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Chapter 11-Part B Income Taxation of Individuals- Tax Rates, AMT, Credits, etc. Fall, 2007

Chapter 11-Part B Income Taxation of Individuals- Tax Rates, AMT, Credits, etc. Fall, 2007. Tax Rates for Married Filing a Joint Return. For married filing a joint return for 2006 10% on first $15,100 taxable income 15% on $15,101 - $61,300 25% on $61,301 - $123,700

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Chapter 11-Part B Income Taxation of Individuals- Tax Rates, AMT, Credits, etc. Fall, 2007

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  1. Chapter 11-Part B Income Taxationof Individuals-Tax Rates, AMT, Credits, etc.Fall, 2007

  2. Tax Rates forMarried Filing a Joint Return • For married filing a joint return for 2006 • 10% on first $15,100 taxable income • 15% on $15,101 - $61,300 • 25% on $61,301 - $123,700 • 28% on $123,701 - $188,450 • 33% on $188,451 - $336,550 • 35% over $336,550

  3. Tax Rates forMarried Filing Separately • For married filing separately for 2006 • 10% on first $7,550 taxable income • 15% on $7,551 - $30,650 • 25% on $30,651 - $61,850 • 28% on $61,851 - $94,225 • 33% on $94,226 - $168,275 • 35% over $168,275

  4. Tax Rates forHead of Household • For head of household for 2006 • 10% on first $10,750 taxable income • 15% on $10,751 - $41,050 • 25% on $41,051 - $106,000 • 28% on $106,001 - $171,650 • 33% on $171,651 - $336,550 • 35% over $336,550

  5. Tax Rates for Single Individuals • For single individuals for 2006 • 10% on first $7,550 taxable income • 15% on $7,551 - $30,650 • 25% on $30,651 - $74,200 • 28% on $74,201 - $154,800 • 33% on $154,801 - $336,550 • 35% over $336,550

  6. Special Tax Rates-1 • Dividend income is taxed at a maximum of 15% (5% for taxpayers in 10% or 15% tax brackets) • Individuals with long-term capital gains file a Schedule D which includes a worksheet for determining the total tax liability

  7. Special Tax Rates-2 • 28% rate applies to LTCG from collectibles and Section 1202 small business stock • 25% rate applies to unrecaptured Section 1250 gain

  8. Credits vs. Deductions • Deductions only reduce tax liability by a percentage based on the taxpayer’s marginal tax rate • Credits are direct dollar-for-dollar reductions in the gross tax liability • Tax credits have the same dollar value to all taxpayers, regardless of their marginal tax brackets

  9. Child Tax Credit-1 • $1,000 nonrefundable tax credit for each qualifying child under age 17 • Qualifying children include the taxpayer’s son, daughter, stepson, stepdaughter, grandchild, or eligible foster child that the taxpayer claims as a dependent

  10. Child Tax Credit-2 • Phased out at rate of $50 for every $1,000 (or part thereof) of AGI in excess of • $110,000 if married filing jointly ($55,000 if MFS) • $75,000 if single or head of household

  11. HW-34 Child Tax CreditCindy files as head of household and has three dependent children ages 12, 14, and 16. Her AGI is $80,000. How much can Cindy claim for the child tax credit?

  12. Education Credits-1 • Two elective nonrefundable tax credits are provided for college or vocational tuition and fees for the taxpayer, spouse, or dependents • Hope Scholarship Credit– 100% of first $1,100 and 50% of second $1,100 tuition and fees for first 2 years only (maximum $1,650 per student) • Lifetime Learning Credit– 20% of up to $10,000 tuition and fees (maximum $2,000 per taxpayer) • A student who is a dependent cannot claim the credit

  13. Education Credits-2 • Expenses paid with a Pell Grant, scholarship, or employer-provided educational assistance do not qualify • The election is separate for each student, so a parent may choose one credit for one child and a different credit for a second child • Both credits phase out over modified AGI of • $45,000 - $55,000 if single • $90,000 - $110,000 if married filing jointly

  14. Jerry has two dependent children, Greg and Mandy, who attend an accredited college in 2006. Greg is a senior who spent $7,000 for tuition & fees. Mandy, a freshman, had tuition expenses of $4,000. Jerry meets all the income and filing status requirements for the education credits. There is no tax-free assistance to pay these expenses. Jerry’s salary is $90,000 and his tax liability before credits equals $14,000. What is the maximum credit that Jerry may claim on his 2006 tax return?

  15. HW-35 Education CreditsGreg and Barbara, a married couple with an AGI of $80,000, have two children who are full-time college students. They pay $6,000 for tuition annually for each child. Their son is a sophomore in college. Their daughter is a senior in college. How much can Greg and Barbara claim for education credits?

  16. HWA-35 Ed. Credits$2,850 in total credits. $1,650 Hope scholarship credit for the son and $1,200 (20% x $6,000) lifetime learning credit for the daughter.

  17. HW-35 Education CreditsDoris is a single individual with modified AGI of $48,000. During the year, she pays $11,000 for tuition for a master’s in taxation program. How much can Doris claim for the lifetime learning credit?

