Income Tax Fundamentals 2012, 30th ed. - CengageBrain

Licensed to:
c Nruboc/Dreamstime.com
1-12 Chapter 1 The Individual Income Tax Return
Tax Computation
The laws for tax year 2011 are covered in this text. After 2012, many of the tax
laws passed between 2001 and 2010 will ‘‘sunset’’ or ‘‘self-destruct.’’ As we go
to press, the tax rate structure described below, including the rates for qualified
dividends and capital gains (discussed in LO 1.8 and Chapter 8), will end
on December 31, 2012. In 2013, we may see a reversion to rates in effect
more than a decade ago or, more likely, Congress will pass new laws, possibly
extending some of the rates in effect in 2011 and 2012.
For 2011, there are six income tax brackets (10 percent, 15 percent, 25 percent, 28 percent,
33 percent, and 35 percent). The individual tax rates for 2011 are presented in the tax
rate schedules in Appendix A. The tax rate schedule for single taxpayers is summarized
below.
Single Tax Rate Schedule
If taxable income
is over--
But not
over--
The tax is:
-0- $8,500 10% of the amount over $0
$8,500 $34,500 $850 plus 15% of the amount over $8,500
$34,500 $83,600 $4,750 plus 25% of the amount over $34,500
$83,600 $174,400 $17,025 plus 28% of the amount over $83,600
$174,400 $379,150 $42,449 plus 33% of the amount over $174,400
$379,150 no limit $110,016.50 plus 35% of the amount over $379,150
The tax rates applicable to net long-term capital gains currently range from 0 percent to
28 percent depending on the taxpayer’s tax bracket and the kind of capital asset. The calculation
of the tax on capital gains is discussed in detail in Chapter 8, and the applicable tax
rates are discussed in LO 1.8 of this chapter.
The 2003, 2006, and 2010 tax acts introduced new lower rates for qualifying dividends,
discussed in detail in Chapter 2, effective for tax years before 2013. The tax
rates on dividends are as follows through 2012:
Qualifying Dividend Rate
Ordinary Tax Bracket 2003–2007 2008–2012
10% and 15% 5% 0%
Higher brackets 15% 15%
EXAMPLE Carol, a single taxpayer claiming one exemption, has adjusted gross
income of $120,000 and taxable income of $105,000 for 2011. Her tax is
calculated using the 2011 tax rate schedule from Appendix A as follows:
$23,017 ¼ $17,025 þ 28% ($105,000 $83,600) ◆
Copyright 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.