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Individual Income Tax Formula

All Income
Less: Exclusions
Equals: Gross Income
Less: Above-the-line deductions (deductions for AGI better than FROM AGI)
Equals: Adjusted Gross Income (AGI) The Line
Less: Below-the-line deductions (deductions from AGI)

Greater of Itemized Deductions OR Standard Deduction

Personal & Dependency Exemption amounts


Equals: Taxable Income (Ordinary Income + LTCG Income)
Times: Tax Rates (ordinary tax rates and/or LTCG rates)
Equals: Income Tax Liability
Add: Other Taxes (Self-Employment Tax, Net Invest Income Tax)
Equals: Tax Liability Before Credits
Less: Credits (Higher Education, Child Tax, Child Care, Earned Income Credit)

American Opportunity Credit/Earned Income Credit refundable


Equals: Tax Liability After Credits
Less: Prepayments (Withholdings and Estimated Tax Pmts)
Equals: Taxes Due (Refund)
Filing Status (effects tax rate, standard deduction, various limitations)
Married Filing Jointly (MFJ) lowest rate

Based on marital status on 12/31 (unless spouse died - still MFJ that year)
If file joint return, then joint and several liability
Head of Household (HH) 2nd lowest

Pay > costs of maintaining home for entire year

Home is principal residence for qualifying dependent > yr

Dependent parent not required to live with TP

Dependent must have qualifying family relationship


Single (S) 3rd lowest

Unmarried as of the last day of taxable year & dont qualify for HH/SS
Married Filing Separately (MFS) highest (rarely any tax benefits)

Typically used for nontax reasons (eg. no joint & several liability)
Abandoned Spouse (AS) (HH instead of MFS)

pay > costs of maintaining home for entire year

home is principal residence for dependent child > yr

live apart from spouse for last six months of year


Surviving Spouse (SS) (MFJ for 2 yrs after spouse kicks it)

Do not remarry

Pay > costs of home where dependent child lives for entire year
Personal and Dependency Exemptions
Deduction allowed for each exemption claimed on tax return
Amount adjusted annually for inflation (2015: $ 4K - one per each person)
For whom can a TP claim an exemption?

Personal Exemptions themselves & spouse (unless claimed as dependent)

Dependency Exemptions US Citizen OR US/CA/MX Perm Res

No Joint Return filed by dependent w/ spouse (unless filed only for refund
claim, no taxes owed)

Qualifying Child (QC) OR Other Qualifying Relative (QR)


Qualifying Child (QC) (four tests)

Relationship children/siblings/step & descendants

Residence - Same principal residence for > year (away @ school counts; if
divorced then where child lives most of the time)

Age younger, < 19 yrs old (<24 if FT-student) (unless disabled)

Financial Support - TP provides > of support (based on amt spent,


scholarships excluded)
Qualifying Relative (QR) (three tests)

Relationship family (except cousins)

unrelated must live w/ for whole year (& doesnt qualify TP for HH)

Financial Support same as QC

Multiple-supporter: anybody contrib >10% can claim (but only 1 TP can)

Taxable Gross Income: <$4k (excl N/T income, eg. scholarship/muny bonds)
Gross Income and Exclusions
Income taxable unless specifically excluded by tax law (opposite of deductions)
Exclusions from Gross Income
Municipal (everything but Federal) Bond Interest Income
Qualifying Employee Fringe Benefits (examples)

All employer-paid premiums for health insurance (employee & family)

on $50K life insurance (if >50, exclude: 50K/total coverage * premium)

employee education assistance (max $5250)


Child Support (N/T to recipient, N/D for AGI to payor) & Alimony (both yes)
Scholarships/Grants (unless exchanged for service but TAs, etc. excluded)
Gifts, Inheritances, Life Insurance Proceeds (no income tax, but estate tax)

Whole Life Policy if cash in early, amt of CSV > premiums paid is taxable

Whole Life - pay premium X, get Y if you die, get Z (<Y) if you $ in early

Term Life pay premium each year for coverage if you die that year
Gain on Sale of Personal Residence
Exclude up to $250K of gain from taxable income if owned and used as
principal residence for 2 out of 5 years b4 sale (but only 1 sale/2 yrs)

