Exam 1-01: FICA Taxes, Taxable Income, and Income Tax Liability

FICA Taxes, Taxable Income, and Income Tax Liability

FICA Taxes (P: E1 – 01a and b)

Social Security tax (OASDI) and Medicare (MHI) are proportional taxes.
- Applied at a constant rate to all levels of the tax base.
  - SS: $6.20\%$ up to yearly limit.
  - MHI: $1.45\%$ on all wages and salaries.
- Reported on W-2 for employees, reduces take-home pay.
- Employer matches the employee contributions.
- Self-employed taxpayers pay both portions:
  - SS = $12.4\%$ .
  - MHI = $2.9\%$ .

Taxable Income: Deductions FOR AGI vs. FROM AGI (E1 – 02, 03)

Tax returns calculate taxable income and tax liability.
The formula starts with wages from all sources.
Taxpayers can take deductions to reduce this income to the taxable portion.
Deductions FOR adjusted gross income (AGI):
- Limited to those related to a trade or business, reimbursed employee expenses, rental and royalty expenses, alimony paid, one-half of self-employment tax paid, contributions to individual retirement accounts, and other specified expenses.
- Always deductible - no minimum allowable amount.
- Generally not limited by the taxpayer's income.
Deductions FROM adjusted gross income:
- Certain personal expenditures (medical, interest, taxes, charitable contributions, personal casualty losses) and investment-related expenses.
- Subject to limitations based on the taxpayer's adjusted gross income.
- If the taxpayer's adjusted gross income exceeds a pre-specified amount, total itemized deductions are reduced.
- A minimum deduction from adjusted gross income is allowed to all taxpayers, called the standard deduction.

Standard Deduction vs. Itemized Deduction: FROM AGI Deductions for Individuals

The standard deduction ensures all individuals get some minimum deduction for personal expenditures.
- The amount is determined by filing status.
Taxpayers can also take specific deductions (medical expenses, mortgage interest, state and local taxes (SALT), charitable contributions, gambling losses, personal casualty losses) on Schedule A called Itemized Deductions.
Taxpayers take the GREATER of the Standard Deduction or Itemized deductions to calculate taxable income.
2024 Standard Deduction Amounts
- Filing Status
  - Single: $14,600$
  - Married Filing Jointly: $29,200$
  - Married Filing Separately: $14,600$
  - Head of Household: $21,900$
  - Qualifying Widow(er) / Surviving spouse: $29,200$
- The additional standard deduction for people who have reached age 65 (or who are blind) is $1,550$ for married taxpayers or $1,950$ for unmarried taxpayers.

2024 Tax Rates Single

Taxable Income
- Over $0$ but not over $11,600$ : The tax is $0.00$ + $10\%$ of the amount over $0$
- Over $11,601$ but not over $47,150$ : The tax is $1,160.00$ + $12\%$ of the amount over $11,600$
- Over $47,151$ but not over $100,525$ : The tax is $5,426.00$ + $22\%$ of the amount over $47,150$
- Over $100,526$ but not over $191,950$ : The tax is $17,168.50$ + $24\%$ of the amount over $100,525$
- Over $191,951$ but not over $243,725$ : The tax is $39,110.50$ + $32\%$ of the amount over $191,950$
- Over $243,726$ but not over $609,350$ : The tax is $55,678.50$ + $35\%$ of the amount over $243,725$
- Over $609,351$ or more: The tax is $183,647.50$ + $37\%$ of the amount over $609,350$

Married Filing Jointly or Qualifying Widow(er)

Taxable Income
- Over $0$ but not over $23,200$ : The tax is $0.00$ + $10\%$ of the amount over $0$
- Over $23,201$ but not over $94,300$ : The tax is $2,320.00$ + $12\%$ of the amount over $23,200$
- Over $94,301$ but not over $201,050$ : The tax is $10,852.00$ + $22\%$ of the amount over $94,300$
- Over $201,051$ but not over $383,900$ : The tax is $34,337.00$ + $24\%$ of the amount over $201,050$
- Over $383,901$ but not over $487,450$ : The tax is $78,221.00$ + $32\%$ of the amount over $383,900$
- Over $487,451$ but not over $731,200$ : The tax is $111,357.00$ + $35\%$ of the amount over $487,450$
- Over $731,201$ or more: The tax is $196,669.50$ + $37\%$ of the amount over $731,200$

