2022 AFBA Financial Planning Guide

wartime or general military service; and, certain portions of disability retired pay. Step 2 — Identify Adjustments. These may include student loan interest, one–half of any self–employment tax and, depending upon income level, payments to Individual Retirement Accounts. Step 3 — Identify Deductions. There are basically two types of deductions — Standard and Itemized. The Standard Deduction is a predetermined amount which the tax law allows for various categories of taxpayers. For 2021 the Standard Deduction amounts are: Married Filing Jointly and Qualifying Widow(er) $25,100; Head of Household $18,800; Single and Married Filing Separately $12,550. The tax law increases the standard deduction for situations of age (65 or older) and blindness. For Single and Head of Household filing statuses, each condition provides an additional standard deduction of $1,750 for tax year 2021. If your filing status is Married Filing Jointly, Married Filing Separately, or Qualifying Widow(er), the additional standard deduction amount for each condition is $1,350. For example, a single taxpayer who is blind and age 65 would have a total standard deduction of $16,050 (consisting of a basic deduction of $12,550 and two additional deductions of $1,750 for both the age and blindness conditions.). If you are age 65 or older or blind on the last day of the tax year, you are considered to have been in that status for the entire year. Itemized Deductions can include medical and dental expenses, state and local taxes, home mortgage interest, charitable gifts, and casualty losses. These deductions are subject to certain limitations and the total of all itemized deductions is phased out at higher income levels. Nonetheless, if the total of the itemized deductions exceeds your standard deduction, then you should go through the itemization process. The personal exemption amount which could be claimed in the past has been eliminated. Step 4 — Calculate Tax Liability. The federal tax system has seven rate brackets ranging from 10% to 37%. The chart to the next page provides a computation schedule that approximates the tax for each income level and filing status. On a yearly basis the IRS adjusts more than 40 tax provisions for inflation. This is done to prevent what is called “bracket creep,” when people are pushed into higher income tax

such as Earned Income Tax Credit, Child Tax Credit, and Recovery Rebate Credit. 15–2. DETERMINATION OF TAX LIABILITY. The determination of your tax liability is basically a five step process: Step 1 — Determine Income. The Wage and Earnings Statement (Form W–2) that you receive from your employer at the end of the year will indicate both your gross income and the amount of any taxes withheld. If the amount you made is less than the minimum gross income required for filing, but taxes were withheld from your pay, then you will have to file a tax return in order to receive a refund. Income subject to federal tax includes fees, commissions, and additional forms of compensation you receive for performing personal or professional services. You must also report interest and dividends earned on investments and savings. Other taxable income includes amounts received from taxable refunds of state and local income taxes (provided the taxpayer included these amounts as itemized deductions the previous year), alimony received, capital gains, taxable IRA distributions, taxable pensions and annuities, rental property, royalties, partnerships, estate income, trust income, possibly unemployment compensation, farm income, possibly some social security benefits, hobby income, prizes and awards received, tip income, rewards, gambling winnings, cancelled debts, and similar forms of income. Generally, military pay items such as base pay, flight pay, and enlistment bonuses are also considered taxable. Income Not Subject to Tax. The following items of income

are generally considered to be tax–free: a. Hostile Fire or Imminent Danger Pay.

b. Military allowance items such as clothing allowance, subsistence allowance, housing allowance, and family separation allowance. c. Accident, life, death, health, casualty, and disability insurance payments; some social security benefits; workmen’s compensation; welfare and food stamp payments; rebates received for purchasing an item; gifts, bequests and inheritances; distributions of stock, stock rights, and stock warrants; and, GI or VA insurance dividends. d. Cost–of–living allowances paid while overseas; rental allowances; interest on municipal securities; virtually all VA benefit payments; bonus payments received for

CHAPTER 15: FEDERAL & STATE TAXES

Made with FlippingBook. PDF to flipbook with ease