As tax law is very complicated, this article is intended only for educational or illustrative purposes and should not be construed to communicate legal or professional advise. You should contact us with any specific questions so we can properly interpret how the tax laws applies to your situation. Killingbeck Tax Preparation, Kokomo, Indiana. 765-452-8000.

There are 4 Steps to Computing Your Tax.

We have outlined in detail below the four steps to computing your tax.  Here's an overview of how it is done. 

The first step to computing your tax is to see if you qualify for an extra standard deduction if you are blind or age 65 or older.  The second step has you compare the standard deduction you can claim with your itemized deductions to see which produces the biggest tax savings.  The third step is to claim the exemptions you qualify for.  Finally, you want to compute your tax using the method that produces the lowest tax. 

 

Rules for Claiming an Extra Standard Deduction for Age 65 and/or Blindness

  1. Check the boxes on top of the backside of the 1040 if you qualify under the following rules for extra standard deduction for being age 65 and/ or blind.

    1. Age 65 and older:  If taxpayer or spouses is 65 or older on the last day of the year, or their birthday is January 1st,  they may claim extra standard deduction.
    2. A deceased is not allowed an additional standard deduction if they died before their 65th birthday.

      Blindness Requirements
       
        
      1.  Blindness is determined as of December 31st.
      2.  To get an additional standard deduction for blindness,  
           must keep a statement from the eye physician in your records.
      3.  If partially blind, must keep a statement from eye doctor in your records stating
           that you can't see better than 20/200 in better eye with glasses or field of vision
           is not more than 20 degrees.
      4.  If eye condition will never improve, you must keep a physician's statement
           in your records saying it won’t improve.
           Do not have to send in statement.

Which Should I Claim, Standard Deduction or Itemized Deductions?

  1. Some taxpayers don't have a choice but are required to itemized by law.  Must check box on back of 1040 that they are required to itemize. 
    1. If married filing separately and other spouse itemizes, you are required to itemize unless you qualify for following exception.
      Exception:  If a spouse qualifies as Head of Household, that spouse does not have to itemize.
      Other spouse still has to itemize if spouse filing head of household itemizes.   
      For information on head of household, see listing on How Do I File in the Tax Preparation menu.

    2. On a separate return, each spouse may only deduct itemized deductions for which he or she is liable and pays.

    3. See itemized deduction section in Tax Preparation menu on items you can deduct. 

  2. Taxpayers should itemize when their allowable deductions exceed their normal standard deduction.   Compare the Standard Deduction you qualify for below to the total Itemized Deductions as computed in the Itemized Deductions section in the Tax Preparation Menu.  
  3. Itemized Deductions phase-out.
    1. In 2015 Phase out starts at: 
    2. Single AGI > $258,250
    3. Head of Household AGI > $284,050
    4. Married Filing Joint > $309,900
    5. The phase out goes up to 80% of itemized deductions.
    6. the phase out does not apply to medical expenses, investment interest, casualty loss or gambling losses.
  4. If Taxpayer is subject to AMT should itemize even if not enough to itemize for regular tax if has:
    1. charitable contributions, home interest from purchase of home, medical bills if over % limit or misc. deductions not subject to 2%
    2. The reason for this is AMT doesn't deduct the standard deduction when computing tax but does allow these deductions.
  5. The standard deduction is determined by filing status, age, blindness & if they are a dependent with unearned income.
    1.                                                                                                              

      If filing status is

           

      And at year end you are

      Must file if Gross Income Greater Than

      Single and you are a Dependent           

                    

      Under 65 with unearned income

       greater of $1050 or $350 + earned inc.

