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Chapter 07Tax Rates.

Howard Godfrey, Ph.D., CPAUNC Charlotte

Rev. Proc. 2011-52, I.R.B. 2011-45, Oct. 20, 2011.[Code Secs. 1, 55 and 59]For purposes of determining whether a child’s unearned income is taxed at the parent’s tax rate, the amount by which the child’s net unearned income is reduced remains at $950. The child’s income can be reported on the parent’s return if the child’s gross income is more than $950, and less than $9,500. The AMT exemption cannot exceed the sum of the child's earned income for the tax year, plus $6,950.

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Dependent’s Standard Ded.-pg-6-33[Sec. 63(b), (c)]Dependent’s standard

deduction is limited to the greater of:1) $950 (in 2012)or2) Earned income + $300 (up to otherwise

allowable standard deduction)– Earned income includes salary and wages– Earned income does not include interest

income, dividend income, capital gains, or income as beneficiary of a trust

Dependent’s Taxable IncomeScott is 15 years old and qualifies as a dependent on his parents' tax return. In 2012 he earns $2,200 from a part-time job and also receives $1,200 of dividend income on stock given to him by his aunt. What is Scott’s taxable income?

Scott 2012Wages $2,200Dividend Income 1,200

Adjusted Gross Income 3,400Standard Deduction:Greater of:1. Base deduction2. Earned income + $300.

Taxable Income

Scott 2012

Wages $2,200Dividend Income 1,200

Adjusted Gross Income 3,400Standard Deduction:Greater of:1. Base deduction 950 2. Earned income + $300. 2,500 2,500

Taxable Income $900

K is 8 years old and single. She is claimed as a dependent on her parents' return. She had interest income of $2,050. Her parents have taxable income of $150,000. What is her taxable income for 2012?

Child's Income (Age 8)Earnings from job $0Interest on savings, etc. 2,050

Gross Income 2,050Less Deduct for AGIAdjusted Gross Income 2,050

Personal Exemption 0Std Ded. -Unearned Income (950)Std Deduction - ExcessTotal Standard Deduction (950)

Taxable Income 1,100

Unearned Earned TotalIncome Income Income

Child's Income (Age 8)Earnings from job

Interest on savings, etc. 2,050 2,050Gross Income 2,050 2,050Less Deduct for AGIAdjusted Gross Income 2,050 2,050 Personal Exemption 0 0 Std Ded. -Unearned Income -950 (950) Std Deduction - Excess 0Total Standard Deduction -950 (950)Taxable Income 1,100 1,100

Information

Unearned Earned TotalIncome Income Income

Child's Income (Age 8)Earnings from job

Interest on savings, etc. 2,050 2,050Gross Income 2,050 2,050Less Deduct for AGIAdjusted Gross Income 2,050 2,050

Personal Exemption 0 0Std Ded. -Unearned Income -950 (950)Std Deduction - Excess 0Total Standard Deduction -950 (950)

Taxable Income 1,100 1,100Taxable Amount & Tax At Child's rates 950 950 At Parent's Rates 150 150Child's tax before credits

Parents' taxable income & marginal tax rate 150,000

Information

Unearned Earned Total TaxIncome Income Income Rate Tax

Child's Income (Age 8) Earnings from job Interest on savings, etc. 2,050 2,050Gross Income 2,050 2,050Less Deduct for AGIAdjusted Gross Income 2,050 2,050

Personal Exemption 0 0Std Ded. -Unearned Income -950 (950)Std Deduction - Excess 0Total Standard Deduction -950 (950)

Taxable Income 1,100 1,100Taxable Amount & Tax At Child's rates 950 950 10% $95

At Parent's Rates 150 150 28% 42

Child's tax before credits $137

Parents' taxable income & marginal tax rate 150,000 28%

Information Tax Return

Salary $120,000Federal income tax withheld: (20,000) Maximum for Soc. Sec. $106,800Social Security base 106,800

Rate-Social Security 6.20%Social Security Tax 6,622

Medicare base 120,000

Rate-Medicare Tax 1.45%Medicare Tax 1,740FICA (Soc. Security & Medicare) (8,362) Take-home pay 91,638$ Note that the 6.2% is temporarily reduced in 2011 and 2012.

