Income Tax Fundamentals  2010 edition  Gerald E. Whittenburg  Martha Altus-Buller 2010 Cengage Learning
<ul><li>Since 1913 - adoption of 16 th  amendment - the constitutionality of income tax has never been questioned </li></u...
<ul><li>Raise revenue </li></ul><ul><li>Tool for  social and economic policies </li></ul><ul><ul><li>Social policy  encour...
<ul><li>Individual </li></ul><ul><ul><li>Taxable income includes wages, salary, self-employment earnings, rent, interest a...
<ul><li>Individual </li></ul><ul><ul><li>1040EZ </li></ul></ul><ul><ul><ul><li>Single or Married Filing Jointly (MFJ) </li...
<ul><li>Individual (continued) </li></ul><ul><ul><li>1040A </li></ul></ul><ul><ul><ul><li>Generally used by taxpayers who ...
<ul><li>Corporations </li></ul><ul><ul><li>Tax rate schedule found on page 1-3 </li></ul></ul><ul><ul><li>1120   </li></ul...
<ul><li>This formula follows Form 1040  </li></ul><ul><li>Gross Income  </li></ul><ul><li>less: Deductions for Adjusted Gr...
2010 Cengage Learning <ul><li>2009 standard deduction </li></ul><ul><ul><li>Single   $ 5,700 </li></ul></ul><ul><ul><li>Ma...
2010 Cengage Learning <ul><li>Facts:  Juan (age 29) is a single taxpayer. In 2009, his salary is $39,000 and he has divide...
2010 Cengage Learning <ul><li>Gross income  $40,000 </li></ul><ul><li>Adjusted gross income ___________ </li></ul><ul><li>...
2010 Cengage Learning Gross income  $40,000 Adjusted gross income   37,500 Greater of the standard deduction or itemized d...
2010 Cengage Learning Gross income  $40,000 Adjusted gross income   37,500 Greater of the standard deduction or itemized d...
2010 Cengage Learning Gross income   $40,000 Adjusted gross income   37,500 Greater of the standard deduction or itemized ...
<ul><li>Based on filing status and gross income </li></ul><ul><ul><li>Generally, if exemptions plus greater of standard or...
Failure to File Penalty  <ul><li>The amount of the penalty ranges from 5 percent to 25 percent of the amount required to b...
Failure to Pay Tax  <ul><li>The penalty is one-half of 1% of the tax not paid, for each month (or part of a month) it rema...
<ul><li>Taxpayer  must  file if </li></ul><ul><ul><li>Owe any special taxes  (See Figure 3 on page 1-8) </li></ul></ul><ul...
<ul><li>Note:  Must analyze each independent situation to determine if the taxpayers are required to file a return for 200...
<ul><li>Taxpayer is single (age 31) and blind and has income of  $9,950; is the taxpayer required to file?  </li></ul><ul>...
<ul><li>Husband (age 67) and wife (age 69) have income of $19,180 and MFJ; are the taxpayers required to file? </li></ul><...
<ul><li>Taxpayer is a single full time college student, age 21, with wages from a part-time job of $6,340. He is claimed a...
<ul><li>Single  </li></ul><ul><ul><li>Unmarried or legally separated as of 12/31 </li></ul></ul><ul><ul><li>And not qualif...
<ul><li>Head of Household (HOH)  </li></ul><ul><ul><li>Tables have lower rates than single or MFS  </li></ul></ul><ul><ul>...
<ul><li>Qualifying Widow(er) with Dependent Child </li></ul><ul><ul><li>Also known as surviving spouse </li></ul></ul><ul>...
<ul><li>Six brackets (in Appendix) </li></ul><ul><ul><li>10%, 15%, 25%, 28%, 33%, 35% </li></ul></ul><ul><ul><li>Tax rate ...
<ul><li>Provisions includes Making Work Pay Credit </li></ul><ul><ul><li>$400 ($800 MFJ) refundable credit on 2009 tax ret...
<ul><li>Personal exemptions may be taken for self/spouse </li></ul><ul><li>Additional exemptions may be taken for individu...
<ul><li>Dependency exemption allowed for child when six tests met </li></ul><ul><ul><li>Relationship Test  - child is taxp...
<ul><li>Joint Return Test  – child doesn’t file joint return with spouse (exception: if it’s only to claim refund, then co...
<ul><li>Dependency exemption may be granted for  a qualifying relative (who is not a qualifying child). </li></ul><ul><li>...
<ul><li>Relationship or Member of Household Test –  list of relatives that qualify is available at IRS web site </li></ul>...
2010 Cengage Learning <ul><li>2009 standard deduction </li></ul><ul><ul><li>Single   $ 5,700 </li></ul></ul><ul><ul><li>Ma...
