1. Special Tax Computation Methods, Tax Credits, and Payment of Tax
Chapter 14
Special Tax Computation Methods, Tax Credits, and Payment of Tax 1

2. Learning Objectives Calculate the Alternative Minimum Tax
Describe what constitutes self-employment income and compute the self-employment tax
Describe the various business and personal tax credits
Understand the mechanics of the federal withholding tax system and the requirements for making estimated payments 2

3. Alternative Minimum Tax
COMPUTATIONAL ASPECTS TAXABLE INCOME PLUS+: TAX PREFERENCE ITEMS PLUS+: PERSONAL AND DEPENDENCY EXEMPTION PLUS+ OR MINUS: ADJUSTMENTS REQUIRED EQUALS =: ALTERNATIVE MINIMUM TAXABLE INCOME MINUS: EXEMPTION AMOUNT ($45,000 MFJ & SS, $33,750 single, & $22,500 MFS)
EQUALS =: ALTERNATIVE TAX BASE TIMES x: TAX RATE (26% of first $175,000; 28% amounts in excess of $175,000)
EQUALS =: TENTATIVE MINIMUM TAX MINUS: REGULAR TAX EQUALS =: THE ALTERNATIVE MINIMUM TAX 3

4. Alternative Minimum Tax
Tax preference items
Include excess depreciation over S\L depreciation
Tax-exempt interest on certain activity bonds
Exclusion of gain on the sale of certain small business stock under Sec. 1202 4

5. Alternative Minimum Tax
AMT adjustments
For most taxpayer AMTI adjustments represent itemized deductions that are not allowed in computing AMTI
Only certain itemized deductions allowed for AMT purposes
Casualty and theft loss in excess of 10% of AGI
Charitable contributions
Medical expenses in excess of 10% of AGI
Qualified housing interest 5

6. Alternative Minimum Tax
AMT adjustments due to timing differences
For real property placed in service after 1986, difference between MACRS and ADS 6

7. Alternative Minimum Tax
AMT adjustments due to timing differences
For personal property placed in service after 1986, difference between MACRS deduction and the amount determined by using 150% DB method 7

8. Self-employment Tax
Distinction between independent contractor and an employee is important
Self-employed individuals are subject to self-employment tax on the amount of net earnings from the self-employment
Employees who have a small business in addition to regular employment may also be subject to the self-employment tax 8

9. Self-employment Tax Computing the tax
Individuals having net earnings from self-employment of $400 or more are subject to the self-employment tax
The self-employment tax is 15.3%. This consist of 12.4% for OASDI and 2.9% for Medicare. The limit for 2004 on OASDI is $87,900 and there is no limit on the Medicare portion of the self-employment tax 9

10. Self-employment Tax
Computing amount subject to the self-employment tax
To compute the amount that is subject to self-employment tax. Multiply self-employment income by 92.35% (100%-7.65%) this equals the net earnings from self-employment 10

11. Self-employment Tax
One-half of self-employment tax imposed is allowed as a for AGI deduction 11

12. Self-employment Tax What constitutes self-employment
Net earnings from a sole proprietorship
Director’s fees
Taxable research grant
Distributive share of partnership income plus guaranteed payments
The self-employment tax is computed on Schedule SE 12

13. Overview Of Tax Credits
Use and importance of tax credits
Tax credits may be used to implement tax policy objectives
Example: provide tax relief for low income taxpayer - earned income credit 13

14. Overview Of Tax Credits
Value of credit versus a deduction
The value of a deduction is dependent on taxpayer’s marginal rate
A tax credit reduces tax liability dollar for dollar 14

15. Overview Of Credits Classification of credits Refundable Nonrefundable15

16. Overview Of Tax Credits Non-refundable
Personal tax credits
Child tax credit
Child and dependent care credit
Tax credit for the elderly & disabled
Adoption credit
Hope scholarship credit
Lifetime learning credit
Qualified Retirement Savings Contribution Credit 16

17. Overview Of Tax Credits Non-refundable
Miscellaneous credits
Foreign tax credit
General business credits
Credit for increasing research
Work opportunity credit
Empowerment zone employment
Disabled access credit
Rehabilitation expenditures
Business energy credit
Welfare to Work 17

18. Refundable Credits Earned Income Credit Eligibility rules:
Earned income and AGI thresholds met
Principal place of abode in the US for more than ½ of the tax year.
The individual is at least 25 years old and not more than 64 at the end of the year.
The individual is not a dependent of another taxpayer for the tax year

19. Payment Of Taxes Withholding of taxes
Employers are required to withhold federal income taxes and FICA tax from employee compensation
Special rules are provided for more than one employer during the same year
Exemptions for certain employment activities such as ministers and domestic servants 18

20. Payment Of Taxes Withholding allowances and methods
Every employee must file an Employee’s Withholding Allowance Certificate (Form W-4) 19

21. Payments Of Taxes Estimated tax payments
Calendar year taxpayers quarterly payments are due April 15, June 15, Sept 15 of the current year, and January 15 of the following year 20

22. Tax Planning Considerations
Avoiding the Alternative Minimum Tax
Avoiding the underpayment penalty for estimated tax
Cash-flow considerations
Use of credits 21

23. Compliance And Procedural Considerations
Alternative minimum tax filing procedures Form 6251 or 4626
Withholding and estimated payments Form W-2 and 1040ES
General Business Credit Form 3800
Personal tax credits
Form 2441
Schedule R
Schedule EIC
Form 1116
Form 8863 22