Mary-2011

Self-Employment Taxes. Pg. __.• Self-employed individuals must pay both the

employer’s and the employee’s share of FICA taxes for a combined rate of 15.3%– 12.4 % (6.2% x 2) for Social Security on income

up to $106,800 in 2011– 2.9% (1.45% x 2) for Medicare – no income

limit• Deduction for employer portion simulated

by multiplying net income from self-employment by 92.35% (100% - 7.65%) before calculating SE tax

Self-Employment Taxes• Tax computed on Schedule SE• Self-employed individuals are also

allowed a deduction for AGI for the employer’s half of self-employment taxes– Calculated by multiplying net income from

self-employment by 92.35% (100% - 7.65%) before calculating SE tax

• There is no deduction for the employee’s half of the taxes

Self-Employment TaxCarrie owns a business that she operates as a sole proprietorship. The business had a net profit of $25,000. This is Carrie’s only earned income.a. How much self-employment taxes will she pay?b. How much can she deduct on her tax return?c. If the business had a net loss of $10,000 (instead of a $25,000 profit), how much in self-employment taxes must Carrie pay?

Self-Employment Tax for Carrie [2]Compute self-employment taxNet profit on Schedule C $25,000Factor for S.E. tax base 92.35%

S.E. Tax RateS.E. Tax Deduct 50% of S.E. tax

Self-Employment Tax for Carrie [2]Compute self-employment taxNet profit on Schedule C $25,000Factor for S.E. tax base 92.35%

23,088S.E. Tax Rate 15.30%S.E. Tax 3,532Deduct 50% of S.E. tax 1,766$ No S.E. Tax for Loss Year.

Self-Employment Tax – George -1George has net income from self-employment of $43,000 (from his week-end tax practice).He has a salary of $72,000, earned as a VP of a local corporation.What is his self-employment tax?What amount may he deduct?

$43,000

Limit for S.E. Tax

Salary 72,000

Limit on full rate 15.30%

Excess 2.90%

Totals

What amount may he deduct? [50% of S.E. Tax.]

Compute self-employ. tax for George - 2

Net profit on Schedule C

Factor for S.E. tax base

Base for S.E. Tax

$43,000

92.35%

39,711$

Limit for S.E. Tax $106,800

Salary 72,000

Limit on full rate $34,800 15.30% $5,324

Excess 4,911 2.90% 142.40

Totals $39,711 $5,467

What amount may he deduct? [50%] $2,733Note: George has paid 7.65% on $72,000 salary above.

Compute self-employment tax for George - 3

Net profit on Schedule C

Factor for S.E. tax base

Base for S.E. Tax

Juan and Wanda-1Juan and Wanda are married and file a joint return. They each earn a salary of $100,000 ($200,000 total). They do not have deductions for AGI. They support and claim exemptions for children, Bud (age 3) and Sarah (age 22). They pay child care expenses of $5,000 for Bud for the entire year, so that both Juan and Wanda can work full-time.

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Juan and Wanda-2. Sec. 24Sarah is a full-time student throughout the year in graduate school. Juan and Wanda pay all of the cost of supporting Sarah, including tuition and other expenses qualifying for the life-time learning credit of $22,000 at Big Private University, where Sarah is a graduate student. Child credit for Juan and Wanda?

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Child Credit

Adjusted Gross Income $200,000Amount of credit per child 1,000

Number of children under 17 1

Total credit before phaseout 1,000

Phase OutThreshold $110,000AGI above Threshhold $90,000Number of layers at $1,000 per layer 90

Phaseout per layer $50

Phase-out 4,500 Child Credit $0

Continue the previous question for Juan and Wanda. How much credit may Juan and Wanda claim for the year for child and dependent care expenses?

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Juan and Wanda- Child care creditNumber of children 1Amount spent for childcare $4,000Spouse 1 - wages 100,000 Spouse 1 - wages 100,000 Total wages 200,000 Max. amount of exp. subject to credit 3,000 Amount spent for childcare 4,000AGI 200,000 Base for reducing credit rate 15,000 Excess 185,000 Divide by $2,000 93 Reduce by 1% per $2,000 93%Maximum credit rate 35%Min. Child care credit rate for taxpayer 20%Credit $600

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Education Credits-1 . Law (below) is a modified version for 2009-10. Two elective (possibly refundable) tax credits for college tuition & fees for the taxpayer, spouse, or dependents

Hope Scholarship Credit – 100% of first $2,000 and 25% of second $2,000 tuition and fees for first 4 (prev. was 2) years (maximum $2,500 per student per yr)Lifetime Learning Credit – 20% of up to $10,000 tuition and fees (maximum $2,000 per taxpayer (family))A student who is a dependent cannot claim the credit. Parent, etc. gets the credit for expense paid by childNote: with first credit, if you spend $2,000, you get a credit of $2,000. Now so with the second one.