2010 Cengage Learning The special rule for standard deduction for dependents is  “deduction = greater of $950  or  earned ...
2010 Cengage Learning Basic Gain/Loss Model Amount Realized* -  Adjusted Basis**  Realized Gain/Loss *Sales Price - Sales ...
<ul><li>A capital asset is any property (personal or investment) held by a taxpayer, with certain exceptions as listed in ...
<ul><li>Long term capital gain  </li></ul><ul><ul><li>Special rates depending upon taxpayer’s bracket </li></ul></ul><ul><...
2010 Cengage Learning Facts:  Noah purchased Sony AAA bonds in 2001 for $47,600.  In 2009, he sold the bonds for $51,500, ...
2010 Cengage Learning Amount realized *  $50,985 Adjusted basis   47,600 Realized gain/loss   3,385 Recognized gain/loss  ...
2010 Cengage Learning
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Chapter 1

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  • Selecting the Proper Tax Form . Tax forms in order of complexity are Form 1040EZ, Form 1040A, and Form 1040.   a. Form 1040EZ is a form for taxpayers with uncomplicated tax situations. It may be used by a taxpayer who:   (1) is not age 65 or over or blind (or if married filing jointly, both spouses are not age 65 or over or blind);   (2) has taxable income of less than $50,000;   has only wages, salaries, tips, taxable scholar­ships and fellowships and interest income of $400 or less; ) does not itemize deductions, claim any adjustments to income, claim any dependency exemptions, or claim any tax credits other than the earned income credit; and   (5) have a filing status of single or married filing jointly.
  • Deductions for Adjusted Gross Income . Included are trade or business expenses, reimbursed employee business expenses, one-half of self-employment tax paid, alimony paid, traditional IRA and Keogh contributions, forfeited interest penalty, moving expenses, capital losses, qualified interest on education loans, and other items. Deductions for AGI are deductible whether the taxpayer itemizes or not , while itemized deductions will benefit the taxpayer only if total itemized deductions exceed the standard deduction.
  • The taxpayer&apos;s standard deduction is the sum of the basic standard deduction amount (adjusted for inflation) and the additional standard deduction for the aged and blind. For married individuals filing jointly and surviving spouses, the basic standard deduction is twice the basic standard deduction for single returns. For married individuals filing jointly and surviving spouses, the basic standard deduction is twice the basic standard deduction for single returns.. Thus, the basic standard deduction for married individuals filing jointly and surviving spouses is $11,400 (twice the basic standard deduction of $5,700 for unmarried individuals) for 2009; For heads of household, the basic standard deduction for 2009 is $8,350 For unmarried individuals, the basic standard deduction for 2009 is $5,700 For married individuals filing separate returns, the basic standard deduction for 2009 is $5,700 the standard deduction also includes a real property tax deduction equal to the lesser of the amount of state and local real property taxes the taxpayer would be allowed to deduct if the taxpayer itemized or $500 ($1,000 in the case of a joint return)
  • Go over penalties Section 6651. Exception for delinquency in filing due to reasonable cause and not due to willful neglect the delinquency was due to the death or serious illness of the taxpayer or a member of the taxpayer&apos;s immediate family (for a corporation, estate, trust, etc., the delinquency was due to the death of the individual responsible for filing or a death in the immediate family of such individual);   (2) the taxpayer is unable to obtain records;   (3) reliance on erroneous advice from the IRS;   (4) reliance on a tax adviser; and   (5) failure to file resulting from a fire, casualty, natural disaster, or other disturbance.
