Comprehensive Guide to Taxation: Key Concepts and Calculations

Posted on Oct 20, 2024 in Mathematics

MTR (Marginal Tax Rate) = Change in Tax / Change in Taxable Income = (New Total Tax – Old Total Tax) / (New Taxable Income – Old Taxable Income)

ATR (Average Tax Rate) = Total Tax / Taxable Income

ETR (Effective Tax Rate) = Total Tax / Total Income

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Gross Income Test for Qualifying Relatives

1. Gross Income: Business Income + Interest and Dividends + Gains from Selling Property + Prizes, Awards, and Gambling Winnings + Discharge of Indebtedness

Property Dispositions

Gain/Loss from Sale of an Asset = Sale Proceeds – Selling Expenses = Amount Realized – Cost of Property = Gain/Loss on Sale

Income from Property

Annuity Payments Include:

  • Expected Return = Annuity Payment * Number of Payments or Life Expectancy
  • Exclusion Ratio = Investment / Expected Return
  • Exclusion Amount per Month = Exclusion Ratio * Annuity Payment
  • Taxable Amount per Month = Annuity Payment – Exclusion Amount per Month

Imputed Income

Below Market Loans:

  • X = Amount of Loan * (Market Rate – Rate Charged) * 0.5
  • X + Loan Amount = Y
  • A = Y * Rate * 0.5
  • Imputed Income = X + A

Excluded Fringe Benefits

  • Medical and Dental Health Insurance Coverage
  • Life Insurance Coverage – Premium up to $50k of Group Term Life Insurance
  • Meals and Lodging
  • Childcare/Dependent Care Benefits – up to $5k
  • Educational Assistance for Tuition, Fees, and Books up to $5,250
  • FSA – up to $3,200 or Dependent Care Benefits up to $5,000
  • HSA – $4,150 for self-coverage and $8,300 for family coverage
  • Qualified Employee Discounts: Employer’s Goods Discount (Limited to Gross Profit), Employer’s Services Discount up to 20%
  • Qualified Transportation Fringes = Bus, Train Pass, or Parking (Max of $315/month)
  • De Minimis Benefits – Less than $100
  • Payments Associated with Personal Injury
  • Disability Insurance – If purchased by taxpayers, benefits are excluded from gross income. If purchased by employer and was a nontaxable fringe benefit, benefits must be included in gross income except for medical costs.

For AGI Deductions

  • Trade and Business Expenses
  • Rental and Royalty Expenses
  • Capital Losses limited to $3k
  • Health Insurance
  • 1/2 SE (Self-Employment Tax)
  • Contributions to IRA
  • HSA up to $4,150 per individual and $8,300 per family
  • Interest on Qualified Student Loans max $2,500 per taxpayer. Phase-outs (MFS cannot claim), Single, HOH ($80k – $95k), MFJ ($165k – $195k). If above phase-out range, then deduction = 0.
  • Alimony Paid Before 2019

From AGI Deductions

  • Greater of Standard or Itemized
  • Itemized:
    • Medical and Dental (7.5% * AGI floor)
    • Taxes (Everything but Federal) limited to $10k
    • NII (Net Investment Income) = Interest Income + Annuity Income + Royalty Income
    • Charity: Cash limit 60% of AGI, Stock limit 30% of AGI, Ordinary Income limit 50% of AGI
    • Casualty and Theft Losses floor 10% of AGI (Tax Deduction = Tax Loss – Insurance Reimbursements)
  • QBI (Qualified Business Income):

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Other Taxes

  • Kiddie Tax
  • AMT (Alternative Minimum Tax)
  • NII Tax = 3.8% imposed on lesser of: Net Investment Income = Interest, Dividends, Annuities, Royalties, Rents, Net Gains from Disposing Property Or Excess of Modified AGI over $250,000 (MFJ), $125,000 (MFS), and $200,000 for all others.
  • SE (Self-Employment) Taxes:
    • Tax Base for Self-Employed Taxpayers = Net Income * 0.9235
    • Tax Base for Employees = Employee’s Salary
    • Social Security Tax 12.4% (6.2%) tax base capped at $168,600
    • Medicare Tax 2.9% (1.45%) no cap, 0.9% additional Medicare tax on tax base in excess of $200,000 (Single), $125,000 (MFS), and $250,000 (MFJ)
  • Child and Dependent Care Credit: $2k per child tax credit based on the number of children under the age of 17 and a US citizen, $500 for each dependent. Phased out when AGI reaches: $400,000 MFJ, $200,000 MFS, Single, HOH. Phase-out reduces credit by $50 for every $1,000 of earnings exceeding the threshold.
  • Lifetime Learning Credit: $2k max. Single phase-out % = (AGI – $80,000) / $10,000. MFJ phase-out % = (AGI – $160,000) / $20,000
  • American Opportunity Credit: $2,500 max. Single phase-out % = (AGI – $80,000) / $10,000. MFJ phase-out % = (AGI – $160,000) / $20,000

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Transportation Costs

  • Actual Cost Method: Costs = Summation of all costs, % of Business Miles = Business Miles / Total Miles, Transportation Expense Deduction = Total Costs * % Business Miles
  • Automatic Mileage Method: Business Miles * 0.67

Travel Costs

  • If travel is solely for business purposes, then all travel costs are deductible.
  • If travel is primarily for business but involves some personal, then transportation costs are fully deductible, but meals, lodging, and incidental expenditures are limited to those incurred for the business portion of travel.
  • If travel is primarily for personal reasons but involves some business, then none of the travel costs are deductible, but meals, lodging, and transportation costs for the business portion are deductible.

Business Casualty Loss

  • Asset Destroyed Loss Deduction = Insurance Proceeds – Adjusted Tax Basis
  • Asset Damaged but Not Completely Destroyed Loss Deduction = Insurance Proceeds – Lesser of (Adjusted Tax Basis or Decline in Value of Asset)