30.   How To Figure Your Tax

Table of Contents

    * Introduction
    * Figuring Your Tax
    * Alternative Minimum Tax
    * Tax Figured by IRS
          o Filing the Return

Introduction

After you have figured your income and deductions as explained in Parts One
through Five, your next step is to figure your tax. This chapter discusses:

    *

      The general steps you take to figure your tax,
    *

      An additional tax you may have to pay called the alternative minimum
tax, and
    *

      The conditions you must meet if you want the IRS to figure your tax.

Figuring Your Tax

Your income tax is based on your taxable income. After you figure your
income tax and any alternative minimum tax, subtract your tax credits and
add any other taxes you may owe. The result is your total tax. Compare your
total tax with your total payments to determine whether you are entitled to
a refund or owe additional tax.

This section provides a general outline of how to figure your tax. You can
find step-by-step directions in the instructions for Forms 1040EZ, 1040A,
and 1040. If you are unsure of which tax form you should file, see Which
Form Should I Use? in chapter 1.
Tax.   Most taxpayers use either the Tax Table or the Tax Computation
Worksheet to figure their income tax. However, there are special methods if
your income includes any of the following items.

    *

      A net capital gain. (See chapter 16.)
    *

      Qualified dividends taxed at the same rates as a net capital gain.
(See chapter 16.)
    *

      Lump-sum distributions. (See chapter 10.)
    *

      Farming or fishing income. (See Schedule J (Form 1040), Income
Averaging for Farmers and Fishermen.)
    *

      Investment income over $1,600 for children under age 14. (See chapter
31.)

Credits.   After you figure your income tax and any alternative minimum tax
(discussed later), determine your tax credits. This chapter does not
explain whether you are eligible for these credits. You can find that
information in chapters 32 through 37 and your form instructions. See the
following table for credits you may be able to subtract from your income tax.
CREDITS
For information on: 	See
chapter:
Adoption 	37
Child and dependent care 	32
Child tax credit 	34
Education 	35
Elderly or disabled 	33
Foreign tax 	37
Mortgage interest 	37
Prior year minimum tax 	37
Qualified electric vehicle 	37
Qualified retirement savings
contributions 	37

  Some credits (such as the earned income credit) are not listed above
because they are treated as payments. See Payments, later.

  There are other credits that are not discussed in this publication. These
include the following items.

    *

      General business credit, which is made up of several separate
business-related credits. These generally are reported on Form 3800,
General Business Credit, and are discussed in chapter 4 of Publication 334,
Tax Guide for Small Business.
    *

      Empowerment zone and renewal community employment credit, which is
for certain employers who are engaged in a business in an empowerment zone,
a renewal community, or the DC zone. See Publication 954, Tax Incentives
for Distressed Communities. Also see the instructions for Form 8844,
Empowerment Zone and Renewal Community Employment Credit.
    *

      District of Columbia first-time homebuyer credit, which is for
certain persons who buy a main home in the District. See the instructions
for Form 8859, District of Columbia First-Time Homebuyer Credit.
    *

      Credit for alcohol used as fuel. See Form 6478.
    *

      Renewable electricity, refined coal, and Indian coal production
credit for electricity and refined coal produced at facilities placed in
service after October 22, 2004, and Indian coal produced at facilities
placed in service after August 8, 2005. See Form 8835, Section B.
    *

      Credit for fuel from a nonconventional source, which is for the
person who sold the fuel or who owned royalty interests and received income
from the sale of fuel produced from a nonconventional source. See Form 8907.

Other taxes.   After you subtract your tax credits, determine whether there
are any other taxes you must pay. This chapter does not explain these other
taxes. You can find that information in other chapters of this publication
and your form instructions. See the following table for other taxes you may
need to add to your income tax.
OTHER TAXES
For information on: 	See
chapter:
Additional taxes on qualified retirement plans and IRAs 	10, 17
Advance earned income credit payments 	36
Household employment taxes 	32
Recapture of an education credit 	35
Social security and Medicare tax on unreported tips 	6
Uncollected social security and Medicare tax on tips 	6

  Another tax you may have to pay, the alternative minimum tax, is
discussed later in this chapter.

  There are other taxes that are not discussed in this publication. These
include the following items.

   1.

      Self-employment tax. You must figure this tax if either of the
following applies to you (or your spouse if you file a joint return).
         1.