      under 65

      $ 6,300

      Single                    

      under 65

      $6,300

      65 or older

      $7,850

      Married Filing Separate                                    

      If spouse Itemizes

      $ 0

      under 65

      $6,300

      65 or older

      $7,550

      Head of Household

      under 65

      $9,250

      65 or older

      $10,800

      Qualifying Widow(er)               

      under 65

      $12,600

      65 or older

      $13,850

      Married filing joint

             

      under 65

      $12,600

      One 65 or older

      $13,850

      Both 65 or older

      $15,100

    2.                                                                                                               
  6.  *Dependents with Unearned Income (interest, dividends, capital gains, etc.)
       have special rules.
    1. Dependents with unearned income are limited in the amount of standard deduction
      they may claim.
    2. Unearned income includes: pensions, annuities, capital gains, interest and dividends.
    3. Two separate rules apply.
      1.  Dependent with over $1000 earned income.
            (a)  This rule applies regardless of dependents age.
            (b)  This rule applies whether if dependent is eligible to be claimed as a dependent,
                   whether claimed or not.
            (c)  Their standard deduction is greater of:  a. $1000 (plus additional if age 65 or blind) 
                   or earned income plus $350.
      2.   A child under age 19 or student under 24 with over $2000 unearned is taxed using
            form 8615 at line 44 of 1040. 

 

Claiming the Exemptions You Qualify For

  1. On the back of the 1040, you deduct $4000 for each exemption claimed on the front of the 1040.
  2. Exemption phase out starts at $258,250 Single, $285,050 Head of Household, and $309,900 Married Filing Joint.
  3. See rules under "Which Filing Status?" and "Can I Claim My Dependents?" to determine how many exemptions you get to claim.

 

 

Computing Your Tax for the Lowest Tax Possible

  1. If Capital Gains or Dividends are involved, our tax program also computes a capital gains worksheet & Sch. D to determine the correct tax.
    1. It’s important to use worksheets & watch the coding you use on the various worksheets so that tax computes properly.
    2. See "What Income is Taxable?" in the Tax Preparation menu for more information on taxation of capital gains and dividends. 

  2.  Lump Sum Distribution.   Form 4972:       
    1. If taxpayer was born before 1936, use 10 year averaging.  The distribution must be the total amount from an IRS approved plan made due to separation from service, death or disability.  Must have been in the plan for 5 years.  Can only use averaging once.   Beneficiaries can also use.

  3. Farm Averaging  Schedule J:
    1. Access this form when farmers have had a big jump in their income.  It requires information from the 3 previous tax years.  You should be able to look up from previous year tax programs.

  4. Tuition Adjustment for Prior Year
    1. If box 4 of Tuition Statement 1098-T shows an adjustment made for prior year (such as child dropped class and received a refund), and you claimed an education credit, you must recompute credit that should not have been claimed and write on line 44 "recaptured education credit."  For adjustment on Tuition and Fees, see that section.

  5. Foreign Earned Income Worksheet  exclusion or foreign housing exclusion. Form 2555  Access the form if you have these exclusions.  See the "Federal Deductions that Save" section in the Tax Preparation menu for more information on these deductions. The purpose of the form is to mitigate double taxation of  
    foreign income.

      1.   In deciding to claim this exclusion, you should compare the overall tax with the exclusion to the tax by taking the foreign tax credit. 
      2.   U.S. Government pay is ineligible for exclusion.
      3. Qualifies if US taxpayers tax home is in a foreign country 330 days out of any 12 months (prorated for partial year if stays over 330 days over 2 years). 
      4.  Foreign Earned Income Exclusion:  They may be able to exclude up to $100,800 of earned income ($206,600 if joint and both work). 
          Use form 2555.  
          a.   Earnings are still subject to Social Security if American employer. 
      5. Foreign Housing Exclusion:  Also may be able to claim housing exclusion on expenses that exceed a base rate which is $15,872 up to $29,760 for a maximum exclusion of $13,888.  Can be higher if working in high cost area. IRS notice 2010-27 provides a table of foreign locations with higher limits.  
         a.  Housing costs include rent, utilities, parking, furniture rental.
         b.  Can only deduct housing up to taxable foreign income.
         c.  Self employed have special rules. 
         d.  If joint return and both spouses are foreign employees, computing housing costs on a combined basis is better as only one base rate 
              is deducted.
         e.  If both income and housing exclusion claimed, the housing exclusion must be claimed first reducing foreign income exclusion.

