Federal income tax is changed on an incrementalbasis rather than a complete revision.
The tax law has been referred to as a quiltwork of tax law.
1913 Tax Form
1% on amount over %%EDITORCONTENT%%nbsp; 20,000 and not exceeding %%EDITORCONTENT%%nbsp; 50,000
2% on amount over %%EDITORCONTENT%%nbsp; 50,000 and not exceeding %%EDITORCONTENT%%nbsp; 75,000
3% on amount over %%EDITORCONTENT%%nbsp; 75,000 and not exceeding $100,000
4% on amount over $100,000 and not exceeding $250,000
5% on amount over $250,000 and not exceeding $500,000
6% on amount over $500,000
3 Types of Income Tax Rates
Rate increases as tax base increases
Individual income tax
Proportional or flat tax
E.g., sales tax
Rate decreases as tax base increases
E.g., FICA tax
Marginal and Effective Tax Rates
Marginal tax rate (Tax Bracket)
Tax rate applied to incremental amount of taxable inc that is added to tax base
Effective tax rate
Total tax liability divided by total income
Determination of Taxable Income and Tax Due
Married Joint Filers
Head of Household Filers
$0 to $9,275
$0 to $18,550
$0 to $13,250
$9,275 to $37,650
$18,550 to $75,300
$13,250 to $50,400
$37,650 to $91,150
$75,300 to $151,900
$50,400 to $130,150
$91,150 to $190,150
$151,900 to $231,450
$130,150 to $210,800
$190,150 to $413,350
$231,450 to $413,350
$210,800 to $413,350
$413,350 to $415,050
$413,350 to $466,950
$413,350 to $441,000
Example of Calculating Tax Due
Married Filing Joint with a total wage of $250,000 1st $18,550 x 10% = $1,855.00 + ($75,300-$18,551) x 15% = $8,512.35 + ($151,900-$75,301) x 25% = $19,149.75 + ($231,450-$151,901) x 28% = $22,273.72 + ($250,000-$231,451) x 33% = $6,121.17 Total Tax Due = $57,911.99
This is why tax deductions and credits are a crucial part of our tax system!
Tax Deductions and Credits
Deductions are expenses that lower your taxable income. It is subtracted “off-the-top” from the amount of money you made throughout the year. Once all deductions are subtracted, this amount is known as your adjusted gross income or AGI.
Credits are dollar-for-dollar reductions that are subtracted from your tax liability.
Job Hunting Expenses
To deduct job-hunting expenses, you must be looking for a job in your present line of work (i.e., you’re not changing professions or looking for your first job). Some expenses include but are not limited to:
Career counseling to assist you in improving your position
Legal and accounting fees you pay in connection with employment contract negotiations and preparation
Transportation costs to job interviews
Uniforms and Gear
Protective clothing and gear
Uniforms (except if you’re full-time active duty in the armed forces)
Dry cleaning costs for your uniforms or protective clothing (not for your everyday clothing, though)
Specialized clothing designed for your job, as long as it’s not suitable for everyday wear
Safety equipment, such as hard hats, safety glasses, safety boots, and gloves
Real estate expenses:
Mortgage prepayment penalties
Penalties of early withdrawals
Points on principal residence financing
Real estate taxes
Auto registration fees
Charitable contributions (cash and non-cash) made to qualified U.S. charities.
Accounting fees (preparation of tax return)
Safe deposit box rental
Interest on margin accounts
Casualty and theft Losses
Ad valorem tax
Certain special assessments
Income tax (state and local)
Personal property tax
Real property tax
Qualified Medical Expenses
Generally, you can only deduct the excess over 10% of Adjusted Gross Income, and then only if you can itemize on Schedule A.
Credit for Overpaid Social Security Taxes
If you had more than one employer and earned over $106,800 in combined salary, you almost certainly had too much Social Security tax withheld.
Dependent Child Credit
If you had at least one dependent child who was under age 17 at the end of last year, the credit is $1,000 per qualifying child. Unfortunately, this break is phased out starting at high adjusted gross incomes.
Dependent Care Credit
If you pay someone to take care of your under-age-13 child so you can work, you could be eligible for the dependent care credit. (If you’re married, your spouse must also work or be going to school.)
American Opportunity and Lifetime Learning Credits
The American Opportunity and Lifetime Learning Credits are credits for attending an accredited higher education institution (college or university).
If you adopt an under-age 18 child, you may qualify for a tax credit to offset your adoption expenses. If you are married, you must file a joint return to qualify.
Energy Efficiency Tax Credit
The energy efficiency tax credit is offered to individuals who install energy-efficient home improvements. The credit is capped for windows, insulation, heating, non-solar water heating systems, air conditioning, ventilation, doors, metal and asphalt roofs and biomass stoves.
Earned Income Tax Credit
The earned income credit is a refundable tax credit designed for lower income working families and individuals.
Retirement Savings Contribution Credit
The Retirement Savings Contribution Credit is a federal tax credit designed to encourage low- and modest-income individuals to save for retirement. The credit is a percentage of savings, from 10% to 50%.
Administration of the Tax Law
Selection of returns for audit
2.5% per year at random
Statute of limitations
General rule 3 years from later of the date tax return was actually filed or due date
Six years if taxpayer omits items of gross income that in total exceed 25%
Indefinite if fraudulent return filed or no return filed
Accessing this course requires a login. Please enter your credentials below!