Chapter 22
Figuring Your Regular Income Tax Liability

There are two types of income tax rates: (1) regular rates, which apply to all taxpayers, and (2) alternative minimum tax (AMT) rates, which apply only if certain tax benefits, when added back to your income, result in an AMT tax that exceeds your regular tax.
Most taxpayers do not have to compute the regular tax. They find the tax for their income and filing status in the IRS Tax Table if their taxable income is less than $100,000 (22.2). The Tax Computation Worksheet must be used to figure your regular income tax if taxable income is $100,000 or more (22.3). However, if you have net capital gain or qualified dividends, do not use the Tax Table or the Tax Computation Worksheet. Instead, figure your regular tax liability on the applicable capital gains worksheet in the IRS instructions (22.4). Use the Foreign Earned Income Tax Worksheet to figure your regular tax if you are claiming the foreign earned income exclusion or foreign housing exclusion (22.5).

To determine if you owe alternative minimum tax (23.1), you have to complete Form 6251.

22.1 Taxable Income and Regular Income Tax Liability

The way you determine your regular tax liability depends on the amount of your taxable income and in some cases the type of income you have. If your taxable income is less than $100,000, you generally must use the IRS Tax Table to look up your tax (22.2). If your taxable income is $100,000 or more, you use the Tax Computation Worksheet to determine the tax (22.3). However, if you have net capital gain or qualified dividends, you generally figure your tax on the Qualified Dividends and Capital Gain Tax Worksheet in the IRS instructions for Form 1040 (22.4). Tax is figured on the Foreign Earned Income Tax Worksheet if you claim the foreign earned income or housing exclusion, or on Form 8615 if the “kiddie tax” computation (24.3) must be made.

Taxable income is your adjusted gross income (12.1) minus the following: (1) your standard deduction or itemized deductions, whichever you claim, and (2) deductions for personal exemptions (21.1). On Form 1040 for 2017, taxable income is entered on Line 43. On Form 1040A and Form 1040EZ, the computation of taxable income generally takes fewer steps because only limited types of income and deductions may be reported. Itemized deductions may not be claimed. Personal exemptions for dependents may be claimed on Form 1040A but not on Form 1040EZ. See page 8 for the types of income and deductions that may not be reported on these forms. On Form 1040A for 2017, taxable income is entered on Line 27; on Form 1040EZ, it is on Line 6.

Separate self-employment tax computation. If you have net self-employment earnings, figure your self-employment tax under the rules at 45.3. Half of the self-employment tax is deductible as an above-the-line deduction from gross income when figuring your regular tax (12.2). The self-employment tax is added to your regular income tax liability on Form 1040.

AMT computation. Regardless of how your regular tax liability is determined, you may also be liable for alternative minimum tax (AMT), which is figured on Form 6251 (23.1). If the tentative AMT figured on Form 6251 exceeds your regular tax (less any foreign tax credit and special averaging tax (7.3) on a lump-sum distribution if born before January 1, 1936), the excess is your AMT liability, which must be reported as an additional tax on Line 45 of Form 1040.

Health care individual responsibility penalty. You must pay a penalty if you do not have minimum essential coverage, unless you qualify for an exemption; see 38.5. If you owe the penalty, it is reported as an additional tax on Line 61 of Form 1040, or Line 38 of Form 1040A, or Line 11 of Form 1040EZ.

22.2 Using the Tax Table

You must use the Tax Table to look up your regular income tax liability unless you have taxable income of $100,000 or more, you have net capital gain or qualified dividends (22.4), or you are claiming the foreign earned income or housing exclusion (22.5). If your taxable income is $100,000 or more, you use the Tax Computation Worksheet (22.3). In the Tax Table, the tax for your taxable income amount will be shown in the column corresponding to your filing status. Filing status (single, married filing jointly, head of household, married filing separately, and qualifying widow/widower) is discussed in Chapter 1.

The Tax Table was not available when this book was completed. The Table will be in the e-Supplement at jkasser.com, and in the IRS instructions.

22.3 Tax Computation Worksheet

If your taxable income is $100,000 or more and you do not have net capital gain or qualified dividends (22.4), or claim the foreign earned income or housing exclusion (22.5), you must figure your 2017 regular tax liability on Form 1040 using the IRS’ Tax Computation Worksheet, which will be in the e-Supplement at jkasser.com, and in the IRS instructions.

Since the Tax Computation Worksheet is used only by taxpayers with taxable incomes of $100,000 or more, it only shows the tax rate brackets that a taxpayer with taxable income of at least $100,000 can be subject to. The Worksheet has four sections (A, B, C, D), one for each filing status. To figure your regular income tax liability using the Tax Computation Worksheet, follow the column-by-column instructions in the section for your filing status. The following Example and Table 22-1 illustrates the computation for a married couple filing jointly.

