Question & Answer

When a taxpayer works as an employee and as a self-employed independent contractor during the year, how does the taxpayer determine their employment and self-employment taxes payable?

Compare and contrast an employee’s FICA tax payment responsibilities with those of a self-employed taxpayer.

Bobbie works as an employee for Altron Corp. for the first half of the year and for Betel Inc. for rest of the year. She is relatively well paid. What FICA tax issues is she likely to encounter?  What FICA tax issues do Altron Corp. and Betel Inc. need to consider?

Are an employee’s entire wages subject to the FICA tax? Explain.

What is the difference between the tentative minimum tax (TMT) and the AMT?

Is it possible for a taxpayer who pays AMT to have a marginal tax rate higher than the stated AMT rate?  Explain.

How do the AMT tax rates compare to the regular income tax rates? 

Describe what the AMT exemption is and who is and isn’t allowed to deduct the exemption.  How is it similar to the standard deduction and how is it dissimilar?

The starting point for computing alternative minimum taxable income is regular taxable income.  What are some of the plus adjustments, plus or minus adjustments, and minus adjustments to regular taxable income to compute alternative minimum taxable income? 

Do taxpayers always add back the standard deduction when computing alternative minimum taxable income?  Explain. 

Describe, in general terms, why Congress implemented the AMT. 

In very general terms, how is the alternative minimum tax system different from the regular income tax system?  How is it similar?

Lauren is 17 years old.  She reports earned income of $3,000 and unearned income of $6,200.  Is it likely that she is subject to the kiddie tax?  Explain.

Does the kiddie tax apply to all children no matter their age?  Explain.

Does the kiddie tax eliminate the tax benefits gained by a family when parents transfer income-producing assets to children?  Explain.

What is the kiddie tax?  Explain.

What is the difference between earned and unearned income?

Augustana received $100,000 of qualified dividends this year.  Under what circumstances might the entire $100,000 of income not be taxed at the same rate?

Are there circumstances in which preferentially taxed income (long-term capital gains and qualified dividends) is taxed at the same rate as ordinary income?  Explain.

Once they’ve computed their taxable income, how do taxpayers determine their regular tax liability?  What additional steps must taxpayers take to compute their tax liability when they have preferentially taxed income?

What is the tax marriage penalty and when does it apply?  Under what circumstances would a couple experience a tax marriage benefit?

In 2024, for a taxpayer with $50,000 of taxable income, without doing any actual computations, which filing status do you expect to provide the lowest tax liability?  Which filing status provides the highest tax liability?

What is a tax bracket?  What is the relationship between filing status and the width of the tax brackets in the tax rate schedule?

Suppose you asked your favorite AI query tool the following question: “In 2024, Josie is age 14, has $5,000 of interest income and no earned income. How much is Josie's standard deduction for federal income tax purposes?”  The AI tool provided the following response:

For the tax year 2024, the standard deduction amount for a dependent child like Josie with only unearned income (such as interest income) and no earned income is generally limited to the greater of:

1. $1,200, or

2. Her earned income plus $350 (but not more than the regular standard deduction amount).

Since Josie has no earned income in 2024, we would consider the first option:

Josie's standard deduction = $1,200

Therefore, Josie's standard deduction for federal income tax purposes in 2024 would be $1,200. Please note that tax laws and figures can change from year to year, so it's essential to refer to the most up-to-date IRS guidelines and tax tables for the specific tax year in question.

Is the AI response correct? Explain.

Part B: $187,222 computed as follows:

Description Amount Explanation

(1) AGI$207,000

 From AGI deductions:

a) and b) Medical expenses 0 Medical expenses in excess of 7.5 percent of AGI are deductible. See note A below.

c) and d) State taxes 2,050 State income taxes paid last year are deductible ($1,800 withheld and $250 overpayment applied on last year’s return treated as paid last year.

e) Real property taxes 3,200 Real property taxes deductible from AGI. Payment to developer is not a tax.

f) Personal property taxes 200 Property tax on personal property based on value deductible from AGI

g) Interest on loans secured by her home 12,300 Primary home loan and home equity loan deductible from AGI

h) Charitable contributions 1,828 See note B below

i) Investment expenses and tax return preparation fees 0 Nondeductible expenses

j) Horse racing activities 0 Nondeductible hobby expenses

k) Gambling losses 200 Gambling losses are limited to earnings from gambling deductible as a miscellaneous itemized deduction but not subject to 2% of AGI floor or phase out.

(2) Total itemized deductions19,778

(3) Standard deduction 14,600 Single taxpayer

(4) Greater of Itemized deductions or standard deduction 19,778 Greater of (2) or (3). Shauna should choose to itemize deductions.

Taxable income $187,222 (1) − (4)

Note A: $0. Medical expenses = $4,680 (medical expenses for broken ankle), + $24 (115 miles × 21¢ per mile) + 3,400 (unreimbursed health insurance premiums) + 3,000 (Lasik eye surgery) + 450 (other medical expenses) − $15,525 (AGI of 207,000 × 7.5 percent) < $0. Because 7.5 percent of Shauna’s AGI exceeds her total medical expenses, Shauna is unable to deduct any medical expenses.

Note B: $1,828. Capital gain property generally in the form of stock is deductible at FMV; Thus, Shauna can deduct $1,000 for her ZYX stock donation to the Red Cross. Cash contributions of $300 are fully deductible. Religious artifacts are used by church in its normal function as a non-profit organization and thus are deductible at FMV of $500. Finally, Shauna may deduct $28 (as a cash donation) expense for her charitable mileage (200 miles × 14¢ per mile). Note that the value of services donated is not deductible. Accordingly, Shauna’s charitable contribution deduction is $1,828 (1,000 + 300 + 500 + 28). Shauna need not be concerned about the AGI-based limitations on her contributions because her AGI is relatively high and her contributions are relatively low.