This document summarizes chapters from a textbook on taxation of individuals and business entities. It discusses how to compute an individual's regular tax liability, alternative minimum tax liability, and other taxes such as the net investment income tax. It also explains how to calculate various tax credits for things like children, education, and earned income. Finally, it provides an example tax computation for an individual named Courtney to demonstrate how to apply the tax rates and brackets.

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Taxation of Individuals and Business
Entities
Individual
Income Tax
Computation and
Tax Credits
2020 Edition
Chapter 8
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consent of McGraw-Hill Education.
1. Determine a taxpayer’s regular tax liability.
2. Compute a taxpayer’s alternative minimum tax
liability.
3. Calculate a taxpayer’s net investment income
tax, employment, and self-employment taxes.
4. Compute a taxpayer’s allowable child tax credit,

2. child and dependent care credit, American
opportunity credit, lifetime learning credit, and
earned income credit.
5. Explain how to compute a taxpayer’s
underpayment, late filing, and late payment
penalties.
Learning Objectives
8-2
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• Regular tax computation dependent upon:
– Filing status
spouse)
ead of household
– Progressive tax rates

3. Federal Income Tax
Computation (1 of 5)
8-3
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• Tax brackets or marginal tax rates on
ordinary income:
– 10 percent, 12 percent, 22 percent, 24
percent, 32 percent, 35 percent, and 37
percent
• Marriage penalty or benefit
– Who is likely to have penalty?
h spouses receive income.
– Who is likely to have benefit?
Federal Income Tax
Computation (2 of 5)
8-4

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• Exceptions to ordinary tax rates
– Long-term capital gains (net capital gains)
28 percent
– Dividends
Qualified dividends generally taxed at 0, 15, or 20
percent.
Federal Income Tax
Computation (3 of 5)
8-5
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• Kiddie Tax
– Net unearned income taxed at trust and estate

5. tax rates.
of $2,200
Federal Income Tax
Computation (4 of 5)
8-6
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– Applies if
-end
-end but earned income not
greater than half of child’s support, or
-time
student, and child’s earned income not greater than
half of child’s support.
Federal Income Tax
Computation (5 of 5)
8-7
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6. consent of McGraw-Hill Education.
Assume that Courtney’s taxable income is
$471,700, including $15,000 of qualifying
dividends taxed at the preferential rate.
What would be Courtney’s tax liability under
these circumstances?
Tax Computation Example
8-8
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Answer: $136,370, computed using the head of
household tax rate schedule as follows:
Tax Computation Example
Solution
(1 of 2)
Description Amount Explanation
1) Taxable income $471,700

7. 2) Preferentially taxed income 15,000
3) Income taxed at ordinary rates 456,700 (1) – (2)
4) Tax on income at ordinary tax rates 133,620
$45,210 + [($456,700 − $204,100) × 35%]
(See tax rate schedule for head of
household.)
5) Tax on preferentially taxed income 2,750 [($5,000 × 15%) +
($10,000 × 20%)]*
Tax $136,370 (4) + (5)
8-9
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*Courtney had $15,000 of preferentially taxed
income. $10,000 of her dividends fall in the 20
percent preferential tax bracket ($471,700 taxable

8. income − $461,700 end of 20 percent preferential
tax bracket; see preferential tax rate schedule for
head of household). The remaining $5,000 is taxed
at 15 percent (15 percent bracket for preferentially
tax income extends from $52,751 to $461,700 for
head of household).
Tax Computation Example