ACC 3410 Chapter 8 Study Guide

Progressive Tax System

A system where the marginal tax rate increases as the taxpayer's taxable income base increases.

Ordinary Income Tax Brackets (2026)

There are seven tax brackets: 10, 12, 22, 24, 32, 35, and 37 percent.

MFS vs. MFJ Taxable Income Levels

The taxable income thresholds for Married Filing Separately are exactly one-half of those for Married Filing Jointly.

Marriage Penalty

Occurs when a married couple's combined tax on a joint return is higher than the sum of their individual taxes if filed as Single.

Marriage Benefit

Occurs when a married couple's combined tax is lower than if they filed as Single (common in one-earner households).

Preferential Tax Rates

Specific rates (0%, 15%, or 20%) applied to net long-term capital gains and qualified dividends.

Preferential Tax Calculation (Step 1)

Split total taxable income into the portion subject to preferential rates and the portion taxed at ordinary rates.

Preferential Tax Calculation (Step 2)

Compute tax on ordinary income using standard schedules, then compute tax on preferential income based on where it falls.

Kiddie Tax Basis

A tax calculated based specifically on a child’s net unearned income.

Unearned Income (Definition)

Income from property, including dividends, interest, rents, royalties, annuities, and capital gains.

Net Unearned Income (NUI) Threshold (2026)

The Kiddie Tax applies to unearned income exceeding $2,700.

Kiddie Tax Rate

Unearned income above the threshold is taxed at the parent's marginal tax rate.

Kiddie Tax Applicability (Age 18)

Applies if the child is 18 at year-end and their earned income does not exceed one-half of their own support.

Kiddie Tax Applicability (Students)

Applies to full-time students aged 19–23 whose earned income does not exceed half of their support.

Dependent Standard Deduction (2026)

The greater of $1,350 or ($450 plus earned income), not to exceed the regular standard deduction.

2026 Capital Gains 0% Threshold (Single)

Taxable income up to $49,450.

2026 Capital Gains 0% Threshold (MFJ)

Taxable income up to $98,900.

2026 Capital Gains 15% Threshold (Single)

Taxable income between $49,451 and $545,500.

2026 Capital Gains 15% Threshold (MFJ)

Taxable income between $98,901 and $613,700.

2026 Capital Gains 20% Threshold (Single)

Taxable income exceeding $545,500.

2026 Capital Gains 20% Threshold (MFJ)

Taxable income exceeding $613,700.

Alternative Minimum Tax (AMT) Purpose

A parallel tax system designed to ensure higher-income taxpayers pay a minimum level of tax regardless of deductions.

AMT Base (Calculation)

Calculated as AMT Income (AMTI) minus the applicable AMT exemption.

2026 AMT Exemption (Single/HOH)

$90,100

2026 AMT Exemption (MFJ)

$140,200

2026 AMT Exemption (MFS)

$70,100

AMT Exemption Phase-out (2026)

Starts at $500,000 (Single) or $1,000,000 (MFJ); exemption is reduced by 50 cents for every dollar over the threshold.

Tentative Minimum Tax (TMT)

The tax calculated on the AMT base using AMT rates (26% or 28%) before subtracting regular tax liability.

2026 AMT Tax Rates

26% on the first $244,500 of the AMT base ($122,250 for MFS); 28% on the excess.

AMT Preferential Rates

Long-term capital gains and qualified dividends are taxed at the same 0%/15%/20% rates as the regular system.

AMT Liability Calculation

AMT Liability = Tentative Minimum Tax minus Regular Tax Liability (cannot be less than zero).

Net Investment Income Tax (NIIT) Rate

A 3.8% tax imposed on the investment income of higher-income taxpayers.

NIIT Thresholds (MAGI)

$250,000 (MFJ), $125,000 (MFS), and $200,000 (all other filers).

NIIT Tax Base

Applied to the lesser of: (1) Net Investment Income, or (2) MAGI in excess of the filing status threshold.

Net Investment Income (Inclusions)

Includes interest, dividends, annuities, royalties, rents, passive business income, and net gains from property sales.

Kiddie Tax Calculation (2026)

NUI = (Gross Unearned Income - $2,700). NUI is taxed at parent's rate; remaining taxable income at child's rate.

Dependent Standard Deduction (2026)

The greater of $1,350 or ($450 + earned income), not to exceed the regular standard deduction ($16,100).

FICA Taxes (Composition)

Consists of Social Security (OASDI) and Medicare (HI) taxes.

Social Security Tax Rate (Employee)

6.2 percent on wages up to the annual wage base limit.

2026 Social Security Wage Base Limit

$184,500 (Wages above this amount are not subject to Social Security tax).

Medicare Tax Rate (Employee)

1.45 percent on all salary or wages; there is no maximum wage base limit.

Additional Medicare Tax Rate

0.9 percent tax applied to wages exceeding specific filing status thresholds.

Additional Medicare Threshold (Single)

$200,000

Additional Medicare Threshold (MFJ)

$250,000 (combined)

Additional Medicare Threshold (MFS)

$125,000

Employer FICA Matching

Employers must pay a matching 6.2% for Social Security and 1.45% for Medicare.

Employer FICA Deductibility

Employer-paid FICA taxes are a deductible business expense for the employer.

Additional Medicare Tax (Employer)

Employers do not match the 0.9% Additional Medicare tax; it is strictly an employee liability.

FICA Overpayment Credit

Available if an employee works for 2+ employers and total Social Security withholding exceeds the $184,500 limit.

Self-Employment (SE) Tax Liability

Independent contractors pay both the employer and employee portions of FICA.

SE Tax "For AGI" Deduction

Self-employed individuals deduct 50% of their total SE tax (the employer portion) to determine AGI.