  6. KIDDIE TAXForm 8615  (Option form 8814)
    1. Must use if you have a dependent under 19 or student under 24 with Investment Income.
    2. Dependents whose income exceeds $1050 with more than $350 of investment income must file a return as the Standard Deduction is the greater of $1050 or earned income plus $350.
    3.  Kiddie Tax rules apply to
      1. A child under age 18.
      2. A child age 18 who is not a full time student and does not have earned income that provides over ½ their own support.  And full-time students under age 24 unless the child’s earned income exceeds ½ of their support or the child files a joint return.
    4. You need to do parent’s return first before computing Kiddie tax on child's return.
    5. The child is taxed on the greater of:
      1. Tax as figured using child’s lower standard deduction.
      2. Investment income over $2100 are taxed at parents top tax rate.  
      3. If parents live together but file separately, use parent with higher taxable income. 
      4. If parents are separated or divorced, use  the income of the parent who has physical custody of the child or can claim Head of Household on child.
    6. There are three exceptions to being subject to this kiddie tax.
      1. If child is married and files a joint return.
      2. Distributions from certain qualified disability trusts.
      3. If both parents are deceased. 
    7.  Option: File Kiddie tax on Parents return:   Instead of filing a separate return, can file Form 8814 on parents return. 
      1. Filing this way may produce a higher tax.
      2. Can only use Form 8814 if:
        1. Child's gross income is under $9500.
        2. No federal income tax withholding.
        3. Income is only from interest & dividends.
        4. No estimated tax paid for child.

  7. Alternate Minimum Tax.
    1. Alternative Minimum Tax (AMT) is an alternate method of computing the tax.  If the taxes are higher using the AMT method of computing the tax, then AMT tax is used.  
    2. This second method of computing tax was designed to make high income taxpayers who weren't paying enough taxes under the regular tax computation (due to high deductions) to pay a higher rate of tax.  It can also catch middle income taxpayers with high deductions.
      1. You may incur alternate minimum tax with one or more of the following deductions:                        
        1. Substantial itemized deductions from taxes, medical expenses or most miscellaneous itemized deductions. (Not home mortgage interest except boats, RVs, or refinanced additional loan proceeds.)
        2. Accelerated depreciation (no expensing or bonus depreciation), depletion, installment sales, passive income, intangible drilling expenses, certain tax-exempt interest, & incentive stock option.
        3. A substantial number of dependents.       
        4. Certain tax-exempt interest, incentive stock option and accelerated depreciation.
      2. A taxpayer subject to AMT tax should itemize even if can't itemize under normal tax if taxpayer has home interest, contributions, medical expenses over 10% or misc. itemized deductions not subject to 2%.  AMT tax doesn't let you claim the standard deduction so these deductions will decrease AMT tax.
      3. The tax is imposed if it exceeds regular income tax.  The tax is 26% to 28% of AMT taxable income.
      4. Our tax program usually will compute automatically but certain modifications may be necessary for refinanced home loan interest on boats or RVs or interest that exceeds original purchase loan and the money used for home improvements.  
      5. Alternate Minimum Tax Exemptions:
        1. $53,600 for Single or Head of Household
        2. $83,400 for Married Filing Joint or Qualifying Widow
        3. $41,700 Married Filing Separately
      6. At higher income levels these exemptions phase out by 25% of amount that alternate minimum taxable income exceeds:
        1. $156,500 Married Filing Joint or Qualifying Widow.
        2. $117,300 Single or Head of Household.
        3. $78,250 Married Filing Separately.

  8. Excess Advanced Premium Credit Repayment Form 8962  

    Go to line 69 for details on when taxpayer has to repay the advanced ObamaCare credit.

  9. Regular tax computation

    1. After taking all the above special tax considerations into account, the income tax preparation software will compute the lowest possible tax taking all these factors into account. 

Give us a call if you have questions or we can be of help, 765-452-8000.  Killingbeck Insurance & Tax Preparation, Kokomo, Indiana.