Module 28 Individual Tax Computation, Credits, and Alternative Minimum Tax.

Module 28Individual Tax

Computation, Credits, and Alternative Minimum Tax

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Filing requirements Computation of regular tax liability Tax credits of individuals Estimated tax payments Alternative minimum tax

Filing Requirements

Key Learning ObjectivesKey Learning Objectives

Determination of filing statusDetermination of filing status Who must file a returnWho must file a return Which return should be filedWhich return should be filed

Filing Status

Married, joint Married, separate Head of household Single Dependent on another's return

Head of Household Rules

Be relative from “short list” Provide > 50% of cost of household Relative must

(a) Be a qualifying dependent or (a) Be a qualifying dependent or (b) Live in same household(b) Live in same household

If child need (b) but not (a) If parent need (a) but not (b) Other qualifying relative need (a) & (b)

In Class Exercise (1)Determining Filing Status

The taxpayer (single, 52, with good sight) 20-year-old son lives with him Son does not pay room and board Son is a full-time graduate student and earns

$8,000 as a TA What information is missing to determine

dependency question? On facts, what is father’s filing status?

Solution: In Class Exercise (1)Determining Filing Status

What information is missing to determine dependency question?

Son is <24 and full time student, so GI not issue You need to know if father paid >50% of

support Did Son or anyone else spend money on Son’sDid Son or anyone else spend money on Son’s

support? support? If yes, Dad must spend at least $1 moreIf yes, Dad must spend at least $1 more

Solution: In Class Exercise (1)Determining Filing Status (con’t)

On facts, what is father’s filing status? Head of Household

Father pays 100% of cost to run homeFather pays 100% of cost to run home Son must live with fatherSon must live with father Son need not be dependent, so missing Son need not be dependent, so missing

information is not needed information is not needed

In Class Exercise (2)Determining Filing Status

Lucy is single, 67 years of age She provides more than one-half the support for

Ethel, who is Lucy's best friend Ethel is 70 years old, single, and lives legally in

Lucy's home for the entire year Ethel is a citizen of the United States and has

income from Social Security of $6,000 What is Lucy's total standard deduction and how

many exemptions can she claim?

Solution: In Class Exercise (2)Determining Filing Status

What is Lucy's total standard deduction ? Filing status = single Ethyl is not a relative so Head of Household is

not available $ of SD = 4,400 + 1,100* = 5,500

* Increase for age > 65* Increase for age > 65 How many exemptions can she claim? Two, one for herself and one for Ethyl

Gross Income (GI) Testfor Filing

Must file if GI exceeds Sum of personal exemptions only standard

deduction (SD), and add on for age only If dependent no PE but get add-on for

blindness and age

Must File to Pay Self-Employment Taxes

Need to file even if GI test not met if SE (Sch. C) income >$400 Remember SE tax rate can be as high as

15.3% of each dollar

Which Form to File

1040 EZ1040 EZ 1040A1040A 10401040

Computation of Regular Tax Liability

Key Learning Objectives (1)

Calculating tax using Tax tables Tax tables Tax rate schedulesTax rate schedules

Marriage penalty Special tax calculation for a child < age 14

Tax rates--Determined by Filing Status

If taxable income <$100,000 use tables Otherwise, use tax rate schedules Special rules for dependents under 14 years

of age

In Class Exercise Determining Tax Liability--

Marge has $102,000 of taxable income Marge is not married Her 12-year-old daughter lives with Marge's

former husband He signed Form 8332 releasing exemption,

so Marge gets to claim the daughter Excerpt from 2000 Tax Table on next slide

Excerpt from 2000 Tax TableIf taxable income is

At least But lessthan

The Tax is FilingStatus

63,550 132,600 14,381.50 Single105,950990,800

161,450147,050

23,965.5020,854.50

+ 31%of excess ofincome over

MFJ HH

taxablecolumn 1

Solution: In Class Exercise Determining Tax Liability--2000 Tax liability = $26,301Tax liability = $26,301 Marge must file as single since child does Marge must file as single since child does

not live with her, even though she gets the not live with her, even though she gets the exemptionexemption