  • To prove reasonable cause, the taxpayer must show that he exercised ordinary business care and prudence but nevertheless could not file the return when it was due. Crocker v. Commissioner , Dec. 45,675, 92 TC 899. Illness or incapacity of a taxpayer or illness of a member of his immediate family may be reasonable cause for late filing. Williams v. Commissioner , Dec. 18,247, 16 TC 893. However, a taxpayer&apos;s selective inability to meet his tax obligations, while performing his regular business duties, does not excuse failure to file on time. 5 Incarceration is not reasonable cause for failure to file. 10 A request for an extension is also not reasonable cause, since a taxpayer cannot presume that the request will be granted. Crocker v. Commissioner
  • For taxpayers who enter into installment agreements with the IRS, the penalty for failure to timely pay taxes is reduced to one-quarter of 1% of the tax not paid (Code Sec. 6651(h); Reg. §301.6651-1(a)(4)). If a taxpayer files a late return that is subject to both the failure-to-file and failure-to-pay penalties, the former may be reduced by the latter. However, if no return is filed or if a late-filed return understates the amount required to be shown on the return, the failure-to-pay penalty attributable to additional tax demanded by the IRS may not be used to offset any portion of the failure-to-file penalty. If the penalty for failure to file beyond 60 days applies, the penalty may not be reduced by a failure-to-pay penalty that is also imposed below the lesser of $100 or 100% of the tax due (Code Sec. 6651(a), (c) and (d)).11
  • Reliance on an attorney or accountant to file a return (that clearly is required to be filed) is not reasonable cause that excuses the taxpayer from the failure to file penalty if the return is not timely filed
  • SURVING SPOUSE For two years after spouse dies •            Have been able to file a joint return with the deceased. •            Not have remarried •            Have a child or stepchild who qualifies as a dependent •            Furnish over 1/2 cost of maintaining a home which is the principal residence of the dependent child.   A widow or widower can file a joint return for the year his or her spouse dies. Abandoned spouse Allows married taxpayer to file as Head of Household if taxpayer: Does not file a joint return Paid &gt; half the cost of maintaining a home Spouse did not live in home for last 6 months of tax year Home was principal residence of taxpayer’s child for &gt; half of year Can claim child as a dependent
  • Be unmarried on the last day of the year. Maintain as your home for more than 1/2 of the taxable year a household in which any of the following relatives live: your children, adopted children, children&apos;s descendants, and stepchildren. **Exception Mom or Dad do not have to live with the taxpayer to qualify. The taxpayer must contribute over 1/2 the cost of maintaining the home. must not be a non-resident alien at any time during the year .
  • For tax years before 2010, the personal exemption amounts are phased out when the taxpayer&apos;s AGI exceeds certain threshold amounts. For tax years before 2006, the total amount of personal exemptions is reduced by the applicable percentage, which is two percentage points for each $2,500 (or fraction thereof) by which AGI exceeds the threshold amount. For married taxpayers filing a separate return, $1,250 is substituted for $2,500. The threshold amounts are annually adjusted for inflation. In 2006 and 2007, the otherwise applicable personal exemption phase-out is reduced by one-third. In 2008 and 2009, the otherwise applicable exemption phase-out is reduced by two-thirds. President Obama will reinstate the phase out of personal exemptions and itemized deductions beginning in 2011, but only for taxpayers in the two highest tax brackets.
  • Relationship - The child must be the taxpayer&apos;s son, daughter, stepson, stepdaughter, brother, sister, stepbrother, stepsister, or a descendant of any such individual. Foster children placed with the taxpayer by authorized placement agencies and legally adopted children (included those lawfully placed with the taxpayer for legal adoption) would satisfy the relationship test. Residence - The child must live with the taxpayer in the same principal place of abode in the United States for MORE THAN half the year . Military personnel on extended active duty outside the United States would be considered to be residing in the United States. The taxpayer and child are considered to live together even if one or both are temporarily absent due to special circumstances such as illness, education, business, vacation, or military service. NOTE: Legally adopted children who are NOT citizens or residents of the United States may be a qualifying child i f the child&apos;s principal place of abode is the taxpayer&apos;s home and the taxpayer is a U.S. citizen or national . Age for Dependency Exemption, Earned Income Credit, and Head of Household Filing Status - The child must be under age 19 (or under age 24 if a full-time student) on the last day of the tax year, or any age if totally and permanently disabled. Age for Child &amp; Dependent Care Tax Credit - The child must be under age 13 at the time care is provided (or any age if physically or mentally incapable of caring for himself or herself). Age for Child Tax Credit - The child must be under age 17 (whether of not disabled) on the last day of the tax year.
