SE Tax, Credits, and PaymentsSE Tax, Credits, and Payments

SELF SELF

EMPLOYMENT EMPLOYMENT

(SE) TAX:(SE) TAX: (MTG Paragraphs 2664-2670)

WHATWHAT it is it is::both the employer and employee

portion of the social security and Medicare taxes.

WHEREWHERE it is reported it is reported:SE tax is calculated on

Schedule SE and reflected on Form 1040, page 2.

WHOWHO pays it pays it: Individuals with self-employment earnings

of $400 or more

SE Tax Details:

• This is a major expense for self-employed individuals (sole proprietors, partners in partnerships).

• There is an "above-the-line" deduction for one-half of the SE tax.

SE tax is computed SE tax is computed separately for each spouse.separately for each spouse.

Calculating the SE Tax (2002):Calculating the SE Tax (2002):

Social ComponentSocial Component

Medicare ComponentMedicare Component

SE Tax AmountSE Tax Amount

12.4% on the first $84,900 of net earnings from self-employment. The $84,900 amount is referred to as the

“OASDI maximum base." This base increases annually with inflation

2.9% on all net earnings from self-employment

(no annual maximum)

Self-Employment Income

Self-employment income includesSelf-employment income includes::

total earnings from a sole proprietorshipsole proprietorship (Schedule C net income)

partnership incomepartnership income (2000 Schedule K-1, line 15a).(2000 Schedule K-1, line 15a).

AND

Calculating Net Earnings from SECalculating Net Earnings from SE

Self-Employment Self-Employment IncomeIncome

x .9235x .9235

<Less><Less>

Any wages received as an Any wages received as an employeeemployee

Sole Proprietorship earnings plus partnership income

Schedule SE (long one), Section B

Net Earnings From Self- EmploymentNet Earnings From Self- Employment

Example:

• Simple Case: Net earnings from self employment < OASDI max base

• Karen has net income from her sole proprietorship of $40,000.

•Compute Karen’s SE Tax.

??

Example:

• More Complex Case: Net earnings from self employment > OASDI max base

• Sue has net income from her sole proprietorship of $120,000.

• Compute Sue's SE tax.

??

Deductions vs. CreditsDeductions vs. Credits

Deductions Deductions reducereduce taxable taxable income. income.

To calculate the tax benefit:To calculate the tax benefit:

Deduction Amount Deduction Amount

x x

Marginal Tax Rate Marginal Tax Rate

(which tax bracket (which tax bracket

the taxpayer is in)the taxpayer is in)

Help! I’m Taxable Income!

I am a Deduction bird and I will reduce you!

Tax Benefit

CreditsCredits::

Credits Credits reduce tax liabilityreduce tax liability dollar-for-dollar. dollar-for-dollar.

To calculate the tax benefit:To calculate the tax benefit:

Full Amount of Credit = Tax BenefitFull Amount of Credit = Tax Benefit

IT”S THAT SIMPLE!IT”S THAT SIMPLE!

Refundable vs. Nonrefundable CreditsRefundable vs. Nonrefundable Credits

Nonrefundable credits are limited to …Nonrefundable credits are limited to …

Refundable credits can be taken even if …Refundable credits can be taken even if …

Income tax before credit

The total exceeds income tax before credits

Child Tax CreditChild Tax Credit (MTG Paragraph 1302)(MTG Paragraph 1302)

Amount of Credit = Amount of Credit = $600 for each $600 for each qualifyingqualifying child child

Qualifying childQualifying child: U.S. citizen/national/resident: U.S. citizen/national/resident

under 17 as of year end under 17 as of year end

who qualifies as the taxpayer’s dependent and who qualifies as the taxpayer’s dependent and

is a descendent, stepchild, or foster childis a descendent, stepchild, or foster child

Phase-out of CreditPhase-out of Credit

The total credit for all children The total credit for all children is reduced by $50 for each is reduced by $50 for each $1,000 (or fraction thereof) of $1,000 (or fraction thereof) of AGI over stated amounts that AGI over stated amounts that vary with filing status.vary with filing status.

Find threshold amounts in Find threshold amounts in MTG. This appears to be a bit MTG. This appears to be a bit more tricky than it should be!!!more tricky than it should be!!!

ExampleExample::

In 2002, Jay and Jane are married In 2002, Jay and Jane are married and file a joint return and have AGI and file a joint return and have AGI of $125,302. of $125,302.

Jay and Jane have four children: Jay and Jane have four children: Roxanne I (17), George (14), Suzy Roxanne I (17), George (14), Suzy (8), and Joey (5). (8), and Joey (5).

Compute the 2002 child tax credit.Compute the 2002 child tax credit.

