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

2. 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

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.)
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

5. Capital Gains Tax Calculation
Figure 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
Chapter 11: Tax Structure

7. Calculate taxable equivalent yield
Chapter 11: Tax Structure

8. 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

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

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

11. Computation of Alternative Minimum Tax
Figure Computation of Alternative Minimum Tax
Chapter 11: Tax Structure

12. 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