Chapter 7 Individual Income Tax Computation and Tax Credits

INSTRUCTOR’S MANUAL

Learning Objectives

1. Determine a taxpayer’s regular tax liability and identify tax issues associated with the process. 2. Compute a taxpayer’s alternative minimum tax liability and describe the tax characteristics of taxpayers most likely to owe the alternative minimum tax. 3. Calculate a taxpayer’s employment and self-employment taxes payable and explain tax considerations relating to whether a taxpayer is considered to be an employee or a self-employed independent contractor. 4. Describe the different general types of tax credits, identify specific tax credits, and compute a taxpayer’s allowable child tax credit, child and dependent care credit, American opportunity credit, lifetime learning credit, and earned income credit. 5. Explain taxpayer filing and tax payment requirements and describe in general terms how to compute a taxpayer’s underpayment, late filing, and late payment penalties.

Lecture Notes

1) Regular Federal income Tax Computation a) Tax Rate Schedules i) Schedule depends on filing status. ii) Each separate range of income subject to a different tax rate is referred to as a tax bracket. iii) Each filing status has its own tax rate schedules which consists of tax brackets taxed at 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent, and 39.6 percent. iv) The IRS provides tax tables that present the gross tax for various amounts of taxable income under $100,000 and filing status. b) Marriage Penalty or Benefit i) Marriage penalty (benefit) occurs because dual earning spouses pay more (less) combined tax than if they each filed single. ii) Refer to exhibit 7-1 for 2014 marriage penalty (benefit) two wage earner vs. single wage earner married couple c) Exceptions