            Your net earnings from self-employment from other than church
employee income were $400 or more. The term “net earnings from
self-employment” may include certain nonemployee compensation and other
amounts reported to you on Form 1099-MISC, Miscellaneous Income. If you
received a Form 1099-MISC, see the Instructions to Recipients on the back.
Also see the instructions for Schedule SE (Form 1040), Self-Employment Tax;
and Publication 334, Tax Guide for Small Business.
         2.

            You had church employee income of $108.28 or more.
   2.

      Recapture taxes. You may have to pay these taxes if you previously
claimed an investment credit, a low-income housing credit, a mortgage
interest credit, a new markets credit, a qualified electric vehicle credit,
a credit for employer-provided child care facilities, or an Indian
employment credit. For more information, see the instructions for Form
1040, line 63.
   3.

      Section 72(m)(5) excess benefits tax. If you are (or were) a 5% owner
of a business and you received a distribution that exceeds the benefits
provided for you under the qualified pension or annuity plan formula, you
may have to pay this additional tax. See Tax on Excess Benefits in chapter
4 of Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and
Qualified Plans).
   4.

      Uncollected social security and Medicare tax on group-term life
insurance. If your former employer provides you with more than $50,000 of
group-term life insurance coverage, you must pay the employee part of
social security and Medicare taxes on those premiums. The amount should be
shown in box 12 of your Form W-2 with codes M and N.
   5.

      Tax on golden parachute payments. This tax applies if you received an
“excess parachute payment” (EPP) due to a change in a corporation's
ownership or control. See the instructions for Form 1040, line 63.
   6.

      Tax on accumulation distribution of trusts. This applies if you are
the beneficiary of a trust that accumulated its income instead of
distributing it currently. See the instructions for Form 4970, Tax on
Accumulation Distribution of Trusts.
   7.

      Additional tax on HSAs or MSAs. If amounts contributed to, or
distributed from, your health savings account or medical savings account do
not meet the rules for these accounts, you may have to pay additional
taxes. See Publication 969, Health Savings Accounts and Other Tax-Favored
Health Plans; Form 8853, Archer MSAs and Long-Term Care Insurance
Contracts; Form 8889, Health Savings Accounts (HSAs); and Form 5329,
Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored
Accounts.
   8.

      Additional tax on Coverdell ESAs. This applies if amounts contributed
to, or distributed from, your Coverdell ESA do not meet the rules for these
accounts. See Publication 970, Tax Benefits for Education, and Form 5329.
   9.

      Additional tax on qualified tuition programs. This applies to amounts
distributed from qualified tuition programs that do not meet the rules for
these accounts. See Publication 970 and Form 5329.
  10.

      Tax on insider stock compensation from an expatriated corporation.
You may owe a 15% excise tax on the value of nonstatutory stock options and
certain other stock-based compensation held by you or a member of your
family from an expatriated corporation or its expanded affiliated group in
which you were an officer, director, or more-than-10% owner. For more
information, see the instructions for Form 1040, line 63.
  11.

      Additional tax on income you received from a nonqualified deferred
compensation plan that fails to meet certain requirements. This income
should be shown in Form W-2, box 12, with code Z, or in Form 1099-MISC, box
15b. For more information, see the instructions for Form 1040, line 63.
  12.

      Interest on the tax due on installment income from the sale of
certain residential lots and timeshares. For more information, see the
instructions for Form 1040, line 63.

Payments.   After you determine your total tax, figure the total payments
you have already made for the year. Include credits that are treated as
payments. This chapter does not explain these payments and credits. You can
find that information in other chapters of this publication and your form
instructions. See the following table for amounts you can include in your
total payments.
PAYMENTS
For information on: 	See
chapter:
Child tax credit (additional) 	34
Earned income credit 	36
Estimated tax paid 	4
Excess social security
and RRTA tax withheld 	37
Federal income tax withheld 	4
Health coverage tax credit 	37
Regulated investment company
credit 	37
Tax paid with extension 	1

  Another credit that is treated as a payment is the credit for federal
excise tax paid on fuels. This credit is for persons who have a nontaxable
use of certain fuels, such as diesel fuel and kerosene. It is claimed on
Form 1040, line 70. See Form 4136, Credit for Federal Tax Paid on Fuels.

