Tax return samples in advance

1. A single filer with $50,000 in annual adjusted gross income (AGI) and who uses the standard deduction currently.

First, let’s look at a simple tax situation. Under the current tax law, a single filer would be entitled to a $6,500 standard deduction in 2018 and a personal exemption of $4,150, which would leave this taxpayer with taxable income of $39,350. Plugging this in to the current-law 2018 tax brackets shows that this individual would pay $5,491 for the year. Under the GOP’s tax bill, single individuals would get a $12,000 standard deduction, but no more personal exemption, which would lower this person’s taxable income to $38,000. Using the GOP’s new tax brackets, not only would this taxpayer have a lower taxable income, but he or she would be subject to a lower marginal tax rate on most of that income. In fact, the new tax brackets would result in a 2018 federal income tax of $4,370, a savings of $1,121. So it’s fair to say that middle-income taxpayers with simple tax situations like this could save a significant amount of money.

2. A married couple with $100,000 in AGI, no children, $7,000 in annual mortgage interest, $4,000 in charitable contributions, and $3,000 in other itemized deductions.

Now, let’s look at a slightly more complex tax situation. Under current tax law, this couple would have $14,000 in itemizable deductions, which is better than the $13,000 standard deduction to which they would be entitled. They would also get personal exemptions of $4,150 each. This would reduce their taxable income to $77,700. Based on the current tax brackets, the couple would pay $10,676 for the year.

With the new tax plan, the higher standard deduction of $24,000 would make it no longer worth itemizing, and would give this couple a taxable income of $76,000. The new tax brackets would result in taxable income of $8,739, a $1,919 savings.

3. A married couple with $110,000 in AGI, three children, and itemized deductions of $10,000 in mortgage interest, $4,000 in charitable contributions, and $7,000 in state and local property and income taxes.

So far, we’ve looked at taxpayers without kids, so let’s see how the Tax Cuts and Jobs Act could affect families with children.

Under current law, this family would have $21,000 in itemizable deductions, and $20,750 in personal exemptions, which would produce taxable income of $68,250. The current tax brackets would produce an income tax of $9,285. However, they would also get a $1,000 credit for each child, which would reduce their tax owed to $6,285.

The new tax structure would give this family a $24,000 standard deduction but no personal exemptions, for a taxable income of $86,000, which would translate to a federal income tax of $10,799. However, what they lose in personal exemptions will be more than made up by the doubling of the child tax credit to $2,000 per child. This would reduce their taxable income to $4,799, a savings of $1,486.

4. A single taxpayer with $1 million in AGI who rents their home, donates $40,000 to charity, pays $45,000 in state income tax, and has no other itemizable deductions.

So far, we’ve looked at how the new tax bill will affect various middle-income households. However, some of the bill’s critics have called it a “massive tax cut for the rich,” or something similar, so let’s see how it would affect a high-income taxpayer.

Under current tax law, this individual would use $85,000 in itemized deduction (they wouldn’t get a personal exemption), to reduce their taxable income to $915,000. This would result in federal income tax of $317,283.

The new tax structure would allow this taxpayer to deduct their entire charitable contribution, but only $10,000 of their local property taxes, bringing their taxable income to $950,000. The generally lower marginal tax rates would result in a federal income tax of $317,190, which would be a tax cut of just $93. In other words, the three middle-income households would get much bigger tax cuts than a wealthy taxpayer like this.

5. An elderly married couple with assets valued at $30 million, who dies in 2018

Finally, let’s take a look at an estate tax situation. Under current tax law, the first $11.2 million of a couple’s estate’s value ($5.6 million per person) is excluded from taxation, and any amount above this is taxed at a 40% rate. So, if a couple dies in 2018 with $30 million worth of assets, $7.52 million in estate taxes will be due.

The Tax Cuts and Jobs Act doubles the estate tax exclusion, so $22.4 million of this couple’s assets would be exempt, resulting in an estate tax of $3.04 million, saving this couple’s heirs $4.48 million. In this sense, the bill certainly provides a big tax cut to wealthy families.


source: the Mothley Fool

What is the Section 199 Deduction?

The Section 199 deduction (also referred to as the domestic manufacturing deduction, U.S. production activities deduction, and domestic production deduction) is a tax break for businesses that perform domestic manufacturing and certain other production activities. It was established by the American Jobs Creation Act of 2004 in an effort to ease the tax burden of domestic manufacturers and as a result, make the investment in domestic manufacturing facilities more advantageous.

What activities are eligible for the Section 199 deduction?

Per Section 199, domestic production gross receipts (DPGR) can be derived from the following qualifying production activities as long as they are conducted in whole or in significant part within the U.S.:

  • The manufacture, production, growth, or extraction by the taxpayer of tangible personal property. This encompasses all tangible personal property (except land and building), computer software, and sound recordings.
  • The production of qualified film
  • The production of electricity, natural gas, or water
  • The construction of real property
  • The services of architecture/engineering

DPGR resulting from the property produced must be owned by the producer taking the deduction (i.e. the production of property that is owned and under contract by someone else would generally not be eligible).