Information given was taxable income, so Information given was taxable income, so no adjustment was needed for deductions no adjustment was needed for deductions from AGIfrom AGI

In Class Exercise Determining Tax Liability--2000

Use the tax rate schedules on previous slide Use the tax rate schedules on previous slide to calculate tax liabilities for the following to calculate tax liabilities for the following taxpayers:taxpayers:

Single, TI = 128,228Single, TI = 128,228 Married, joint, TI = 139,100Married, joint, TI = 139,100 Head of Household, TI = 145,104Head of Household, TI = 145,104

Solution: In Class ExerciseSingle, Tax Liability

TI 128,228TI 128,228 TAX 34,432TAX 34,432

(128,228 - 63,550) * .31 + 14381.50 (128,228 - 63,550) * .31 + 14381.50

Solution: In Class ExerciseMarried Joint, Tax Liability

TITI 139,100139,100 TAXTAX 34,24234,242

(139,100 - 105,950) * .31 + 23965.50 (139,100 - 105,950) * .31 + 23965.50

Solution: In Class ExerciseHead, Tax Liability

TITI 145,104 145,104 TAXTAX 37,689 37,689

(145,104 - 90,800) * .31 + 20854.50 (145,104 - 90,800) * .31 + 20854.50

Taxation if Claimed on Another's Return

Calculate taxable income Determine if subject to “Kiddie Tax” Calculate tax liability

If Claimed By AnotherCalculate Taxable Income

For all dependent filers calculate taxable income using this rule

AGI - SD** = TI **SD = standard deduction

Assumes taxpayer does not itemizeAssumes taxpayer does not itemize No personal exemption allowed

If Claimed By AnotherCalculate Taxable Income

SD will be between $700 & $4,400 (2000) SD > $700 is a function of

earned income plus $250

SD limited in total to $4,400 plus any increases for age or blindness

If Claimed By AnotherDetermine if Kiddie Tax Applies

<13 years old AND Unearned income >$1,400** Then must use Kiddie Tax (KT) rules ** Twice the dependent SD

$700 in 2000 $700 in 2000 If dependent filer itemizes, amount could be If dependent filer itemizes, amount could be

differentdifferent

If Claimed By Another Calculate Tax

If KT n/a use normal rules If KT applies

(1) Am't taxed at parent's rates is Unearned - $1,400

(2) Remainder taxed at lowest rates for dependent’s filing status

(3) Total tax = sum of 1 & 2

In Class Exercise 1: Dependent Filer Tax Calculation

Taxpayer is claimed on another's return and has the following income:

Salary = 3,750 Taxable Interest = 5,000

AGI = 8,750PE = 0

SD (salary + 250) = (4,000)TI = 4,750

Solution In Class Exercise 1:Dependent Filer Tax Calculation

If filer is >13 the tax = $716 (Table) If filer <13 use KT rules

Unearned income (5,000 - 1,400) = 3,600

Remaining T/I = (4,750 - 3,600)= 1,150

TI 4,750Parents 's MTR = 31%

TL = 3,600 x .31 + 1,150 (table)

1,116 + 174 = $1,290

In Class Exercise 2:Dependent Filer Tax Calculation


Salary = -0- Taxable Interest = 9,000

AGI = 9,000PE = 0

SD = (700)

TI = 8,300


If filer is >13 the tax = $1,249 (Table)

If filer <13 use KT rules

Unearned income (9,000 - 1,400) = 7,600

Remaining TI (8,300 - 7,600)= 700

TI 8,300

Parent's MTR is 28%

TL = 7,600 x .28 + 700 (per table) 2,128 + 107 = 2,235



Salary = 5,000 Taxable Interest = 9,000

AGI = 14,000PE = 0

SD = (4,400)

TI = 9,600



If filer <13 use KT rules

Unearned income (9,000 - 1,400) = 7,600

Remaining TI (9,600 - 7,600)= 2,000

TI 9,600

Parent's MTR is 28%

TL = 7,600 x .28 + 2,000 (per table) 2,128 + 302 = 2,430

In Class Exercise 4:Dependent Filer Standard Add-on

Taxpayer is LEGALLY BLIND, claimed on another's return and has following income:

