Calibrate against SOI statistics for filers with AGI below $10,000

[nikhilwoodruff]

We removed calibration of incomes and filer counts with AGI below 10k, but perhaps we should re-add them (but not trained).

[MaxGhenis]

Claude gave this example of a taxable return with S-corp income (one of the variables with higher aggregate in this slice) and AGI below $5k:

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S Corporation Low AGI Taxable Return Scenario (Corrected)

Income and Deductions:

1. W-2 Income: $1,500
2. S Corporation Ordinary Business Income: $1,300
3. Qualified Dividends: $2,000
4. S Corporation Capital Gains (Separately Stated): $12,000

Calculations:

1. AGI Calculation:

   • W-2 Income: $1,500
   • S Corp Ordinary Business Income: $1,300
   • Qualified Dividends: $2,000
   • AGI: $4,800

2. Taxable Income Calculation:

   • AGI: $4,800
   • Capital Gains (not in AGI but taxable): $12,000
   • Minus Standard Deduction (2024 single filer): ($14,600)
   • Taxable Income: $2,200

3. Tax Calculation:

   • Ordinary Income: $0 (all covered by standard deduction)
   • Long-term Capital Gains and Qualified Dividends: $2,200
   • Tax on Long-term Capital Gains and Qualified Dividends (0% rate up to $47,025 for single filer in 2024): $0

4. Self-Employment Tax:

   • S Corp Ordinary Business Income: $1,300
   • Self-Employment Tax Rate: 15.3% (12.4% Social Security + 2.9% Medicare)
   • Self-Employment Tax: $1,300 * 0.9235 * 0.153 = $183.82

5. Final Tax Liability:

   • Income Tax: $0
   • Self-Employment Tax: $183.82
   • Total Tax: $183.82

Key Points:

• AGI is below $5,000 ($4,800)
• Qualified dividends are correctly included in AGI
• Taxable income is $2,200 after standard deduction
• No regular income tax due to 0% rate on capital gains/qualified dividends at this income level
• Self-employment tax creates a positive tax liability
• Return is considered "taxable" by SOI definition (tax > $0)

[MaxGhenis]

o1-preview gave a different type of example, a dependent return:

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Taxpayer Profile:

• Name: Alex Smith
• Age: 17 years old
• Filing Status: Single, claimed as a dependent on parents' tax return.
• Income Sources:
  • S-corp Income: $4,000 (reported on Schedule K-1)
  • Earned Income: $0

Detailed Explanation:

1. Income Calculation:

• Total Income: $4,000 (All from S-corp income)
• AGI: $4,000 (No adjustments)

2. Standard Deduction for Dependents:

Since Alex is a dependent, the standard deduction is limited to the greater of:

• $1,250, or
• Earned income ($0) + $400 = $400

Therefore, Alex's standard deduction is $1,250.

3. Taxable Income:

• Taxable Income = AGI - Standard Deduction
• Taxable Income = $4,000 - $1,250 = $2,750

4. Tax Liability Calculation:

Because Alex is under 18 and has unearned income over $2,500 (2023 threshold), the Kiddie Tax applies.

• Net Unearned Income:

  • Unearned Income: $4,000
  • Subtract: $1,250 (Standard deduction for dependents)
  • Subtract: $1,250 (Additional threshold)
  • Net Unearned Income: $1,500

• Tax on Net Unearned Income:

  • This $1,500 is taxed at the parents' marginal tax rate.
  • Assume parents' tax rate: 22%
  • Tax: $1,500 * 22% = $330

• Tax on Remaining Income:

  • Taxable Income - Net Unearned Income = $2,750 - $1,500 = $1,250
  • This is taxed at Alex's rate.
  • Assuming 10% bracket: $1,250 * 10% = $125

• Total Tax Liability:

  • $330 (Kiddie Tax) + $125 = $455

5. Final Summary:

• AGI: $4,000
• Taxable Income: $2,750
• Total Tax Liability: $455
• Positive Tax Liability with AGI below $5,000 and Positive S-corp Income

Conclusion:

Alex Smith, a 17-year-old dependent, has an AGI of $4,000 from S-corp income. After accounting for the limited standard deduction for dependents and applying the Kiddie Tax rules, Alex has a taxable income of $2,750 and a tax liability of $455.