Refund or balance due.   To determine whether you are entitled to a refund
or owe additional tax, compare your total payments with your total tax. If
you are entitled to a refund, see your form instructions for information on
having it directly deposited into your checking or savings account instead
of receiving a paper check.

Alternative Minimum Tax

This section briefly discusses an additional tax you may have to pay.

The tax law gives special treatment to some kinds of income and allows
special deductions and credits for some kinds of expenses. Taxpayers who
benefit from the law in these ways may have to pay at least a minimum
amount of tax through an additional tax. This additional tax is called the
alternative minimum tax (AMT).

You may have to pay the alternative minimum tax if your taxable income for
regular tax purposes, combined with certain adjustments and tax preference
items, is more than:

    *

      $58,000 if your filing status is married filing a joint return (or
qualifying widow(er) with dependent child),
    *

      $40,250 if your filing status is single or head of household, or
    *

      $29,000 if your filing status is married filing a separate return.

Adjustments and tax preference items.   The more common adjustments and tax
preference items include:

    *

      Addition of personal exemptions,
    *

      Addition of the standard deduction (if claimed),
    *

      Addition of itemized deductions claimed for state and local taxes,
certain interest, most miscellaneous deductions, and part of medical expenses,
    *

      Subtraction of any refund of state and local taxes included in gross
income,
    *

      Changes to accelerated depreciation of certain property,
    *

      Difference between gain or loss on the sale of property reported for
regular tax purposes and AMT purposes,
    *

      Addition of certain income from incentive stock options,
    *

      Change in certain passive activity loss deductions,
    *

      Addition of certain depletion that is more than the adjusted basis of
the property,
    *

      Addition of part of the deduction for certain intangible drilling
costs, and
    *

      Addition of tax-exempt interest on certain private activity bonds.

More information.   For more information about the alternative minimum tax,
see the instructions for Form 1040, line 45, and Form 6251, Alternative
Minimum Tax—Individuals.

Tax Figured by IRS

If you file by April 17, 2006, you can have the IRS figure your tax for you
on Form 1040EZ, Form 1040A, or Form 1040.

If the IRS figures your tax and you paid too much, you will receive a
refund. If you did not pay enough, you will receive a bill for the balance.
To avoid interest or the penalty for late payment, you must pay the bill
within 30 days of the date of the bill or by the due date for your return,
whichever is later.
When the IRS cannot figure your tax.   The IRS cannot figure your tax for
you if any of the following apply.

   1.

      You want your refund directly deposited into your account.
   2.

      You want any part of your refund applied to your 2006 estimated tax.
   3.

      You had income for the year from sources other than wages, salaries,
tips, interest, dividends, taxable social security benefits, unemployment
compensation, IRA distributions, pensions, and annuities.
   4.

      Your taxable income is $100,000 or more.
   5.

      You itemize deductions.
   6.

      You file any of the following forms.
         1.

            Form 2555, Foreign Earned Income.
         2.

            Form 2555-EZ, Foreign Earned Income Exclusion.
         3.

            Form 4137, Social Security and Medicare Tax on Unreported Tip
Income.
         4.

            Form 4970, Tax on Accumulation Distribution of Trusts.
         5.

            Form 4972, Tax on Lump-Sum Distributions.
         6.

            Form 6198, At-Risk Limitations.
         7.

            Form 6251, Alternative Minimum Tax—Individuals.
         8.

            Form 8606, Nondeductible IRAs.
         9.

            Form 8615, Tax for Children Under Age 14 With Investment Income
of More Than $1,600.
        10.

            Form 8814, Parents' Election To Report Child's Interest and
Dividends.
        11.

            Form 8839, Qualified Adoption Expenses.
        12.

            Form 8853, Archer MSAs and Long-Term Care Insurance Contracts.
        13.

            Form 8889, Health Savings Accounts (HSAs).
        14.

            Form 8915, Qualified Hurricane Katrina Retirement Plan
Distributions and Repayments.

Filing the Return

After you complete the line entries for the tax form you are filing, as
discussed next, attach the peel-off label. If you do not have a peel-off
label, fill in your name and address. Enter your social security number in
the space provided. If you are married, enter the social security numbers
of you and your spouse. Complete the “Third Party Designee” area of the
return if you would like another person to discuss your return with the
IRS. Sign and date your return and enter your occupation(s). If you are
filing a joint return, both you and your spouse must sign it. Enter your
daytime phone number in the space provided.

