Chapter 8: Individual Income Tax Computation and Tax Credits

Flashcards covering individual income tax computation, Kiddie tax, AMT, self-employment taxes, and various tax credits based on Chapter 8 of the lecture notes.

Marginal tax rates on ordinary income

The tax brackets applicable to ordinary income, which include $10$, $12$, $22$, $24$, $32$, $35$, and $37 ext{ percent}$.

Marriage penalty

A condition likely to occur when both spouses receive income, resulting in a higher tax liability compared to filing as single individuals.

Marriage benefit

A condition likely to occur when only one spouse receives income, resulting in a lower tax liability compared to filing as single individuals.

Preferential tax rates for long-term capital gains

Tax rates that are generally $0$, $15$, or $20 ext{ percent}$, though they can be as high as $28 ext{ percent}$.

Kiddie Tax

A tax rule where net unearned income in excess of $2,700$ is taxed at the parents' marginal rate for children under $18$ (or students under $24$ whose earned income does not exceed half of their support).

Net unearned income (Kiddie Tax definition)

Unearned income in excess of $2,700$ used to determine the portion of a child's income taxed at the parents' marginal rate.

Net Investment Income Tax (NIIT)

A $3.8 ext{ percent}$ tax imposed on the lesser of net investment income or the excess of modified AGI over $250,000$ (MFJ), $125,000$ (MFS), or $200,000$ (all others).

Alternative Minimum Tax (AMT)

A tax based on an alternative, more inclusive tax base than regular taxable income, intended to ensure taxpayers pay a minimum level of tax.

AMT formula

Regular Taxable Income plus standard deduction (if taken) plus or minus other adjustments equals AMTI; minus AMT exemption equals Tax base for AMT; times AMT rate equals Tentative minimum tax; minus Regular tax equals AMT.

FICA Taxes (Employee share)

Social Security tax of $6.2 ext{ percent}$ on the first $176,100$ of wages, and Medicare tax of $1.45 ext{ percent}$ ($0.9 ext{ percent}$ additional Medicare tax on wages exceeding $200,000$ or $250,000$ for MFJ).

Self-employment tax base

The taxpayer's net earnings from self-employment, calculated by multiplying net Schedule C income by $92.35 ext{ percent}$.

Self-employed FICA responsibility

The requirement for self-employed individuals to pay both the employee and employer shares of Social Security and Medicare taxes.

Nonrefundable personal credits

Tax credits that can reduce tax liability to zero but cannot result in a refund; examples include the Child and Dependent Care Credit and the Lifetime Learning Credit.

Child Tax Credit

A credit of $2,200$ for each qualifying child under age $17$ (partially refundable) and $500$ for each other qualifying dependent (not refundable).

Child and Dependent Care Credit

A credit for expenditures to care for a dependent under $13$ or a disabled dependent, with maximum qualifying expenditures of $3,000$ for one person and $6,000$ for two or more.

American Opportunity Tax Credit (AOTC)

A credit for the first four years of postsecondary education, maximum $2,500$ per student ($100 ext{ percent}$ of first $2,000$ and $25 ext{ percent}$ of next $2,000$), with $40 ext{ percent}$ being refundable.

Lifetime Learning Credit

A credit for eligible tuition and expenses for any course to improve job skills, calculated as $20 ext{ percent}$ of up to $10,000$ of expenses (maximum $2,000$) per taxpayer.

Earned Income Credit

A refundable personal credit designed as a negative income tax for taxpayers with earned income who meet specific child or age requirements.

Business Tax Credits carryover

Provisions allowing excess business credits to be carried back one year and carried forward $20 ext{ years}$.

Safe-harbor provisions (Underpayment)

Provisions to avoid underpayment penalties if the taxpayer pays $90 ext{ percent}$ of the current tax liability or $100 ext{ percent}$ of the previous-year tax liability ($110 ext{ percent}$ if AGI > $150,000$).

Late filing penalty

A penalty of $5 ext{ percent}$ of tax owed per month up to $25 ext{ percent}$ ($15 ext{ percent}$ per month up to $75 ext{ percent}$ if fraudulent).

Late payment penalty

A penalty of $0.5 ext{ percent}$ of the tax owed for each month or fraction of a month the tax is not paid.