Salary = -0- Taxable Interest = 9,000

AGI = 9,000PE = 0

SD = (1,800) *

TI = 7,200

*Calculate SD using limits, THEN add bump for age/blindness



If filer <13 use KT rules BUT here taxable income (7,200) is less than unearned (9,000) so all income is taxed at parents’ MTR

Parent's MTR is 36%

TL = 7,200 x .36 + 0 (per table) 2,592 + 0 = 2,592

Computation of Regular Tax Liability

Key Learning Objectives (2)Key Learning Objectives (2) Self employment taxSelf employment tax Domestic service employment taxDomestic service employment tax

Tax Credits of Individuals

Key Learning Objectives (1)

Refundable vs. nonrefundable credits Taxes withheld Social security tax overpayments Earned income credit Child and dependent care credit

Tax Credits of Individuals

Key Learning Objectives (2)Key Learning Objectives (2)

Mortgage certificate creditMortgage certificate credit Elderly and disabled person creditElderly and disabled person credit Foreign tax creditForeign tax credit

Estimated Tax Payments

Key Learning Objectives

Who must pay Regular installment method High income installment method Annualized installment method

Estimated Tax Payments & Withholding

All taxpayers must pay "as you go" Withholding automatic if W2 income All other income

Pay by voucherPay by voucher Pay quarterlyPay quarterly

Due Dates & Extensions

Individual returns generally due April 15April 15

Must file written request to extend

Penalties & Interest

File return, even if no money Contact IRS for payment schedules Ignoring is never good strategy Penalties sometimes abated for cause Interest only abated if IRS is grossly late

Alternative Minimum Tax of Individuals

Key Learning ObjectivesKey Learning Objectives Calculation formulaCalculation formula AMT preferences and adjustmentsAMT preferences and adjustments ExemptionsExemptions Tax ratesTax rates AMT creditAMT credit Carryover of creditCarryover of credit

AMT Background

Policy reasonPolicy reason History of individual provisionsHistory of individual provisions Compliance burdenCompliance burden

AMT Concepts

Parallel tax systemParallel tax system AMT is a separate tax systemAMT is a separate tax system Differences will exist between regular taxable Differences will exist between regular taxable

income and AMTIincome and AMTI Prepayment systemPrepayment system

AMT accelerates income and defers deductionsAMT accelerates income and defers deductions Minimum tax credit available for future yearsMinimum tax credit available for future years

Individual AMT FormulaAMT Tax Base

Taxable incomeTaxable income

+ NOL deduction+ NOL deduction

+ Tax preferences+ Tax preferences

+/- Adjustments+/- Adjustments

Tentative AMTITentative AMTI

- AMT NOL (90% limit)- AMT NOL (90% limit)

AMTIAMTI

- Exemption- Exemption

AMT BaseAMT Base

Individual AMT Formula AMT Tax Calculation

ATM BaseATM Base

x 26 / 28%x 26 / 28%

Tentative minimum tax before FTCTentative minimum tax before FTC

Minus AMT FTC (90% limit)Minus AMT FTC (90% limit)

Tentative minimum taxTentative minimum tax

Minus regular tax (after FTC)Minus regular tax (after FTC)

AMT (if positive)AMT (if positive)

Common Adjustments: Deductions From AGI

Exemptions**Exemptions** ** Tax form does this by picking up taxable ** Tax form does this by picking up taxable

income before exemptions are deductedincome before exemptions are deducted Standard deduction ORStandard deduction OR Lessor of medical or 2.5% of AGILessor of medical or 2.5% of AGI 100% of taxes paid100% of taxes paid

Also delete refund included in incomeAlso delete refund included in income

Common Adjustments: Deductions From AGI (con’t)

Equity interest on homeEquity interest on home Difference between regular and AMT Difference between regular and AMT

investment interest expenseinvestment interest expense 100% of remaining misc. 2% deductions100% of remaining misc. 2% deductions

In Class Exercise: AMT Adjustments From AGI

What is the AMT adjustment relating to the What is the AMT adjustment relating to the following deductions from AGI?following deductions from AGI?

