Basic Federal Income Tax Davidian – Outline Spring 2016
COMPUTATION OF TAX:
Start with: Gross Income See § 61 – Defines Gross Income
Subtract: Certain Deductions
This produces: Adjusted Gross Income (AGI)
Then Subtract: The Standard or Itemized Deductions
And Subtract: Personal Exemptions See § 151
This produces: Taxable Income
Multiply by: The Applicable Tax Rate(s)
This Produces: Tentative Tax
Then Subtract: Tax Credits
Finally, this =: Tax Due (if positive #) or Refund (if negative number)
ALTERNATIVE MINIMUM TAX
· A TP is liable for AMT if AMT is greater than regular tax liability. TP is liable to the extent AMT amount exceeds regular tax. Therefore, TP pays AMT amount in excess of regular tax, plus regular tax
o Example: Frodo, a single taxpayer, has AMTI of $75,000 in 2011. What is his tentative AMT? Frodo reduces his AMTI by the appropriate exemption amount ($48,450) and multiplies the result ($26,550) by 26%. His tentative AMT is $ $6,903. To the extent that this amount exceeds Frodo’s regular tax, he will pay the difference as AMT.
· Exemptions: After Section 56, 58, and 57 adjustments are made and the AMTI is calculated, the amt of AMT is reduced by an exemption, which depends on the taxpayers classification and the year involved.
· Phaseouts: Exemptions are phased out once AMTI reaches a certain amount, 112,500 (for single TP’s) or 150,000 (married TP’s filing jointly) the exemption is reduced by 25% of the amount by which AMTI exceeds this amount.
o Example: Joanne, a single taxpayer, has AMTI of $250,000. While her exemption amount would normally be $48,450, her AMTI is above the threshold phase-out amount ($112,500), so that her exemption amount is reduced by 25% of the amount by which her AMTI ($250,000) exceeds the phaseout amount ($112,500). Therefore, her exemption amount is reduced (but not below zero) by $34,375 (25% × ($250,000 – $112,500)) so that her exemption amount is $14,075.
COMPUTATION OF ALTERNATIVE MINIMUM TAX
1. Taxable income (As computed for regular tax purposes)
a. Plus: Adjustments
2. ALTERNATIVE MINIMUM TAXABLE INCOME
a. Less AMT Exemption
i. Section 55(d) – A maximum in 2016 of 83,800 (joint returns) and 53,900 (for most single TP’s subject to phase-out)
ii. Must also consider phaseout amounts if AMTI is greater than 112,500 (single) or 150,000 (married) – see above calculation – phaseouts reduce regular exemption amounts
3. TAXABLE EXCESS
a. Times AMT Tax Rates (Generally 26% and 28%)
i. 26% on amts up to 175,000 and 28% on amounts over 175,000
ii. IF EXCESS CONSISTS OF CAPITAL GAINS OR DIVIDEND INCOME, GETS LOWER TAX RATE PURSUANT TO § 1(h) Maximum Capital Gains Rate
4. ALTERNATIVE MINIMUM TAX (paid only if greater than Regular Tax Liability)
a. Less: Tax Credits
5. TAX DUE OR (REFUND)
Seven Basic Tax Issues and Why It Matters
1. Who is the Taxpayer?
a. Important bc it helps us understand and identify strategies a taxpayer may use to direct income or deductions to improve his tax situation
2. Does the Taxpayer have income?
a. Not everything is income – Fed Tax only concerned w/ income
3. What deductions may the taxpayer claim?
a. Fed Tax concerned not w/ gross income but something less – so need to know what these deductions are if anyt
4. In which taxable year should the taxpayer include items in gross income or claim deductions?
a. Proper reporting year is important
b. TP can invoke timing rules in the income deferral and deduction acceleration strategies to save taxes
5. What is the character of the TPs income and loss
a. Code distinguishes between different types of income ad loss giving preference to some and not others
b. Principle distinctions
i. Ordinary income or loss
ii. Capital gain or loss
1. Gain – subject to preferential rate
2. Loss – limited to an individual’s capital gains plus 3000 of ordinary income
6. What tax rate is TP subject to?
a. Depends on taxable income and status of the TP
7. Is the TP entitled to any tax credits?
a. Subtracted on a dollar for dollar basis from TP tentative tax
Five Step Approach to Understanding a Tax Statute
1. Find the general rule
a. Underline in red
2. Find the Terms of Art and their definitions
a. Highlight in yellow – if not defined may be up for admin or judicial interpretation
3. Find the exceptions and special rules
a. Marked with a big green X
4. Find related statutory material
a. Use Blue Text and Bold
5. Note when the statute is likely to be implicated
a. Note this in the margin in Black
REGULAR TAX LIABILITY:
· TAXABLE INCOME =
o Gross Income (§ 61 items such as wages, dividends, etc.)
o less “above the line” deductions (IRC § 62)
§ = Adjusted Gross Income
· measuring rod for other sections of the code
o most important = business expenses of an owner
o loosely designed to put a business owner and a run of the mill wage earner on an equal footing for income comparison purposes
o importance = used as a measuring rod for various items with
ome is:
The tax is:
Not over $22,100
15% of taxable income
Over $22,100 but not over $53,500
$3,315 + 28% of excess over $22,100
Over $53,500 but not over $115,000
$12,107 + 31% of excess over $53,500
Over $115,000 but not over $250,000
$31,172. + 36% of excess over $115,000
Over $250,000
$79,772 + 39.6% of excess over $250,000
§ Tax rates generally increase faster for singles than for surviving spouses (25% at income of $89,150 for surviving spouse; 25% at income of $53,500 for single person).
Married Individuals Filing Separate Returns – IRC § 1(d)
If taxable income is:
The tax is:
Not over $18,450
15% of taxable income
Over $18,450 but not over $44,575
$2,767.50 + 28% of excess over $18,450
Over $44,575 but not over $70,000
$10,082.50 + 31% of excess over $44,575
Over $70,000 but not over $125,000
$17,964.25 + 36% of excess over $70,000
Over $125,000
$37,764.25 + 39.6% of excess over $125,000
· rare because most married couples file jointly
· could be better use of deductible items
o e.g. H’s AGI = $100k; W’s AGI = $100k, and H has $20k in medical expenses
§ if joint return, could not file deduction for medical exemptions
§ if separate returns, H can deduct $10K.
§ ** applicable tax rates are adjusted every year to take inflation into account
o CAPITAL GAINS may be subject to preferential tax rate treatment
· taxable income x applicable tax rate = TAX LIABILITY
o less TAX CREDITS
§ e.g. taxes that have already been withheld, higher education costs, child tax credit
o left with either amount due or a refund
TWO CATEGORIES OF TAXABLE INCOME
Ordinary Income
i) Includes most TPs usual source of taxable income
(1) Example: salary, interest income, etc.?
ii) Exception
(1) Dividend income – qualifies for preferential tax break treatment even though it is considered ordinary income
Capital Gains
iii) Favorable capital gain treatment applies to the sale of most investment property that has been held for > 1 year prior to its sale
iv) Provides for a lower tax rate – See Section 1(h)
v) LTCG for most will be 15%
(1) Recent tax legislation
(a) If you are single w/ Taxable income over 400k, or married and over 450k, you will pay a tax rate of 20%
