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Lecture Taxation of individuals and business entities 2015 (6/e) - Chapter 7: Individual income tax computation and tax credits

After studying this chapter you will be able to understand: Determine a taxpayer’s regular tax liability and identify tax issues associated with the process; compute a taxpayer’s alternative minimum tax liability and describe the tax characteristics of taxpayers most likely to owe the alternative minimum tax; calculate a taxpayer’s employment and self-employment taxes payable and explain tax considerations relating to whether a taxpayer is considered to be an employee or a self-employed independent contractor;. | Chapter 7 Individual Income Tax Computation and Tax Credits Learning Objectives Determine a taxpayer’s regular tax liability and identify tax issues associated with the process. Compute a taxpayer’s alternative minimum tax liability and describe the tax characteristics of taxpayers most likely to owe the alternative minimum tax. Calculate a taxpayer’s employment and self-employment taxes payable and explain tax considerations relating to whether a taxpayer is considered to be an employee or a self-employed independent contractor. Learning Objectives (cont’d) Describe the different general types of tax credits, identify specific tax credits, and compute a taxpayer’s allowable child tax credit, child and dependent care credit, earned income credit, American opportunity credit, lifetime learning credit, and earned income credit. Explain taxpayer filing and tax payment requirements and describe in general terms how to compute a taxpayer’s underpayment, late filing, and late payment . | Chapter 7 Individual Income Tax Computation and Tax Credits Learning Objectives Determine a taxpayer’s regular tax liability and identify tax issues associated with the process. Compute a taxpayer’s alternative minimum tax liability and describe the tax characteristics of taxpayers most likely to owe the alternative minimum tax. Calculate a taxpayer’s employment and self-employment taxes payable and explain tax considerations relating to whether a taxpayer is considered to be an employee or a self-employed independent contractor. Learning Objectives (cont’d) Describe the different general types of tax credits, identify specific tax credits, and compute a taxpayer’s allowable child tax credit, child and dependent care credit, earned income credit, American opportunity credit, lifetime learning credit, and earned income credit. Explain taxpayer filing and tax payment requirements and describe in general terms how to compute a taxpayer’s underpayment, late filing, and late payment penalties. Federal Income Tax Computation Regular tax computation dependent upon: Filing status Married filing jointly Qualifying widow or widower (also called Surviving spouse) Married filing separately Head of household Single Progressive tax rates Tax rate schedules Tax tables Federal Income Tax Computation Tax brackets or marginal tax rates on ordinary income 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% Marriage penalty or benefit Who is likely to have penalty? Both spouses receive income Who is likely to have benefit? One spouse receives income Federal Income Tax Computation Exceptions to ordinary tax rates Long-term capital gains (net capital gains) Generally 0%,15%, or 20%, but can be as high as 28% Two different tax rates on one gain is possible Dividends Qualified dividends generally taxed at 0%,15%, or 20% Two different tax rates on one dividend is possible Alternative Minimum Tax Items commonly added back to regular taxable income in computing AMT income Personal and dependency .