Income Tax Computations

TaxMode contains all federal income tax calculations that are used by majority of taxpayers. These calculations are performed automatically based on your data. Interaction between certain taxes is also accounted for automatically regardless of the order you enter the data.

Among the taxes this program computes are-

· Regular income tax

· Tax based on qualified dividends and capital gains worksheet

· Self-employment taxes

· Alternative minimum tax

· Net investment income tax

· Lump-sum distribution tax

· Earned Income Credit (EIC)

· Phase-out of deductions and exemptions

· Additional Medicare tax

Regular income Tax

Based on taxable income, the regular tax is computed using the Tax Tables or Tax Rate Schedules based on the Filing status for the year of tax computations. Tax deductions are taken into account to the extent they exceed standard deductions unless the program is instructed to use the itemized deductions even if they are lower.

Tax based on qualified dividends and cap gain worksheet

The Qualified Dividend & Capital Gain worksheet is used to calculate the Federal Income Tax when either of these two items are present and as per instruction on Form 1040 and schedule D.

Self-employment tax

Computations for Self-employment tax are performed when active partnership income, farm income, business or other self-employment income values are entered. The computations follow the steps described on for 1040 SE. Self-employment tax is computed for the taxpayer and spouse individually when applicable. The Additional Medicare tax and the Net investment income tax have been  added among other changes in income tax laws.

Alternative minimum tax

These computations are performed in accordance with Form 6251 for the year of tax computations. For an advance tax year for which this form has not yet published by IRS the latest published form is used. Applicability of AMT is tested after each change in value or the entry of a new value of data. Each of Part of the form I, II & III are tested for applicability based on values entered. An overall adjustment can also be made for the calculation of the Alternative Minimum Taxable Income (item 89)

Net investment income tax

This Medicare surtax is computed on the lesser of investment income or the excess of modified adjusted gross income (MAGI) above a threshold based on the filing status. Starting in tax year 2013 the Net Investment Income Tax is set at 3.8% of this base.

Lump-sum Distribution tax

This tax is computed on the capital gain and the ordinary income portion of a lump-sum distribution subject to 10 year averaging method using Form 4972. This tax is applicable for Qualified Plans or participants born before January 2, 1936.

Earned Income Credit (EIC)

This credit is calculated automatically based on the information entered. The program assumes the taxpayer and spouse (if applicable) are between the age of 25 and 65. The accuracy of this computation can be improved by providing additional information on the following items if applicable-
• Indicate if either the taxpayer or the spouse is under 25 years of age or is over 65 years old.
• Number of dependent children that are qualified for EIC.
• If the taxpayer is claimed as a dependent on someone else’s tax return.
• If taxpayer or spouse can be claimed as a qualified child on another tax return.
• If either spouse has been in the US for under 6 months or does not have Social Security number.

Phase-out of itemized deductions and exemptions

Starting in tax year 2013 a phase-out is applied to the deductions and exemptions. This phase-out starts when adjusted gross income exceeds certain threshold based on the filing status, e.g. $300,000 for Joint filers in 2013 and succeeding years. Many itemized deductions are reduced by 3% of the amount by which the AGI exceeds the threshold with a maximum of 80% of itemized deductions. The personal exemption phase-out have been implemented over the threshold up to a maximum of 100% elimination of personal and dependent exemptions.

Deductibility limitation

A deductibility check is applied for the following items. If the amounts entered is more than the deductible amount the deduction is reduced by the allowable amount.
• Medical and dental expense is allowed for amounts in excess of 7.5% of AGI
• Investment interest is limited to investment income as instructed on form 4952
• Charitable contributions to 50%, 30% or 20% limitation depending on the qualification of the gift and the type of charity it is given to.
• The sum of unreimbursed business expense, Job search expense, Tax preparation fees and other investment expenses is allowed for amounts in excess of 2% of AGI.
• Casualty & theft losses are allowed for amounts in excess of 10% of AGI.
• Student loan interest deduction is limited to $2,500 for AGI up to $60,000 ($120,000 if married filing Joint Return). It is prorated down for AGI up to $75,000 ($150,000 if married filing Joint Return). No deduction is allowed after this higher limit.
• Tuition and fees deduction is limited to $4,000 max for income up to $65,000 ($130,000 for joint filers), $2,000 max for income over $65,000 up to $80,000 ($130,000 to $160,000 for joint filers), none for income over $80,000 ($160,000 for joint filers).

Details of tax computations

You can display the details of each tax computation by clicking on the tax amount or its caption shown on the result screen. These details are shown as lines of information filled in for the corresponding IRS tax forms. Following IRS Forms are programmed in varying degrees of details subject to data availability-

- Form 1040

- Form 1040 Schedule A (Itemized deductions)

- Form 1040 D (Capital gain/loss schedule)

- Form 1040 SE (Self-employment tax)

- Form 4952 (Investment interest limitations)

- Form 4972 (Lump-sum distribution tax form)

- Form 6251 (Alternative minimum tax)

- Form 8917 (Tuition and fees limitations)

- Form 8959 (Additional Medicare tax)

- Form 8960 (Net investment income tax)

- Qualified dividends and capital gains worksheet

- Earned income credit qualification worksheet

Income & Tax Statement

Two formats of Income & Tax Statement are available to display and/or print: main and detailed. The Main report shows the input items entered along with each tax amount computed. Detailed report supplements the Main report with details of each tax form applied in that case to arrive at the tax results.

Printing reports

Reports provided on the result screen can be printed by pressing the F10 key. The function key 10 can be used to print the following-

• Main report
• Full report
• Details of an item shown on the result screen
• Data corresponding to IRS tax forms involved in current tax calculations

Comparing alternative scenarios

While TaxMode can be used as a standalone tax calculator it can also be switch is an advanced mode requiring comparative analysis. Two comparative modes are available to provide you with tax result comparisons from a static point of reference or a continuous (dynamic) comparison each time you make an entry.

Comparing tax comps in this year versus the next

This tax calculator contains tax computation laws for a two year span. Tax results can be displayed for either year and can be switched from one to the other year to providing you with ability to gauge the impact of taking an income or deduction item this year versus next year.



 Tax comps 4

The above screen shows part of detailed input screen associated with Earned income. This screen is displayed upon clicking the corresponding button of the virtual keyboard when you are in Full or Flex input mode. how deatiled entry of earned income was made for taxpayer and spouse individually.

Tax comps 5

Above tax computations include $89,000 of state and local income taxes entered as tax deductions. require such a service.

Tax comp 6Details of any computation can be obtained by clicking on that item or the calculated amount. These details are provided with reference to the applicable IRS Tax Form. The above screen represents AMT computation using Form 6251 with data in applicable lines of this form. This computation was displayed after the AMT amount was clicked on the second last screen.

Tax comp 7