The Basic Federal Income Tax Structure CHAPTER 11 The Basic Federal Income Tax Structure Chapter 1: General Setting Chapter 11: Tax Structure

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

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

COMPUTATION OF FEDERAL TAXABLE INCOME (Contd.) Capital. Gains and Losses 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 Chapter 11: Tax Structure

Capital Gains Tax Calculation Figure 11-2 Capital Gains Tax Calculation Chapter 11: Tax Structure

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 Chapter 11: Tax Structure

Calculate taxable equivalent yield Chapter 11: Tax Structure

COMPUTATION OF FEDERAL TAXABLE INCOME (Contd.) Deductions Standard Deduction Itemized Deductions Medical Expenses State and Local Taxes Interest Expense Charitable Contributions Business Use of a Home Casualty or Theft Losses Moving Expenses Miscellaneous Expenses Exemptions Number of Dependents Chapter 11: Tax Structure

Standard Deductions Standard Deduction Amount Age 65 or Blind Dependents Chapter 11: Tax Structure

COMPUTATION OF INCOME TAX Basic Computation Marginal Tax Rate Alternative Minimum Tax Chapter 11: Tax Structure

Computation of Alternative Minimum Tax Figure 11-3 Computation of Alternative Minimum Tax Chapter 11: Tax Structure

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