ExemptionsExemptions 5,400 5,400 TaxesTaxes 15,000 15,000 Interest on home mortgageInterest on home mortgage

AcquisitionAcquisition 13,000 13,000 EquityEquity 4,560 4,560

Charitable contributionsCharitable contributions 1,300 1,300

Solution: In Class Exercise: AMT Adjustments From AGI

Add back these deductions from AGI: Exemptions 5,400** Taxes 15,000 Interest on home mortgage

EquityEquity 4,560 Total adjustment 24,960

**Amount does not show up on tax form**Amount does not show up on tax form

Common Tax PreferencesBusiness Related Items

Difference between regular and AMT Difference between regular and AMT investment interest expenseinvestment interest expense

Depreciation adjustmentsDepreciation adjustments Gain/loss adjustments on sale of propertyGain/loss adjustments on sale of property Incentive stock optionsIncentive stock options Excess percentage depletion/IDCExcess percentage depletion/IDC

In Class Exercise: AMT Depreciation Adjustments

John is a CPA with a Schedule CJohn is a CPA with a Schedule C He bought office furniture for $20,000 in JuneHe bought office furniture for $20,000 in June He elected to expense $18,500 under §179He elected to expense $18,500 under §179 The furniture is 7-year property The furniture is 7-year property

200% for MACRS 200% for MACRS 150% for ADS 150% for ADS

What is John’s AMT depreciation adjustment? What is John’s AMT depreciation adjustment?

Solution--In Class Exercise: AMT Depreciation Adjustments

CostCost 20,00020,000

Sec. 179 expenseSec. 179 expense 18,50018,500**

Depreciable basisDepreciable basis 1,500 1,500

*allowed for both regular tax and AMT*allowed for both regular tax and AMT

MACRS: 1,500 x .1429 = 214MACRS: 1,500 x .1429 = 214

ADS: 1,500 x .1071 = ADS: 1,500 x .1071 = 161161

AMT adjustment (+) 53AMT adjustment (+) 53

AMT ExemptionBase Amount

Determined by filing status

Married, joint 45,000

Married, separate 22,500

Single//Head of household 33,750

AMT ExemptionPhase Out

Determined by filing status Phase out starts when AMTI equals

Married, joint 150,000Married, separate 75,000

Single//Head of household112,500

Reduced by 25 of excess

In Class Exercise: Calculating the AMT Exemption

John has AMTI of $190,000John has AMTI of $190,000 What is his statutory exemption and AMT What is his statutory exemption and AMT

base if he filesbase if he files

Single?Single?

Married, separate?Married, separate?

Solution--In Class Exercise: Calculating the AMT Exemption

Exemption filing single: 14,375

14,375 = 33,750 -

.25 x (190,000-112,500)

AMTI 190,000

Exemption 14,375

AMT Base 175,625

Exemption filing married, separate: -0-

-0- = 22,500 -

.25 x (190,000 - 75,000)

AMTI 190,000

Exemption - 0 -

AMT Base 190,000

AMT Tax Rates

Determined by AMTI amount 26% on first 754,000

87,500 if married, separate87,500 if married, separate 28% on amount over 175,000

In Class Exercise: Calculating the AMT Tax

Calculate tentative AMT tax before credits for a single taxpayer if AMTI is 95,00095,000 295,000295,000

Solution: In Class Exercise: Calculating the AMT Tax

24,70024,700

AMTI = 95,000AMTI = 95,000

Tax rate 26%Tax rate 26%

AMT tax AMT tax

before creditsbefore credits 24,70024,700

79,10079,100

AMTI = 295,000AMTI = 295,000

Tax rate 26% Tax rate 26% on 175,000on 175,000

Tax rate 28% Tax rate 28% on 120,000on 120,000

AMT taxAMT tax

before credits before credits 79,10079,100 45,500 + 33,60045,500 + 33,600

Minimum Tax Credit

AMT paid in one year can offset regular tax AMT paid in one year can offset regular tax in a later yearin a later year