  18. Earned Income Credit • The purpose is to reduce the impact of payroll taxes for low-income individuals • Credit is equal to a percentage of earned income below a maximum • With one qualifying child, maximum credit is $2,747 ($8,080 x 34%) for 2006 • With two or more qualifying children, maximum credit is $4,536 ($11,340 x 40%) • Smaller credit available to taxpayers without children

  19. Earned Income Credit • This is a refundable credit • Taxpayers with investment income of $2,800 or more are not eligible • Anyone who can be claimed as a dependent is not eligible • A taxpayer without a qualifying child, must be between the ages of 25 and 64 to be eligible • Credit starts phasing out when income exceeds $16,810 if married filing jointly ($14,810 for others)

  20. Dependent Care Credit-1 • Nonrefundable credit for taxpayers who pay for child or dependent care so they can work

  21. Dependent Care Credit-2 Credit percentage varies from 20% to 35% of up to $4,000 for one qualifying child or $6,000 for 2 or more qualifying children under 13 • 35% if AGI does not exceed $15,000 • Reduced by 1% for each $2,000 (or fraction thereof) AGI exceeds $15,000 • 20% if AGI exceeds $43,000

  22. HW-37 Dependent Care CreditJune is a single individual with AGI of $45,000. June has a five-year-old son who is in day care while she works.a. How much can she claim for the dependent care credit if she spends $5,000 for child care during the year?b. How much can she claim for the dependent care credit if she spends $3,000 for child care during the year?

  23. HWA-37 Dep. Care Credita. $800 (20% x $4,000 maximum)b. $600 (20% x $3,000)

  24. Retirement Contributions Credit-1 To encourage participation by low-income wage earners, a credit for up to $2,000 contributed to employer-sponsored retirement plans or IRAs is available

  25. Retirement Contributions Credit-2 • Credit varies with AGI • 50% credit for joint filers with AGI up to $30,000 ($15,000 if single) • 20% for joint filers with AGI of $30,000 - $32,500 ($15,000 - $16,250 if single) • 10% for joint filers with AGI of $32,500 - $50,000 ($16,250 - $25,000 if single) • Dependents or full-time students are not eligible

  26. Excess Payroll Tax Credit • Taxpayers working for more than one employer during the year with earnings exceeding the Social Security ceiling ($94,200 for 2006) usually have too much tax withheld • Employee is allowed a refundable credit for any excess Social Security taxes withheld

  27. HW-38 Excess Payroll Tax WithheldRoland worked for Sorbonne Company for the first four months of 2006 and earned $36,000 from which his employer withheld $2,754 for payroll taxes. In May, Roland accepted a job with Lyon Company. During the last eight months of the year, Roland earned $84,000 from which Lyon withheld $6,426 for payroll taxes. How much credit can Roland claim for excess payroll taxes withheld?

  28. Credits for Energy Efficiency • 10% for insulation, windows, skylights, exterior doors & metal roofs for improvements to principal residence ($500 maximum credit) • 30% for qualified solar water heating equipment ($2,000 maximum) and equipment that uses solar power to generate electricity ($2,000 maximum) for improvements to principal residence or vacation home • Up to $3,400 credit for hybrid vehicles

  29. Payment of Income Tax • Estimated quarterly payments are made by persons with large amounts of income from sources not subject to withholding • Due on April 15, June 15, September 15 of current year and January 15 of following year • If payments are not 90% or more of the total tax owed (or an amount required based on the prior year’s tax), a penalty may be charged, unless balance due is less than $1,000

  30. Filing Requirements • Any taxpayer whose gross income is less than the sum of their standard deduction and their personal exemption (but not dependency exemptions) does not have to file a tax return • $8,450 in 2006 for a single individual • Returns should be filed if • Net self-employment income is $400 or more • A child claimed as a dependent has unearned income only of over $850 • Any married person filing separately has income over $3,300

  31. HW-39 Filing RequirementsWhich of the following must file a tax return?a. Carolyn (single and age 66) receives:Interest of $2,000Dividend income of $3,000Social Security benefits of $6,000b. Tim (single, age 18, full-time student). Claimed as a dependent on his parents' tax return. Tim earned $2,000 from a part-time job and $300 in interest income.c. Justin (single, age 25, full-time graduate student). He earned $8,250 from a part-time job.

  32. HWA-30 Filing Requirements-1a. Carolyn is not required to file. $5,150 standard deduction + $1,250 extra for age + $3,300 personal exemption = $9,700 which is more than her gross income subject to tax of $5,000 ($2,000 + $3,000).

  33. HWA-39 Filing Requirements-1b. Tim is not required to file. $2,000 earned income + $300 = $2,300 standard deduction. No personal exemption is allowed for a dependent. He is not required to file because his income does not exceed his allowable standard deduction.c. Justin is not required to file. $5,150 standard deduction + $3,300 personal exemption = $8,450 which is more than his gross income of $8,250.

  34. Alternative Minimum Tax • The purpose of the alternative minimum tax is to ensure high-income taxpayers pay their fair share of tax. • Certain deductions are disallowed or reduced and certain exempt income items are subject to the AMT.

  35. Alternative Minimum Tax • IF AMT is greater than the regular tax, taxpayers pay the larger amount • Rate is 26% on first $175,000 and 28% on excess for individuals

  36. AMT Exemptions • AMT exemptions for 2006 are • $62,550 if married filing jointly • $31,275 if married filing separately • $42,500 if single or head of household • Exemptions begin to phase out when AMTI reaches $112,500 for singles and $150,000 for married filing jointly ($75,000 if MFS) at a rate of $1 for every $4 above the threshold

  37. Alternative Minimum Tax • Itemized deductions are different from those calculated for regular income tax • Medical expenses must exceed 10% AGI • Taxes, home equity loan interest, and miscellaneous itemized deductions are not deductible • Tax preferences that are added include • Nontaxable interest on private activity bonds • Bargain element of incentive stock options

  38. HW-40 AMTDiana, a single individual, has regular taxable income of $220,000 and alternative minimum taxable income of $350,000.(AMTI is usually before exemption)a. What is Diana's tentative minimum tax?b. What is Diana's AMT?

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