per month up to 75 percent if fraudulent No penalty if no tax is owed as of the due date. Late Payment Penalty. If don’t pay entire tax owed by due date of return..5 percent of the tax owed for each month (or fraction of a month) that the tax is not paid. © McGraw Hill LLC 23  Late Filing and Late Payment Penalty Example Solution Answer: Her combined late filing penalty and late payment penalty would be $200 ($4,000 late payment × 5 percent × 1 month or portion thereof—the combined penalty is limited to 5 percent per month). © McGraw Hill LLC 24  Best wishes for a great week! © McGraw Hill LLC