Jack, who weighs 150 lbf, runs 5 miles in 43 minutes on a treadmill set at a one-degree incline (Fig. P2.17). The treadmill display shows he has burned 620 kcal. For Jack to break even calorie-wise, how much vanilla ice cream, in cups, may he have after his workout?
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