Income Tax Fundamentals 2012, 30th ed. - CengageBrain

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1-22 Chapter 1 The Individual Income Tax Return
In the spring of 2010, Congress passed health care legislation with the goal of
providing coverage over the next several years for many millions of Americans
who are currently not covered by health insurance. This may be one of the most
significant pieces of social legislation passed in our lifetime, and much of it is
administered and enforced through our tax system. The following is a summary
of some tax elements of the health care legislation and the phase-in dates:
Tax Rates Beginning in 2013, high-income taxpayers (modified AGI over
$200,000 for single taxpayers and over $250,000 for married taxpayers) will be subject
to a new Medicare tax on most income. Please see LO 3.1, 9.3, and 9.6 for
coverage of the Medicare tax in 2011. The 2013 tax will be an additional .9 percent
on most earned income which is already subject to the Medicare tax, and
an additional 3.8 percent on most investment income, including capital gains,
interest, dividends, and rental income. Distributions from IRAs and retirement
plans and municipal bond interest will be exempt from this tax.
Extended Coverage for Adult Children Beginning in 2010, any health plan
which covers dependents must be extended to allow for coverage of most
unmarried adult children through age 26.
Small Employer Health Insurance Credit Starting in 2010, small employers
are allowed a credit for health insurance provided to workers who are not owners
and who meet certain criteria. This credit will continue with differing
requirements through 2015.
Itemized Deduction Threshold Increases Beginning in 2013, the AGI threshold
for deducting medical expenses as an itemized deduction will increase from 7.5 percent
to 10 percent of AGI, with a temporary reprieve for seniors age 65 or older.
Refundable Premium Assistance Credit Beginning in 2014, a tax return
credit will be allowed to help subsidize the purchase of health insurance
through new health benefit ‘‘exchanges’’ for certain low-income taxpayers.
Tax Return Penalty for Failure to Maintain Coverage Beginning in 2014, taxpayers
must have qualifying health coverage for themselves and their dependents or
be subject to a penalty which will be reported and paid on their personal tax return.
‘‘Play or Pay’’ Penalty for Large Employers Not Offering Required Health
Insurance Beginning in 2014, large employers will be assessed penalties for
not offering health coverage. The calculation of the penalty is complex and
depends on many variables such as type of coverage provided by the employer
and income levels of the employees.
LEARNING OBJECTIVE 1.8 A BRIEF OVERVIEW OF CAPITAL GAINS AND LOSSES
Compute basic capital
gains and losses.
When a taxpayer sells an asset, there is normally a gain or loss on the transaction. Depending
on the kind of asset sold, this gain or loss will have different tax consequences. Chapter
8 of this text has detailed coverage of the effect of gains and losses on a taxpayer’s tax liability.
Because of their importance to the understanding of the calculation of an individual’s
tax liability, however, a brief overview of gains and losses will be discussed here.
The amount of gain or loss realized by a taxpayer is determined by subtracting the
adjusted basis of the asset from the amount realized. Generally,theadjustedbasisofan
asset is its cost less any depreciation (covered in Chapter 7) taken on the asset. The amount
realized is generally what the taxpayer receives from the sale (e.g., the sales price less any
cost of the sale). The formula for calculation of gain or loss can be stated as follows:
Gain (or loss) ¼ Amount realized Adjusted basis
Most gains and losses realized are also recognized for tax purposes. That is, most gains
or losses that occur are included in the taxpayer’s taxable income. The exceptions to this
general tax recognition rule are discussed in Chapter 8.
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