Married couples get 500K if either meets ownership AND both meet use
If one spouse used exclusion on another sale within 2 yrs, only up to $250K
If live in home >15d and rent for <15d a year, no tax! (if >15 all is taxed)
If no meet own/use rules b/c change in job/health/other unforeseen, then
excludable amt = days owned & used / 24 months * max amt (250 or 500)
Deductions FOR AGI (above-the-line deductions)

Trade/Business Expenses

Traditional IRA Contributions

Moving Expenses (house-hunting trips/meals/ temporary living dont count)

Only includes cost of moving crap & traveling from old to new place

New job must be 50 miles further from home than old (or >50mi if 1st job)

Be full-time employee for 39 wks/12 mo (x2 if S/E) immediately after move


o
Pay moving expenses yourself = deduction FOR AGI
o
Reimbursement from employer = N/T to extent of qualifying exps
o
Employer allowance = include in income; deduct actual exps FOR AGI

Interest on Qualified Higher Education Loans (<=2,500 per tax return)

Phaseout @ 65-85/130-160K S&HH/MFJ

Qualified Higher Education Tuition and Fees

Available as alternative to higher education credits

$4K if AGI<$65K, $0 if AGI>$85K, $2K if $65-85 (no phase out)

TP must pay exps AND claim dependency exemption to deduct

Student can deduct if claims own exemption & someone else pays expenses

Self-Employed Taxpayers: can deduct Health Insurance Premiums, retirement


contributions, & Employer Portion of S/E Tax (Soc Sec & Medicare)
Deductions FROM AGI (below-the-line deductions)
Personal/Dependency Exempts - 4K (phaseout @ 258.25/284.05/309.9 - S/HH/MFJ)

Computation: Amt phased out = (Excess AGI/2500*2)/100*# of people*4000


Standard Deduction - greater of standard deduction OR itemized deductions
Amt: 6300/9250/12600 - S/HH/MFJ (+1550/1250 - S&HH/MFJ per blind/65+)
If claimed dependent, then greater of: $1,050 OR Earned Inc + 350 (<6,300)
Itemized Deductions
Medical and Dental Expenses: necessary but not covered by insurance (glasses, etc.)

Subtract 10% of AGI from total (7.5% if 65+ or MFJ w/ at least 1 person 65+)
Taxes: property (real-estate, cars/boats, etc.) & either state/local income or sales tax
Home Mortgage Interest: <=$1mil on 2 residences & <=$100K on Home Equity Debt
Charitable Contributions: public charities, private operating, private nonoperating

Services: no deduct, but deduct $0.14/mile for transportation

Property: total cash & prop limited to 50% of AGI (excess carry fwd 5yrs)

Capital Gain (limited to 30% of AGI, generally deduct @ FMV)


o
Investment/personal-use asset held LT (> 1 yr) & has increased in value
o
Deduct @ donors basis when tangible & used for unrelated purposes
o
If >30%, count excess as carryover & count 30% toward total 50% limit

Ordinary Income (deduct @ lower of FMV or donors basis/cost)


o
ST assets, inventory, capital gains prop that has decreased in value
Casualty/Theft Losses (lesser of either cost basis OR resulting decrease in FMV)

Limit: $100 floor per casualty/theft & 10% AGI floor for total

Deductible amount = sum(each loss -100) 10% AGI


Misc. Itemized Deductions (must total >=2% AGI)

Employee Business Expenses (uniforms, union dues), Investment Expenses


(advisors, WSJ subscription), Tax Prep fees (H&R block), Hobby Losses
Gambling Losses (can deduct when including winnings in taxable income)
Retirement Plans
Employer-Provided (Qualified Retirement Plans: Defined Benefit & Contribution)

Defined Benefit: employer pays/bears risk rare, mostly govt/unions

Defined Contrib: both pay in/bear risk (private: 401k, Gov/noprof: 403b/457)

Requirements: admin in trust form, non-discrim (all same %, etc.),


sufficiently funded to pay out later, vested (6-yr graded or 3-yr cliff)
Self-Employed Plans (Simplified Employee Pension (SEP) IRA, Self-employed 401k)
Qualified Employer-Provided Traditional Defined Contribution Plans

Contrib (employee max @18k(/24k if >=50), total <=53/59k, <=100% comp)

By Employer employer: deduct; employee: No FICA, income tax deferred

By Employee deductible, Yes FICA, income tax deferred (for employee)

Earnings (tax-deferred until distributed)