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Education Credits-2Expenses paid with a Pell Grant, scholarship, or employer-provided educational assistance do not qualifyThe election is separate for each student, so a parent may choose one credit for one child and a different credit for a second childBoth credits phase out is AGI is above threshold.Hope$80,000 - $90,000, [or $160,000 - $180,000 (Joint)]LLC$50,000 - $60,000, [or $100,000 - $120,000 (Joint)]

IRS News Release IR-2011-104, (Oct. 20, 2011)

Credits, deductions, and related phase outs. The modified adjusted gross income threshold at which the lifetime learning credit begins to phase out is $104,000 for joint filers, up from $102,000, and $52,000 for singles and heads of household, up from $51,000.

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100% of 25% of

Exp. subject to credit First $2000 Next $2,000

Our Education Cost 2,000 1,200 4,500

Credit percentage 100% 25% 20%

Amount $2,000 $300 $900

Credit before phaseout 2,300 900

Phase OutAdjusted Gross Income $108,000 $108,000

Threshold starts at $160,000 $102,000

Threshold range $20,000 $20,000

AGI above Threshhold $0 $6,000Reduction % 0% 30%

Percent allowed 100% 70%

Credits allowed $2,300 $630

Cost of books allowed for Hope, but not for LLC

Hope (AOTC) Life-Time Learn. Credit

expense of $10,00020% of maximum

First-Time Homebuyer Credit, Woods, Jr., 137 TC No. 12

The Tax Court has found that a taxpayer who took possession of a home under a contract for deed was entitled to the first-time homebuyer credit even though he had not yet occupied the home. Although the taxpayer would not obtain legal title until he made his final payment due under the contract, he assumed all the benefits and burdens of ownership when he entered into the contract.04/19/23 30

First-Time Homebuyer Credit, Woods, Jr., 137 TC No. 12

Sec. 36(c)(3)(B) provides that "a residence which is constructed by the taxpayer shall be treated as purchased by the taxpayer on the date the taxpayer first occupies such residence." The Tax Court held that the taxpayer’s renovations were enough to establish occupancy. The court noted, without ruling conclusively on the matter, that in the future questions may arise concerning the distinction between a taxpayer who "purchases" and "renovates" and a taxpayer who "constructs."

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First-Time Homebuyer Credit, Woods, Jr., 137 TC No. 12

The taxpayer claimed the Sec. 36 credit, which provides a refundable tax credit for a first-time homebuyer of a principal residence. At the time the taxpayer entered into a contract for his house, the first-time homebuyer credit reached $7,500 and was repayable in installments.The IRS determined that the taxpayer was not entitled to the homebuyer credit because the taxpayer did not have equitable or legal title to the property when he claimed the credit. Additionally, the house was not the taxpayer's principal residence because he had not yet occupied it, according to the IRS.

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First-Time Homebuyer Credit, Woods, Jr., 137 TC No. 12

Court’s analysisHolding first that state (Texas) property law controlled the taxpayer’s property interest, the court found that a contract for deed effected a change of ownership and gave the taxpayer equitable ownership of the home, even where the seller retained bare legal title, which was more in the nature of a security to guarantee payment.Second, the court held that Code Sec. 36 required a "prospective" analysis to determine whether the taxpayer occupied the home as his principal residence. The taxpayer’s intent to occupy the home as his principal residence after completing renovations was enough to establish occupancy.

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IRS News Release IR-2011-104, (Oct. 20, 2011) Credits, deductions, and related phase outs. For tax year 2012, the maximum earned income tax credit (EITC) for low- and moderate- income workers and working families rises to $5,891, up from $5,751 in 2011. The maximum income limit for the EITC rises to $50,270, up from $49,078 in 2011.The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children.The foreign earned income deduction rises to $95,100, an increase of $2,200 from the maximum deduction for tax year 2011.The modified adjusted gross income threshold at which the lifetime learning credit begins to phase out is $104,000 for joint filers, up from $102,000, and $52,000 for singles and heads of household, up from $51,000.For 2012, annual deductible amounts for Medical Savings Accounts (MSAs) increased from the tax year 2011 amounts; please see the table below. 34

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The End