Head of Household

Taxable Income
- Over $0$ but not over $16,550$ : The tax is $0.00$ + $10\%$ of the amount over $0$
- Over $16,551$ but not over $63,100$ : The tax is $1,655.00$ + $12\%$ of the amount over $16,550$
- Over $63,101$ but not over $100,500$ : The tax is $7,241.00$ + $22\%$ of the amount over $63,100$
- Over $100,501$ but not over $191,950$ : The tax is $15,469.00$ + $24\%$ of the amount over $100,500$
- Over $191,951$ but not over $243,700$ : The tax is $37,417.00$ + $32\%$ of the amount over $191,950$
- Over $243,701$ but not over $609,350$ : The tax is $53,977.00$ + $35\%$ of the amount over $243,700$
- Over $609,351$ or more: The tax is $181,954.50$ + $37\%$ of the amount over $609,350$

FICA Taxes

OASDI (SS) → $6.2\%$ on Income up to $168,600
MHI → $1.45\%$ on all Income (No Cap)
- Employee pays & employer matches / Self-employed (S/E) pays both parts
- Taxable wages and income for FICA taxes can be different on one’s W-2

E1-01a. Gosney Corporation Example

Clinton earns $80,000 and Trahn earns $180,000. How much FICA tax does Gosney have to pay?
- Looking for employer match
  - Clinton: $80,000 < $168,600 → Can calculate both parts together
    - SS & MHI:
      - $80,000 \times (6.2\% + 1.45\%) = $80,000 \times 7.65\% = $6,120.00
  - Trahn: $180,000 > $168,600 → Have to calculate two parts separately
    - SS: $168,600 \times 6.2\% = 10,453.20
    - MHI: $180,00 \times 1.45\% = 2,610.00
      - Total: $13,063.20$
  - Gosney Corp. pays $19,184.00$ (round up)

E1-01b. Eric Example

Eric is a self-employed financial consultant. During the current year, Eric's net self-employment income is $190,000. What is Eric's self-employment (S/E) tax?
- S/E tax includes both the employee and employer match portions for both Social Security and MHI
- S/E taxpayers do get a FOR AGI deduction for one-half of self-employment tax
  - Income $190,000 > $168,600 → Have to calculate two parts separately
    - SS: $168,600 \times (6.2\% \times 2) = 168.6k \times 12.4\% = 20,906.40
    - MHI: $190,000 \times (1.45\% \times 2) = 190k \times 2.9\% = 5,510.00
      - Total S/E Tax: $26,417.00
    - NOTE: Actual Schedule S/E multiples net S/E income by $92.35\%$ before applying FICA tax rates – This will be addressed in Exam 2 materials. For now focus on the general ideas.

E1-02. Single Individual Taxable Income and Tax Liability Calculation

Total income: $128,900
Excludable income: $2,000
Deductions for adjusted gross income: $2,500
Deductions from adjusted gross income (Itemized Deductions): $8,000
- Greater of:
  - Standard Deduction (Single): $14,600
  - Itemized Deductions: $8,000

Calculation

Total Income From All Sources: $128,900
(Exclusions for Income): ($2,000)
Gross Income: $126,900
(Deductions FOR Adj. Gross Income): ($2,500)
Adjusted Gross Income (AGI): $124,400
(Deductions FROM Adj. Gross Income): ($14,600)
Taxable Income (T.I.): $109,800
Tax Calculation (using the provided tax table/formula for Single):
- $17,168.50 + 24\% \times (109,800 – 100,525)$
- $17,168.50 + 24\% \times 9,275$
- 17,168.50 + 2,226 = $19,395.00

E1-03. Married Couple Filing Jointly Taxable Income and Tax Liability Calculation

Total income: $128,900
Excludable income: $2,000
Deductions for adjusted gross income: $2,500
Deductions from adjusted gross income (Itemized Deductions): $8,000
- Greater of:
  - Standard Deduction (MFJ): $29,200
  - Itemized Deductions: $8,000

Calculation

Total Income From All Sources: $128,900
(Exclusions for Income): ($2,000)
Gross Income: $126,900
(Deductions FOR Adj. Gross Income): ($2,500)
Adjusted Gross Income (AGI): $124,400
(Deductions FROM Adj. Gross Income): ($29,200)
Taxable Income (T.I.): $95,200
Tax Calculation (using the provided tax table/formula for MFJ):
- Tax Table (what software uses) = $11,056
- Tax Computation (for comparison and practice):
  - $10,852 + 22\% \times (95,200 – 94,300)$
  - $10,852 + 22\% \times 900$
  - 10,852 + 198 = $11,050
Tax Liability (Tax Credits): $ for $ Reduction of Cash Paid
- (Withholding): Employed taxpayers W-2 (Est. Payments): Self-employed taxpayers
- (Refund) Tax Due