Essay Chapter 8
Individual Income Tax Computation and Tax Credits
1. [LO 1] What is a tax bracket? What is the relationship between filing status and the width of the tax brackets in the tax rate schedule?
A tax bracket is a range of taxable income that is taxed at a specified tax rate. Because only the income in the particular range is taxed at the specified rate, tax brackets are often referred to as marginal tax brackets or marginal tax rates. The level and width of the brackets depend on the taxpayer’s filing status. The tax rate schedules include seven tax rate brackets. The rates for these brackets are 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. In general, the tax brackets are widest for …show more content…
4. [LO 1] 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?
Once taxpayers have determined their taxable income, they should split the income into two portions: (1) ordinary income and (2) income taxed at preferential rates (if any), and compute tax on each portion separately.
Taxpayers compute the tax on the ordinary income portion by applying the appropriate tax rate schedule (based on their filing status).
For dividends and capital gains taxed at preferential tax rates, the preferential tax rate is 0 percent, 15 percent, or 20 percent. The preferential tax rate is 0 percent to the extent the income would have been taxed in the 10 percent or 15 percent tax rate bracket if it were ordinary income, 20 percent to the extent the income would have been taxed in the 39.6 percent tax rate