Chapter 8: Individual Income tax computation and tax credits Flashcards
What is a tax bracket?
a range of taxable income taxed at a specified rate
What is a tax rate schedule?
a schedule of progressive tax rates and the income ranges to which the rates apply that a taxpayer may use to compute her gross tax liability
What is a tax table?
An IRS provided table that specifies the federal income tax liability for individuals with taxable income within a specific range. Taxpayers with income less than 100k must use the tables instead of the schedules
What are some exceptions to taxpayers who’s taxable income is 100k or less for using the tax schedules rather than the tax tables?
when taxpayers are subject to the kiddie tax, with qualified dividends or capital gains, or claiming the foreign earned income exclusion
What is the marriage penalty?
the extra cost of a married couple pays by filing a joint return relative to what they would have paid had they each filed as single taxpayers. This typically occurs when both spouses earn approximately the same amount of income.
When does the marriage penalty occur?
when a married couple has a greater tax liability when they use the married filing jointly tax rate schedule to determine the tax on their joint income than they would have owed if each spouse would have used the single tax rate
What is the marriage benefit?
the tax savings married couples receive by filing a joint return relative to the tax they would have paid had they each filed as single taxpayers, This typically occurs when one spouse is either not working or earns significantly less than the other spouse
When does a marriage benefit occur?
when a couple has a lesser tax liability when they use the married filing jointly tax rate schedule to determine the tax on their joint income than they would have owed if each spouse would have used the single tax rate
What is the kiddie tax?
a tax imposed at the parent’s marginal rate on a child’s unearned income
What is net unearned income?
Unearned income in excess of a specified threshold amount of a child under the age of 19 or under the age of 24 if a full time student
When does the kiddie tax apply?
this tax applies when:
- the child is under 18 years of age at year end
- the child is 18 at year end but her earned income does not exceed half of her support
- the child is over 18 but under 24, is a full time student during the year, and her earned income does not exceed half her support
What is the alternative minimum tax?
a tax on a broader tax base than the regular tax. it is designed to require taxpayers to pay some minimum level of tax even when they have low or no regular taxable income as a result of certain tax breaks in the tax code
What is the alternative minimum tax system?
a secondary or parallel system calculate on an alternative tax base that more closely reflects economic income than the regular income tax base. the system was designed to ensure that taxpayers generating economic income pay some minimum amount of income tax each year. However as it is currently structured it forces many taxpayers who don’t fit this description to pay the tax
What is the AMT base?
alternative minimum taxable income minus the alternative minimum tax exemption
What are alternative minimum tax adjustments?
adjustments (positive or negative) to regular taxable income to arrive at the alternative minimum tax base