Distributions (earnings AND principle taxable)

Premature (+10% if withdrawn before 59.5 or 55 if no longer w/ employer)


o
No penalty if roll over to IRA within 60 days

Minimum Distrib (by 4/1 of year after turning 70.5or retiring if later)
o
Amt based on IRS tables, penalty = 50%*(min distrib actual distrib)
Qualified Employer-Provided Roth Defined Contribution Plans

Only Employee can contribute & contribs taxed when made (income & FICA)

Earnings not taxed (if qualified distribif not pay income tax+10% penalty)

Qualified distribs = open for >=5 yrs, owner>=59.5 (everything tax-free)

Partially w/drawn: tax = taxable amt/total *amt w/drawn * (tax rate + penalty)
Individual Retirement Accounts (IRAs)
Contributions (max 5500/6500 if 50+, <=100% of earned incomeincl. alimony)

Can use spouses earned inc. for spousal IRA (total <11-13K or 100% of both)

Roth phased out @ 116-131k/183-193k/0-10k S&HH/MFJ/MFS

o
Limit = (1-Excess AGI/total zone)*contrib limit (can still put in trad)

Max age to contribute = 70.5 (only traditional Roth has no age limit)
Deductions for Contributions (Trad Only above-the-Line deduction FOR AGI)

If in other plan: phased out @ 61-71k/98-118k - S&HH/MFJ (calc is above^)

If spouse in other: phased out @ 183-193k, No other plans = fully deductible


Earnings: taxed when withdrawn (or possibly never taxed if Roth)
Distributions (+10% penalty if <59.5, Trad: start withdraw on 4/1 after turning 70.5)

No penalty: <=10k for 1st home, qualified Higher Ed, health insurance prems

Trad: deducted=withdrawal taxed (& opposite), earnings taxed @ withdrawal

If partial distrib, taxable amt/total* amt withdrawn

Roth: (if open for >=5 yrs & owner>=59.5, everything tax-free)

If nonqualified: only earnings (not contribs) taxed & penalized 10%

If partial distrib, only taxed/come from earnings when more than contribs

Rollovers (Trad>Roth, contribs + earnings all taxed but no 10% penalty)

Must roll over all $ w/in 60 days (no AGI limits lets rich put $ in Roth)
Tax Computation & Credits
Regular Individual Tax Rates: progressive (10-39.6%), see attached chart
LTCG Rates: on qualified domestic corporations dividends & LT capital gains

0/15/20% if regular tax rate <=15/between 15 & 39.6/39.6%

Calc: split into ordinary & LTCG pools, apply appropriate rates, add up
Net Investment Income Tax: 3.8% of lesser of NII/AGI over 200/250K S&HH/MFJ

Additional tax on NII (unlike LTCG, NII taxed @ regular rate as well)

Includes: Interest, Dividends, Annuities, Rents & Royalties, Income from


Passive Activities, Net gain from property dispositions

Reduced by allowable deductions related to investment income

Excludes tax-exempt income & qualified retirement distributions


Kiddie Tax: <18/1823 if FT student, earned income < of support (ex. scholarships)

Net unearned income (ex. Interest/div) >$ 2,100 taxed @ parents rate

1,050 standard deduct, next 1,050 taxed @ childs rate (10%, or 0% if LTCG)
Individual Tax Credits

Child Tax Credit ($1000 credit per qualifying child <17)

Phaseout: -$50 for every $1000 over 75/110K S&HH/MFJ

Goes up in steps > 1001 counts as 2000, etc.

Education Credits (contrast w/ deductions for AGI section)

American Opportunity: up to $2500 for <=4 yr


o
($2K * 100%) + ($2K * 25%) if <4k, then 2k + (_-2k)*.25
o
At least half-time for 1 semester in degree/credential program
o
For tuition/fees/materials & 40% refundable (split into 2 pools)
o
Phaseout range 80-90K/160-180K S&HH/MFJ
o
Must claim exemption for student to take credit, but can take
credit for qualifying expenses even if paid by others

Lifetime Learning Credit (20% of qual exps up to $10K (max $2K/yr)


o
Tuition/fees ONLY, broader (>4 years, self-study like CPA prep)
o
Phaseout range 55-65K/110-130K S&HH/MFJ

Earned Income Credit (encourage low-incomers to work)

Refundable gradually increases, peaks from $14-18K, then phases out