22.4 Tax Calculation If You Have Net Capital Gain or Qualified Dividends

If a portion of your taxable income consists of net capital gain (net long-term capital gain in excess of net short-term capital loss (5.3)) or qualified dividends (4.1), you should figure your regular tax liability on the Qualified Dividends and Capital Gain Tax Worksheet in the IRS instruction booklet for Form 1040. On the Worksheet, you can apply the favorable capital gain rates (5.3) to your net gain and qualified dividends. An example of how to report transactions on Form 8949 and Schedule D (Form 1040) and a filled-in sample of the Qualified Dividends and Capital Gain Tax Worksheet is shown in 5.8. You may be able to figure your liability on the Qualified Dividends and Capital Gain Tax Worksheet without having to file form 8949 and Schedule D if you have capital gain distributions from Box 2a of Form 1099-DIV (32.8) and/or qualified dividends from Box 1b of Form 1099-DIV and no other capital gains or losses.

However, you use a different worksheet if you report any 28% rate gains or unrecaptured Section 1250 gain on Schedule D. In this case, you must use the Schedule D Tax Worksheet (5.3) in the Schedule D instructions to figure tax liability.

If you have qualified dividends or capital gain distributions and file Form 1040A, use the Qualified Dividends and Capital Gain Tax Worksheet in the instructions to figure your tax using the favorable capital gain rates. However, you cannot use Form 1040A for net capital gain from the sale of a capital asset.

22.5 Foreign Earned Income Tax Worksheet

If you claim the foreign earned income exclusion (36.1) on Form 2555 or Form 2555-EZ, or the foreign housing exclusion on Form 2555, you must figure your regular tax liability using the Foreign Earned Income Tax Worksheet in the Form 1040 instructions. The worksheet computation must be used because of the rule requiring non-excluded income to be “stacked” on top of the excluded income, so that the non-excluded income is subject to the same tax rate or rates that would have applied had the foreign exclusions not been elected.

22.6 Income Averaging for Farmers and Fishermen

A farmer or fisherman may elect to average 2017 farm or fishing income over three years on Schedule J of Form 1040. On Schedule J, one-third of elected farm or fishing income is allocated to each of 2014, 2015, and 2016. The tax for 2017 equals the tax liability figured without elected farm or fishing income plus increases in tax liability for the three prior years by including allocated elected farm or fishing income. Income averaging is available only to individual farmers or fishermen and may not be elected by estates or trusts engaged in the farming or fishing business. When computing potential AMT on Form 6251 (23.1), regular tax liability is determined without regard to Schedule J averaging. Since AMT liability is based on the excess of tentative AMT over regular tax, ignoring the Schedule J reduction to the regular tax limits or eliminates the AMT.

Elected farm or fishing income is taxable income attributable to a farming or fishing business. A farming business is generally any business that involves cultivating land or raising or harvesting agricultural or horticultural commodities. A fishing business is generally any business involving the actual or attempted catching, taking, or harvesting of fish. See the Schedule J instructions.

A previous election to average farm income may by revoked or the elected farm income may be changed by filing an amended return within the period of limitations for a refund claim (47.2).

22.7 Tax Credits

After applying the Tax Table or Tax Computation Worksheet to get your 2017 regular tax liability, you may be able to reduce that liability as well as AMT liability (23.1) by claiming tax credits. The child tax credit, the dependent care credit, earned income credit, adoption credit, credit for retirement savings contributions, residential energy credit, plug-in electric and fuel cell vehicle credit, mortgage interest credit, the premium tax credit, and the health coverage credit are discussed in Chapter 25. The education tax credits are discussed in Chapter 33. The credit for the elderly is discussed in Chapter 34 and the foreign tax credit in Chapter 36. The business tax credits are discussed in Chapter 40. The credit for prior year AMT liability is discussed at 23.5.

If you worked for more than one employer in 2017 and Social Security taxes of more than $7,886.40 were withheld from your wages, the excess may be claimed as a credit on Line 71 in the “Payments” section of Form 1040 (26.10).

22.8 Additional Medicare Tax and Net Investment Income Tax

There is an 0.9% additional Medicare tax on wages and self-employment income exceeding $250,000 if married filing jointly; $200,000, if single, head of household, or a qualifying widow/widower; or $125,000, if married filing separately. To the extent the tax was not withheld (26.8) from your wages, you will have to pay it when you file Form 1040 (28.2).

If you have net investment income (NII), some or all of it will be subject to a 3.8% tax if you have modified adjusted gross income (MAGI) exceeding the applicable threshold. The same $250,000, $200,000 or $125,000 threshold shown above for the 0.9% tax also applies to the tax on NII except for qualifying widows/widowers, who are treated as married persons filing jointly for purposes of the 3.8% tax. If MAGI exceeds the threshold, the 3.8% tax applies to the lesser of your NII or the MAGI exceeding the threshold (28.3).