Carry forward onlyCarry forward only Not time limitNot time limit Cannot offset AMT Cannot offset AMT Based on adjusted net minimum taxBased on adjusted net minimum tax

Minimum Tax Credit Adjusted Net Minimum Tax

Difference betweenDifference between AMT actually paid ANDAMT actually paid AND AMT calculated using exclusionsAMT calculated using exclusions

See next slideSee next slide

Reduced by any credit used in pastReduced by any credit used in past

Adjusted Net Minimum TaxExclusions

Itemized deductions or standardItemized deductions or standard Personal exemptionsPersonal exemptions The following preference itemsThe following preference items

Percentage depletionPercentage depletion Tax exempt interestTax exempt interest

Exemption phaseout is recalculatedExemption phaseout is recalculated

In Class Exercise: Calculating The Minimum Tax Credit (1)

AMT BaseAMT Base AMTI AMTI Tentative AMTTentative AMT 128,750128,750 95,000* 95,000* 24,700 24,700 Regular tax = 13,000Regular tax = 13,000 AMT liability = 11,700 (24,700 - 13,000)AMT liability = 11,700 (24,700 - 13,000)

* Single, gets full exemption of 33,750* Single, gets full exemption of 33,750 Calculate the Minimum Tax Credit IFCalculate the Minimum Tax Credit IF

AMT base using only exclusions would be AMT base using only exclusions would be 70,000 smaller70,000 smaller

Solution: In Class Exercise (1) : Calculating Minimum Tax Credit Revised AMT baseRevised AMT base 128,750 - 70,000128,750 - 70,000 AMT BaseAMT Base AMTI AMTI Tentative AMTTentative AMT

58,75058,750 25,000* 25,000* 6,600 6,600 Regular tax = 13,000Regular tax = 13,000 AMT liability = 0 (6,600 < 13,000)AMT liability = 0 (6,600 < 13,000)

* Single, gets full exemption of 33,750* Single, gets full exemption of 33,750 Credit = Credit = 24,700 24,700

Entire AMT liability for year since there is no exclusion Entire AMT liability for year since there is no exclusion alternative minimum taxalternative minimum tax

In Class Exercise: Calculating The Minimum Tax Credit (2)

AMT BaseAMT Base AMTI AMTI Tentative AMTTentative AMT 295,000295,000 295,000*295,000* 79,10079,100 Regular tax = 50,000Regular tax = 50,000 AMT liability = 29,100 (79,100-50,000)AMT liability = 29,100 (79,100-50,000)

*Single, gets 0 exemption after phaseout*Single, gets 0 exemption after phaseout Calculate the Minimum Tax Credit IFCalculate the Minimum Tax Credit IF

AMT base using only exclusions would be 80,000 AMT base using only exclusions would be 80,000 smallersmaller

Solution: In Class Exercise (2) : Calculating Minimum Tax Credit

Revised AMT baseRevised AMT base295,000 - 80,000295,000 - 80,000 AMT BaseAMT Base AMTI AMTI Tentative AMTTentative AMT

215,000215,000 206,875*206,875* 54,425**54,425** Regular tax = 50,000Regular tax = 50,000 AMT liability = 4,425 (54,425-50,000)AMT liability = 4,425 (54,425-50,000)

*Single, gets 8,125 exemption after phaseout*Single, gets 8,125 exemption after phaseout 33,750 - (215,000-112,500) x .2533,750 - (215,000-112,500) x .25

**Tentative AMT = 54,425**Tentative AMT = 54,425 175,000 x .26 + 31,875 x .28175,000 x .26 + 31,875 x .28

Solution: In Class Exercise (2) : Calculating Minimum Tax Credit Minimum Tax Credit = 24,700Minimum Tax Credit = 24,700

29,100 - 4,42529,100 - 4,425

Module 28 Individual Tax Computation, Credits, and Alternative Minimum Tax.

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Transcript of Module 28 Individual Tax Computation, Credits, and Alternative Minimum Tax.