How is the Section 199 deduction calculated?
The deduction is limited to the income produced by the above qualifying activities. Income from qualified production activities is calculated as domestic production gross receipts (DPGR) less cost of goods sold and other expenses that are directly allocable to the production of DPGR. Income and expenses that are not directly related to qualifying activities will need to be backed out of the calculation of qualified production activity income. After the lesser of the DPGR or taxable income is multiplied by the applicable percentage (9% for 2010), the deduction is further limited to 50% of Form W-2 wages allocable to DPGR.

The Section 199 deduction is allowed for both regular and alternative minimum tax for individuals, C corporations, farming cooperatives, estates, trusts, and their beneficiaries. The deduction is also allowed at the partner, member, and owner level for a partnership, LLC, and S corporations, respectively. Businesses should also be aware that the Section 199 deduction does not always apply at the state level. As of the beginning of 2010, 22 states (including Indiana) have departed from the federal deduction.

The following are some examples of how the Section 199 deduction would be calculated in certain circumstances:

Example #1: For the year ended December 31, 2010, Kim”s Manufacturing Company (a C-Corp) had taxable income, all from qualifying manufacturing activities, of $1 million and paid $100,000 in W-2 wages.
Example #1 Solution: Kim will be entitled to a Section 199 deduction of $50,000 due to the 50% limit of W-2 wages. If the W-2 wages had been greater than $180,000, the deduction would have been $90,000 [$1 million X 9%].

Example #2: Same facts as #1 ($180k W-2 wages), except Kim’s Manufacturing Company is a S-Corp, with Kim owning 60% and Choi owning 40%.
Example #2 Solution: The deduction passes through to the shareholders, with Kim receiving $54,000 and Choi receiving $36,000 of the deduction.

Example #3: Same facts as #2, except that Kim takes a $108,000 distribution and Choi takes a $72,000 distribution. No W-2 wages are paid.
Example #3 Solution: A Section 199 deduction can’t be taken because W-2 wages were not paid.

What are some specific applications of the Section 199 deduction to the Manufacturing Industry?

Qualified production property (QPP) includes all tangible personal property, except land and buildings, and includes computer software and sound recordings. Qualified manufacturing activities will include those which, manufacture, produce, develop, improve, install, grow, extract and/or create the qualifying production property. Even those processes that use scrap, salvages, or junk material (instead of new or raw material), may be eligible. Such produced material will be eligible if it is processed, manipulated, refined, or altered such that the material’s form is changed or the material is combined/assembled into two or more articles or materials. Furthermore, manufacturing components that will later be used by another party for manufacturing or product activities will be considered eligible.

Below are some of the other examples

The Suburban Family in Westchester

A married couple in a New York suburb has estimated state income tax of $17,290; their annual mortgage interest deduction is $14,000; and they pay property tax of $13,750—about the same amount they donate to charity.

While the bill takes a bite out of this family’s deductions and exemptions, they would benefit from enhanced child tax credits and avoiding the alternative minimum tax, or AMT. (The bill would raise the thresholds at which the AMT applies—until 2026.)

Single in Manhattan

This New York renter pays estimated state income tax of $8,148 and gives about $6,500 to charity.

The final tax legislation is more generous to this taxpayer than the bills that originally passed the House and Senate. That’s because it permits the deduction of state and local income taxes up to $10,000. The original proposals scrapped the income tax deduction entirely and allowed only a $10,000 deduction for property taxes, which this renter doesn’t pay.

The Multimillionaires in New York

These Manhattan residents have a jumbo mortgage (at an assumed 4 percent interest rate) and take a $40,000 deduction on mortgage interest; pay property taxes of $96,250 and state income tax of $135,360; and make annual charitable contributions totaling $100,000.

They will pay a bit more next year because they would lose key deductions, especially the ability to put down more than $10,000 in state and local taxes. That offsets a drop in the top marginal tax rate, from 39.6 percent to 37 percent. (The “marginal rate,” the rate paid on any extra dollar earned, is different from the “effective tax rate,” which is the overall, blended rate you pay as different tax rates are levied on your income at different thresholds.)

City taxes for these Manhattan dwellers would work out to almost 4 percent. Combine that with the top federal rate and top state rate, and you get a marginal rate approaching 50 percent.

The Second-Home Scenario in California

A married couple has a primary residence in Malibu, California, and a second home in Lake Tahoe. The property tax on the Malibu home is $15,860, and they pay $4,896 on their second home; they deduct a total of $40,000 in mortgage interest for the two homes; and they give $50,000 to charity.

This couple would lose almost $86,000 in deductions under the tax bill. Nonetheless, other changes—especially the drop in the top tax rate—means their effective tax rate creeps up by only 0.5 percentage points.


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