SE Tax Base (Calculation)

Generally equal to 92.35 percent of net earnings from self-employment.

Social Security Rate (Self-Employed)

12.4 percent (combined) on the first $184,500 of the SE tax base.

Medicare Rate (Self-Employed)

2.9 percent (combined) on the entire SE tax base (no limit).

Additional Medicare Tax (SE)

The 0.9% tax applies to SE earnings over thresholds, but is not part of the 50% "for AGI" deduction.

Net SE Earnings Reporting

Reported on Schedule SE; required if net earnings are $400 or more.

IRS Worker Status Factors

The IRS determines status based on three categories: Behavioral Control, Financial Control, and Type of Relationship.

Behavioral Control

Refers to whether the company has the right to control what the worker does and how the job is performed.

Financial Control

Refers to aspects like how the worker is paid, reimbursement of expenses, and who provides tools/supplies.

Type of Relationship (Status)

Refers to written contracts, employee-type benefits, and the permanency/key nature of the work.

Employee Tax Withholding

The employer is responsible for withholding income and payroll taxes (FICA) from the employee's paycheck.

Employee FICA Rates (2026)

6.2% Social Security (up to $184,500) and 1.45% Medicare (no limit) plus possible 0.9% Additional Medicare tax.

Employee Business Expenses

Unreimbursed employee business expenses are strictly nondeductible.

Employee Fringe Benefits

Eligible for nontaxable benefits like employer-provided health insurance and retirement contributions.

Independent Contractor Reporting

Income and expenses are reported on Form 1040, Schedule C.

Independent Contractor FICA Rates (2026)

12.4% Social Security (up to $184,500) and 2.9% Medicare on net earnings.

SE Tax Base Calculation

The tax base is equal to 92.35% of net self-employment income.

SE Tax "For AGI" Deduction

Independent contractors can deduct 50% of their total self-employment tax liability to provide tax equity.

Contractor Business Expenses

Can deduct ordinary and necessary business expenses "for AGI"; expenses can result in a deductible business loss.

QBI Deduction (Contractors)

Independent contractors may qualify for the 20% Qualified Business Income deduction.

Contractor Tax Payments

Contractors must make periodic estimated tax payments since no taxes are withheld by clients.

SE Tax Step 1: Net SE Income

Gross self-employment compensation minus total ordinary and necessary business expenses.

SE Tax Step 2: Taxable Earnings

Multiply Net SE Income by 0.9235 to determine the earnings subject to self-employment tax.

SE Tax Step 3: SS & Medicare

Apply 12.4% rate to earnings (up to cap) and 2.9% rate to all earnings to find total SE Tax Liability.

Tax Credits vs. Deductions

Credits reduce tax liability dollar-for-dollar; deductions reduce taxable income and are limited by the marginal tax rate.

Nonrefundable Personal Credits

Credits that can reduce tax liability to zero but cannot result in a refund or carryover (e.g., LLC).

Refundable Personal Credits

Credits that can reduce tax liability below zero, resulting in a refund of the excess to the taxpayer (e.g., EITC).

2026 Child Tax Credit (CTC) Amount

A $2,200 credit for each qualifying child under age 17; now indexed annually for inflation.

Credit for Other Dependents

A $500 nonrefundable credit for dependents who do not qualify for the CTC (e.g., age 17+ or elderly parents).

CTC Phase-out Thresholds (2026)

Credit is reduced by $50 for every $1,000 AGI exceeds $200,000 (Single) or $400,000 (MFJ).

Child and Dependent Care Credit (Age)

Subsidizes care for a dependent under age 13 or a disabled dependent so the taxpayer can work.

Dependent Care Credit Rate (2026)

Under OBBBA, the credit rate ranges from 20% up to a maximum of 50% based on AGI.

Dependent Care Expense Limits

Eligible expenses are capped at $3,000 for one individual or $6,000 for two or more.

American Opportunity Tax Credit (AOTC)

Covers the first four years of post-secondary education; maximum credit of $2,500 per student.

AOTC Refundability

40 percent of the AOTC (up to $1,000) is refundable.

Lifetime Learning Credit (LLC)

Nonrefundable credit for any level of post-secondary education; maximum $2,000 per taxpayer (20% of $10,000).

Education Credit Phase-out (2026)

Phase-out begins at $80,000 MAGI ($160,000 MFJ) and is fully eliminated at $90,000 ($180,000 MFJ).

Earned Income Credit (EIC) Purpose

A refundable "negative income tax" designed to assist low-income taxpayers and encourage work.

EIC Investment Income Limit (2026)

Taxpayers with disqualified investment income exceeding $12,200 are ineligible for the credit.

EIC Eligibility Factors

Based on earned income, filing status, and number of qualifying children.

Business Tax Credits

Nonrefundable credits designed to incentivize specific hiring or business activities.

Business Credit Carryover

Unused business credits are carried back 1 year and forward 20 years.

Foreign Tax Credit Purpose

Provides relief for U.S. citizens to avoid double taxation on worldwide income earned abroad.

Foreign Tax Credit Carryover

A unique carryover period of 1 year back and 10 years forward.

Credit Application Order

1. Nonrefundable Personal, 2. Business, 3. Refundable Personal.

Nonrefundable Credit Treatment

Applied first; any excess credit above the tax liability is lost.

Business Credit Treatment

Applied second; any excess is carried back or forward to other years.

Refundable Credit Treatment

Applied last; any excess is paid out to the taxpayer as a refund.

Tax Prepayment Methods

Accomplished through employer withholding from wages or periodic estimated tax payments.

Estimated Tax Due Dates

Due April 15, June 15, Sept 15, and Jan 15 of the following year.