chapter 11 the basic federal income tax structure chapter 11: tax structure 1
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Basic Income Tax Structure Figure 11-1 Basic Income Tax Structure Chapter 11: Tax Structure 3TRANSCRIPT
CHAPTER 11
The Basic Federal Income Tax Structure
Chapter 11: Tax Structure 1
INTRODUCTION
Method of tax computation can help a taxpayer
utilize all allowable deductions to reduce taxes develop tax planning strategies to minimize long-term tax liability avoid violating tax limits or rules make improved financial decisions with full consideration of tax implications
Chapter 11: Tax Structure 2
Basic Income Tax Structure
Figure 11-1 Basic Income Tax Structure
Chapter 11: Tax Structure 3
COMPUTATION OF FEDERAL TAXABLE INCOME
Calculation of Gross Income Earned Income
W2 / 1099 Portfolio Income
Interest 1099-INT
Dividends 1099-DIV Report separate if exceeds $1,500 Max 15%
Capital Gains and Losses Capital Gains Tax Rates
Chapter 11: Tax Structure 4
COMPUTATION OF FEDERAL TAXABLE INCOME (Contd.)
Calculation of Gross Income Contd.) Long-term vs. Short-term Gains or Losses
Long-term = 365 days + 1 Current tax rate max of 15%
Wash Sales Cannot take loss on an asset that is “replaced” with a similar asset within 30 days prior to or after a sale
61 days Capital Gains and Sale of Residence
House for Sale MFJ 500,000 of profit is tax free Could include vacation home Renews every 2 years
Selling at a Loss No deduction for selling at a loss
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Capital Gains Tax CalculationFigure 11-2 Capital Gains Tax Calculation
Chapter 11: Tax Structure 6
COMPUTATION OF FEDERAL TAXABLE INCOME (Contd.)
Passive Income Tax shelters etc as long as no material participation Can only offset passive gains with passive losses Passive losses can be carried forward
Real estate exception If own at least 10%, make decisions, and AGI < 100K Can use up to 25,000 to offset regular income
Miscellaneous Income Tax-exempt Income: Municipal Bonds
Exempt from federal taxes and state taxes if purchased from resident state. Social Security Income
Might be taxable Non-taxable Income
Gifts Death benefits
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Allowable Deduction of Real Estate Losses
Table 11-1 Allowable Deduction of Real Estate Losses
Chapter 11: Tax Structure 8
Tax-exempt Yields and Equivalent Taxable Yields
Table 11-2 Tax-Exempt Yields and Equivalent Taxable Yields
Chapter 11: Tax Structure 9
Use to compare the yield on a muni to the yield on a govt or corp bond.
Take the yield on a muni, compare to the yield displayed for your tax bracket.
If muni yield greater, buy the muni.
If the other yield is greater, buy the govt or corporate bond.
Calculate taxable equivalent yield
Chapter 11: Tax Structure 10
COMPUTATION OF FEDERAL TAXABLE INCOME (Contd.) Deductions
Standard Deduction Itemized Deductions
o Medical Expenseso State and Local Taxeso Interest Expenseo Charitable Contributionso Business Use of a Homeo Casualty or Theft Losseso Moving Expenseso Miscellaneous Expenses
Exemptions Number of Dependents
Chapter 11: Tax Structure 11
Standard Deductions Standard Deduction
Amount Age 65 or Blind Dependents
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COMPUTATION OF INCOME TAX Basic Computation Marginal Tax Rate Tax Credits
Child and Dependent Care Credit Earned Income Credit Education Credits Saver’s Credit Child Tax Credit
Alternative Minimum TaxChapter 11: Tax Structure 13
Income Tax Table
Chapter 11: Tax Structure 14
Income Tax Table for 2012
CALCULATING TAXABLE INCOME
Chapter 11: Tax Structure 15
Computation of Alternative Minimum Tax
Figure 11-3 Computation of Alternative Minimum Tax
Chapter 11: Tax Structure 16
EDUCATION PROVISIONS Modification of Education IRAs
Coverdell Education Savings Accounts Maximum $2,000
Qualified Tuition Programs Section 529
Employer-Provided Educational Assistance Maximum allowed is 5,250 Extended to graduate programs also
Student Loan Interest Deduction Up to $2,500 of interest deductible Whether you itemize or not
Deduction for Higher Education Expenses Cannot claim when Hope or Lifetime Learning credit is claimed
Chapter 11: Tax Structure 17
TAXATION OF CORPORATIONS
C Corporations The Tax Relief Act of 2001 left intact the current
corporate tax rate schedule for the majority of C corporations
S Corporations If a person owns a closely held business, an S election
should be investigated
S corporations may be preferable because of the potential for a double tax on the ultimate sale by a C corporation of its assets with a resulting liquidation.
Using S corporations does have drawbacksChapter 11: Tax Structure 18