Use this worksheet for comparing alternative tax scenarios.
The first column (Actual, #1) gives summary actual figures. These figures are taken from Form 1040 and Schedules A and D. The other three columns are for your scenarios.
Note that the first column will NOT be up-to-date if Form 1040A or Form 1040EZ is selected on the Do You Need Form 1040? Worksheet. Select Form 1040 instead.
This worksheet allows you to quickly estimate your current and future years' tax.
Occasionally, the tax shown in Column 2 will not match the apparently identical "Actual" tax shown in column 1. This is because the column 2 calculation makes some simplifying assumptions (e.g., that there is no Form 8814 income).
Enter net capital gain, if any, on the line for net capital gain. Net capital gain is the amount that would be on line 000 of Schedule D.
On the next line, enter the amount of net capital gain that is subject to the 28% tax rate. This is the amount that would be on line 000 of Schedule D.
On the next line, enter the amount of net capital gain that is subject to the 25% tax rate. Only make an entry if you have unrecaptured section 1250 gain. This is the amount that would be on line 19 of Schedule D.
Do not make an entry on these lines if there is an overall capital loss, or an overall short-term gain. Instead, enter those amounts on the line for Other Income. Do not enter more than a $3,000 capital loss, however.
The "total medical" line is for your total medical expenses (before considering the 7.5% AGI floor). The worksheet computation will automatically apply the 7.5% AGI floor on medical expense deductions.
Enter the full amount of your miscellaneous itemized deductions subject to the 2% floor. The program calculation of "total itemized deductions" automatically applies the 2% floor.
The worksheet does quite a bit of work on itemized deductions behind the scenes to arrive at the "Allowed Itemized Deductions" figure. Here are the formulas:
Medical: Only amounts in excess of 7.5% of Adjusted Gross Income are allowed.
Miscellaneous deductions subject to 2%: Only amounts in excess of 2% of Adjusted Gross Income are allowed.
Reductions: Phase-backs of itemized deductions for high-income taxpayers also apply. These reductions are described in detail on other help screens on this form.
Upper-income taxpayers may face reductions in their itemized deductions.
Basically, itemized deductions are reduced by 3% of the amount by which adjusted gross income exceeds $156,400 in 2007 ($78,200 if you are married filing separately). The thresholds will be adjusted slightly for inflation, but these inflation adjustments are not reflected on this worksheet.
Your itemized deductions after reduction may not be less than 20% of your itemized deductions before (i.e., a maximum 80% reduction). Also, the medical, casualty, investment interest, and gambling loss deductions may not be reduced at all by this calculation. (Note: because there is no separate line for "gambling losses," you might want to enter your 2007 gambling losses on the "investment interest" or "casualty" line of this worksheet.)
The program's computation of standard deduction assumes that the person in the scenario is not claimed as a dependent on another person's return. For a dependent on another's return, override the standard deduction here with the standard deduction that is shown on a 1040 with similar inputs.
In general, the worksheet calculates taxable income as Adjusted Gross Income minus Exemptions and minus Standard deduction (or Itemized deductions, if larger).
The worksheet automatically scales back the amount of exemptions deducted from taxable income, as described in the following paragraphs.
If your adjusted gross income is over a threshold, you lose 2% of your exemption amount for each $2,500 ($1,250 if married filing separately) of AGI over the threshold. The threshold for 2007 is $156,400 for single filers, $234,600 for joint filers and qualifying widow(er)s, $117,300 for married filing separate filers, and $195,500 for heads of households. The thresholds are inflation-adjusted annually.
The tax calculation automatically applies the various capital gains tax rates in effect for the year you choose for your tax scenario. That means 10%, 20%, 25%, 28% or ordinary tax rates, depending on the type of capital gain and the applicable ordinary tax bracket.