Chapter 07. Individual Income Tax Computation and Tax Credits. Learning Objectives. Determine a taxpayer’s regular tax liability and identify tax issues associated with the process.
Individual Income Tax Computation and Tax Credits
Assume that Gram’s taxable income is $35,000 including $4,000 of qualifying dividends taxed
at the preferential rate. What would be Gram’s tax liability on her income under these circumstances?
Suppose that during 2011, Deron received $1,000 in interest from an IBM bond, and he received another $2,100 in interest income from a money market account that his parents have been contributing to over the years. What is Deron’s taxable income and corresponding tax liability? (Deron’s mother Courtney is subject to a 25% marginal tax rate.)
Because Deron is younger than 18 years of age at the end of the year and his net unearned income exceeds $1,900, he is potentially subject to the kiddie tax.
Assume that Courtney received $100,000 of taxable compensation from EWD in 2011, and she received $18,000 in self-employment income from her weekend consulting activities. What amount of self-employment taxes is Courtney required to pay on her $18,000 of business income?
Courtney paid $2,000 of tuition and $300 for books for Ellen to attend the University of Missouri–Kansas City during the summer at the end of her freshman year. What is the maximum American opportunity credit (before phase-out) Courtney may claim for these expenses?
Because the cost of tuition and books are eligible expenses, Courtney may claim a maximum American opportunity credit before phase-out of $2,075 [($2,000 × 100%) + ($2,300 - $2,000) × 25%].
Assuming Courtney qualifies for a $2,075 American opportunity credit, she is married filing jointly, and her AGI is $162,000, what amount of American opportunity credit would she be allowed to claim after phase-out?
Assume Courtney filed her tax return on April 10 and included a check with the return for $2,918 made payable to the United States Treasury. The $2,918 consisted of her underpaid tax liability of $2,892 and her $26 underpayment penalty. If Courtney had waited until May 1 to file her return and pay her taxes, what late filing and late payment penalties would she owe?
Answer: Her combined late filing penalty and late payment penalty would be $145 ($2,892 late payment × 5 percent × 1 month or portion thereof). Note that the combined late filing and late payment penalty is limited to 5 percent per month.