Attach a copy of each of your Forms W-2 to your return. Also attach any
Form 1099-R you received that has withholding tax in box 4.

Mail your return to the Internal Revenue Service Center for the area where
you live. A list of Service Center addresses is shown near the end of this
publication.
Form 1040EZ Line Entries

Read lines 1 through 8b and fill in the lines that apply to you. Do not
complete lines 9 through 12. If you are filing a joint return, use the
space to the left of line 6 to separately show your taxable income and your
spouse's taxable income.
Earned income credit.   If you can take this credit, as discussed in
chapter 36, the IRS can figure it for you. Enter “EIC” in the space to the
left of line 8a. Enter the nontaxable combat pay you elect to include in
earned income on line 8b.

  If your credit for any year after 1996 was reduced or disallowed by the
IRS, you may also have to file Form 8862, Information To Claim Earned
Income Credit After Disallowance, with your return. For details, see the
Form 1040EZ instructions.

Form 1040A Line Entries

Read lines 1 through 27 and fill in the lines that apply to you. If you are
filing a joint return, use the space to the left of line 27 to separately
show your taxable income and your spouse's taxable income. Do not complete
line 28. Complete lines 29 through 33, 37, and 39 through 42 if they apply
to you. Do not fill in lines 30 and 41a if you want the IRS to figure the
credits shown on those lines. Also, enter any write-in information that
applies to you in the space to the left of line 43. Do not complete lines
35, 36, 38, and 43 through 48.
Credit for child and dependent care expenses.   If you can take this
credit, as discussed in chapter 32, complete Schedule 2 and attach it to
your return. Enter the amount of the credit on line 29 (Form 1040A). The
IRS will not figure this credit.

Credit for the elderly or the disabled.   If you can take this credit, as
discussed in chapter 33, attach Schedule 3 (Form 1040A), Credit for the
Elderly or the Disabled for Form 1040A Filers. Enter “CFE” next to line 30
(Form 1040A). The IRS will figure this credit for you. On Schedule 3, check
the box in Part I for your filing status and age. Complete Part II and Part
III, lines 11 and 13, if they apply.

Earned income credit.   If you can take this credit, as discussed in
chapter 36, the IRS will figure it for you. Enter “EIC” to the left of the
entry space for line 41a. Enter the nontaxable combat pay you elect to
include in earned income on line 41b. If you have a qualifying child, you
must fill in Schedule EIC, Earned Income Credit, and attach it to your return.

  If your credit for any year after 1996 was reduced or disallowed by the
IRS, you may also have to file Form 8862, Information To Claim Earned
Income Credit After Disallowance, with your return. For details, see the
Form 1040A instructions.

Form 1040 Line Entries

Read lines 1 through 43 and fill in the lines that apply to you. Do not
complete line 44.

If you are filing a joint return, use the space under the words “Adjusted
Gross Income” on the front of your return to separately show your taxable
income and your spouse's taxable income.

Read lines 45 through 70. Fill in the lines that apply to you, but do not
fill in lines 56, 63, and 71. Also, do not complete line 57 and lines 72
through 76. Do not fill in lines 49 and 66a if you want the IRS to figure
the credits shown on those lines.

Fill in any forms or schedules asked for on the lines you completed, and
attach them to your return.
Credit for child and dependent care expenses.   If you can take this
credit, as discussed in chapter 32, complete Form 2441 and attach it to
your return. Enter the amount of the credit on line 48. The IRS will not
figure this credit.

Credit for the elderly or the disabled.   If you can take this credit, as
discussed in chapter 33, attach Schedule R, Credit for the Elderly or the
Disabled. Enter “CFE” on the dotted line next to Form 1040, line 49. The
IRS will figure the credit for you. On Schedule R check the box in Part I
for your filing status and age. Complete Part II and Part III, lines 11 and
13, if they apply.

Earned income credit.   If you can take this credit, as discussed in
chapter 36, the IRS will figure it for you. Enter “EIC” on the dotted line
next to Form 1040, line 66a. Enter the nontaxable combat pay you elect to
include in earned income on line 66b. If you have a qualifying child, you
must fill in Schedule EIC and attach it to your return.

  If your credit for any year after 1996 was reduced or disallowed by the
IRS, you may also have to file Form 8862, Information To Claim Earned
Income Credit After Disallowance, with your return. For details, see the
Form 1040 instructions.