Chapter 8 Tax Notes
Chapter 8 Tax Notes ACCT 404
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This 5 page Class Notes was uploaded by Victoria Andreski on Sunday March 27, 2016. The Class Notes belongs to ACCT 404 at Clemson University taught by Sarah Martin in Spring 2016. Since its upload, it has received 20 views. For similar materials see Individual Taxation in Accounting at Clemson University.
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Date Created: 03/27/16
CHAPTER 8—Individual Income Tax Computation & Tax Credits Federal Income Tax Computation • Regular tax computation dependent upon: o Filing status § Married filed jointly § Qualifying widow or widower (surviving spouse) § Married filing separately § Head of household § Single o Progressive tax rates § Tax rate schedules § Tax tables • Must be used by taxpayers w/ taxable income under $100,000 • Provided by IRS for administrative convenience & to prevent mathematical errors • Tax brackets or marginal tax rates on ordinary income o 10%, 15%, 25%, 28%, 33%, 35%, & 39.6% • Marriage penalty or benefit o Who is likely to have penalty? § Both spouses receive income o Who is likely to have benefit? § One spouse receives income • Exceptions to ordinary tax rates o Long-term capital gains (net capital gains) § Generally 0%, 15%, or 20%, but can be as high as 28% § 2 different tax rates on one gain is possible o Dividends § Qualified dividends generally taxed at 0%, 15%, or 20% § 2 different tax rates on one dividend is possible • Kiddie tax o Net unearned income taxed at parents’ marginal rate § Net unearned income = unearned income in excess of $2,100 § Parents can elect to actually include this income on their tax return o 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 § Child is over age 18 but under age 24, is a full-time student, & child’s earned income not greater than half of child’s support Alternative Minimum Tax • Items commonly added back to regular taxable income in computing AMT income o Personal & dependency exemptions o State income taxes o Real property taxes o Home-equity loan interest expense (if proceeds not used to improve home) o Miscellaneous itemized deductions in excess of 2% floor • AMT is a tax based on an alternative more inclusive tax base than regular taxable income o Meant to ensure that taxpayers are paying some minimum level of tax • Who is most likely to pay it & why? o High state taxes o Multiple children o Capital gains • Why is it becoming so prevalent? o Exemption phase-out threshold not indexed for inflation o Individual tax rates have decreased since AMT enacted • AMT rates 26% or 28% vs. individual ordinary rates 10%, 15%, 25%, 28%, 33%, 35%, 39.6% Employment FICA Taxes • Employee o Must pay FICA taxes on compensation from employer (6.2% Social Security tax rate; 1.45% to 2.35% Medicare tax rate) o $118,500 limit applies to Social Security portion o Multiple employers during year • Employer o Pays FICA tax on employee’s compensation (6.2% Social Security tax rate; 1.45% Medicare tax rate) o & Withholds FICA tax from employee’s pay check • Self-employed taxpayers o Responsible for entire FICA tax (employee & employer share) o Tax base is net earnings from self-employment (net Schedule C income, generally, & multiply by .9235) o Same $118,500 limit applies to Social Security portion • If net earnings from self-employment is less than $400, no SE tax • How does $118,500 Social Security earnings apply when have both wages & SE earnings in the same year? o Wages use up limit first—taxpayer favorable or unfavorable? Employee vs. Independent Contractor • Determining whether taxpayer is employee or independent contractor o Primary question: Who has control over how, when, where work is performed? • Tax differences o Amount of FICA or SE taxes payable o Deductibility of expenses § For AGI § From AGI § Employer portion of self-employment taxes Tax Credits • Reduce tax liability dollar for dollar • Consist of 3 categories o Nonrefundable personal § Child tax credit • $1,000 for each qualifying child under age 17 at end of year o Partially refundable in certain situations • Phase-out amount not percentage § Child & Dependent care credit • Dependent under age of 13 (or disabled dependent) • Percentage of qualifying expenditures o Maximum qualifying expenditures: $3,000 one qualifying person, $6,000 two or more qualifying persons • Percentage depends on AGI § American opportunity credit • For first 4 years of post-secondary education • For eligible expenses & institutions only • Applied PER student o Taxpayer, spouse, taxpayer’s dependents o Amounts paid by dependents treated as paid by taxpayer • 100% of first $2,000 of eligible expenses & 25% of next $2,000 (maximum credit is $2,500) • Phase-out based on AGI • 40% of credit is refundable § Lifetime learning credit • Eligible expenses (tuition) for post-secondary education o Includes professional or graduate school o Includes continuing education • Applied PER taxpayer o MFJ return is one taxpayer • 20% of up to $10,000 of eligible expenses • Phase-out based on AGI § Education credits • If deduct for AGI educational expenses for someone, no education credit for one dependent & for AGI deduction for another o 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 & less than 65 & not a dependent of another o Business Tax Credits • Business credits o Promote certain behaviors o If credit exceeds tax, carry back one year & carry forward 20 years o Foreign tax credit § Hybrid businesses & personal—nonrefundable; carry back one year & carry forward 10 years Prepayments & Filing Requirements • Taxes must be paid-as-you-go o Withholdings § Treated as made equally throughout the year o Estimated tax payments § Due on April 15 , June 15 , September 15 , & January 15 of theth following year • Underpayment penalties o Safe-harbor requirements § 90% of current tax liability § 100% of previous year’s tax liability (110% w/ higher AGI greater than $150,000)-25% at each estimated filing deadline o 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 o Penalty based on amount of underpayment at each quarter x federal short term rate + 3% • Filing requirements o Generally, must file if gross income is greater than standard deduction + personal exemption amounts o If married filing separately, must file if gross income is greater than personal exemption amount o Lower thresholds for those claimed as dependent on another’s tax return • Due dates o April 15 th o Extend filing up to 6 months § May not extend due date for paying taxes • Late filing penalty o 5% of tax owed per month up to 25% if not fraudulent; 15% of tax owed per month up to 75% if fraudulent o No penalty if no tax is due o If a tax return is not filed by the required date (the original due date plus extension) • Late payment penalty o If don’t pay entire tax owed by due fate of return § .5% of amount dues up to 25% maximum if not fraudulent § 15% of amount due per month up to 75% if fraudulent • Combined late filing & late payment penalties may not exceed maximum amounts for either one