????

HOPE Scholarship HOPE Scholarship CreditCredit

Lifetime LearningCredit Reported on Reported on

Form 8863Form 8863

EDUCATION CREDITS

(MTG Paragraph 1303)(MTG Paragraph 1303)

HOPE Scholarship CreditHOPE Scholarship Credit

Taxpayers are allowed up to a $1,500 Taxpayers are allowed up to a $1,500 credit for tuition and fees (not books) for credit for tuition and fees (not books) for each qualified student. each qualified student.

The rate is 100% of the first $1,000 of The rate is 100% of the first $1,000 of tuition/fees and 50% of the second tuition/fees and 50% of the second $1,000 of tuition/fees.$1,000 of tuition/fees.

HOPE credit is only available for the first HOPE credit is only available for the first two years of post-secondary education.two years of post-secondary education.

NOT BOOKS!

NOT FOREVER!

Lifetime Learning CreditLifetime Learning Credit

Taxpayers are allowed a 20% Taxpayers are allowed a 20% credit against a $5,000 credit against a $5,000 maximum amount of tuition maximum amount of tuition and fees (not books).and fees (not books).

Credit can be claimed as long Credit can be claimed as long the qualifying expenses are the qualifying expenses are paid.paid.

No doubling up with the HOPE No doubling up with the HOPE credit is allowed—can’t take credit is allowed—can’t take both credits on the same both credits on the same tuition/fees.tuition/fees.

NOT BOOKS!

Education Credits: The Low Down Education Credits: The Low Down

WHOApplies to education expenses of the Applies to education expenses of the taxpayer, spouse, or dependents. (It taxpayer, spouse, or dependents. (It doesn’t matter who pays the expenses.)doesn’t matter who pays the expenses.)

BUT…

A taxpayer cannot take the credit if A taxpayer cannot take the credit if he/she is claimed a dependent on he/she is claimed a dependent on his/her parent’s return.his/her parent’s return.

Education Credits: The Low DownEducation Credits: The Low Down

Qualified expenses must be reduced by amounts Qualified expenses must be reduced by amounts received and excluded from gross income under received and excluded from gross income under education-related provisions of the tax law:education-related provisions of the tax law:

Excluded Scholarships

Education IRAsExcluded Employer Reimbursements

And Finally…And Finally…

The HOPE and Lifetime Learning credits are The HOPE and Lifetime Learning credits are ratably phased out based on AGI levelsratably phased out based on AGI levels

HINT:HINT:

See Form 8863, Part III (AGI) within phase-out See Form 8863, Part III (AGI) within phase-out range will not be on exam; below/above is fair range will not be on exam; below/above is fair game.game.

ExampleExample::Kristen is a freshman student at UConn. Her parents Kristen is a freshman student at UConn. Her parents claim her as a dependent. Kristen spends $4,000 on claim her as a dependent. Kristen spends $4,000 on tuition, $500 on fees, and $1,000 on books.tuition, $500 on fees, and $1,000 on books.

Compute the amount of the education credit.Compute the amount of the education credit.????

Who claims the credit?Who claims the credit?????

ExampleExample : :

Assume instead that Kristen is a senior Assume instead that Kristen is a senior accounting major at UConn and that she receives accounting major at UConn and that she receives a $500 scholarship. a $500 scholarship.

Compute the amount of the education credit.Compute the amount of the education credit.????

Who claims the credit?Who claims the credit?????

Example :Example :

Assume that Kristen is a graduate student and is Assume that Kristen is a graduate student and is not claimed as a dependent on her parent’s not claimed as a dependent on her parent’s return. She doesn’t receive any scholarships.return. She doesn’t receive any scholarships.

????

Example :Example :

Liz is a senior at UConn and a member of the Liz is a senior at UConn and a member of the swimming team. She receives a full scholarship swimming team. She receives a full scholarship that pays for her tuition, fees, books, and room that pays for her tuition, fees, books, and room and board. and board.

Liz’s parents claim her as a dependent. Liz’s parents claim her as a dependent.

Can Liz’s parents claim the education credit? Can Liz’s parents claim the education credit?

????

FEDERAL TAX

PAYMENTS

Employers are Employers are required to required to withhold federal withhold federal income tax from income tax from compensation paid compensation paid to their employeesto their employees

See W-2, See W-2, Box 2Box 2

Estimated tax payments

(MTG Paragraphs 2679 - 2685) • The tax law requires those

individuals with gross income from sources other than employee compensation to make estimated tax payments at specific times during the year.

Federal income taxes areFederal income taxes are

prepaid during the year!prepaid during the year!KEY POINT!