  • Standard Deduction Not Allowed . The standard deduction may not be claimed by the following: a married individual filing separately if either spouse itemizes; a nonresident alien; or an individual filing a short-period return due to a change in accounting period. Example : Joe and Lynn are married and file separate returns in 2006. Joe claims itemized deductions of $5,600 on his return. Lynn has itemized deductions of $1,500. Lynn must itemize and deduct $1,500, even though the standard deduction for a married person filing separately normally would be $5,150 Standard Deduction Basic amounts for 2006 are: Head of Household - $7,550 MFJ and Qualifying Widow(er)s - $10,300 MFS - $5,150 Single - $5,150 Additional standard deduction for Aged and Blind are: $1,000 for each $1,250 if the individual is unmarried and not a surviving spouse
  • President Obama is trying to increase the current 15% maximum rate to 20% for filers who are above the 28% tax bracket, effective in 2011
  • Chapter 1

    1. 1. Income Tax Fundamentals 2010 edition Gerald E. Whittenburg Martha Altus-Buller 2010 Cengage Learning
    2. 2. <ul><li>Since 1913 - adoption of 16 th amendment - the constitutionality of income tax has never been questioned </li></ul><ul><li>Income taxes serve a multitude of purposes </li></ul>2010 Cengage Learning
    3. 3. <ul><li>Raise revenue </li></ul><ul><li>Tool for social and economic policies </li></ul><ul><ul><li>Social policy encourages desirable activities and discourages undesirable activities </li></ul></ul><ul><ul><ul><li>Credits for investment in solar and wind energy </li></ul></ul></ul><ul><ul><ul><li>Can deduct charitable contributions </li></ul></ul></ul><ul><ul><ul><li>Credits for higher education expenses </li></ul></ul></ul><ul><ul><li>Economic policy as manifested by fiscal policy </li></ul></ul><ul><ul><ul><li>Encourage investment in capital assets through depreciation </li></ul></ul></ul><ul><ul><li>Both economic and social </li></ul></ul><ul><ul><ul><li>Exclude gain on sale of personal residence up to $250,000 ($500,000 if married) </li></ul></ul></ul>2010 Cengage Learning
    4. 4. <ul><li>Individual </li></ul><ul><ul><li>Taxable income includes wages, salary, self-employment earnings, rent, interest and dividends </li></ul></ul><ul><ul><li>An individual may file simplest tax form qualified for </li></ul></ul><ul><ul><ul><li>1040EZ </li></ul></ul></ul><ul><ul><ul><li>1040A </li></ul></ul></ul><ul><ul><ul><li>1040 </li></ul></ul></ul><ul><ul><li>If error made on one of the three above forms, can amend with a 1040X </li></ul></ul>2010 Cengage Learning See next slide
    5. 5. <ul><li>Individual </li></ul><ul><ul><li>1040EZ </li></ul></ul><ul><ul><ul><li>Single or Married Filing Jointly (MFJ) </li></ul></ul></ul><ul><ul><ul><li>Must not be 65 or older and/or blind </li></ul></ul></ul><ul><ul><ul><li>Must not claim any dependents </li></ul></ul></ul><ul><ul><ul><li>Taxable income must be under $100,000 </li></ul></ul></ul><ul><ul><ul><ul><li>Only wages, salaries or unemployment and not more than $1,500 taxable interest income </li></ul></ul></ul></ul><ul><ul><ul><li>Not received advance earned income credit </li></ul></ul></ul>2010 Cengage Learning
    6. 6. <ul><li>Individual (continued) </li></ul><ul><ul><li>1040A </li></ul></ul><ul><ul><ul><li>Generally used by taxpayers who are not self-employed and don’t itemize deductions </li></ul></ul></ul><ul><ul><li>1040 </li></ul></ul><ul><ul><ul><li>If taxpayer doesn’t qualify to use 1040EZ or 1040A should complete a 1040 with possible schedules attached: </li></ul></ul></ul><ul><ul><ul><ul><li>Schedule A to itemize deductions </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Schedule B to report dividends/interest income > $1500 </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Schedule C to report trade/business income </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Schedule D to report capital gains/losses </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Schedule E to report rental/royalty income </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Schedule F to report farm/ranch activities </li></ul></ul></ul></ul>2010 Cengage Learning
    7. 7. <ul><li>Corporations </li></ul><ul><ul><li>Tax rate schedule found on page 1-3 </li></ul></ul><ul><ul><li>1120 </li></ul></ul><ul><ul><li>or </li></ul></ul><ul><ul><li>1120S - corporations that elect S Corporation status </li></ul></ul><ul><ul><ul><li>Don’t pay regular corporate income taxes </li></ul></ul></ul><ul><ul><ul><li>Instead, pass through items of income or loss to shareholders </li></ul></ul></ul><ul><li>Partnerships </li></ul><ul><ul><li>Reporting entity, not taxable entity </li></ul></ul><ul><ul><li>1065 – reports income/loss and allocation to partners </li></ul></ul><ul><ul><ul><li>Pass through items of income or loss to partners </li></ul></ul></ul>2010 Cengage Learning
    8. 8. <ul><li>This formula follows Form 1040 </li></ul><ul><li>Gross Income </li></ul><ul><li>less: Deductions for Adjusted Gross Income (AGI) </li></ul><ul><li>AGI </li></ul><ul><li>less: Greater of Itemized or Standard Deduction </li></ul><ul><li>less: Exemptions </li></ul><ul><li>Taxable Income </li></ul><ul><li>times: Tax Rate (using tax tables or rate schedules) </li></ul><ul><li>Gross Tax Liability </li></ul><ul><li>less: Tax Credits and Prepayments </li></ul><ul><li> Tax Due or Refund </li></ul>2010 Cengage Learning
    9. 9. 2010 Cengage Learning <ul><li>2009 standard deduction </li></ul><ul><ul><li>Single $ 5,700 </li></ul></ul><ul><ul><li>Married Filing Joint (MFJ) $11,400 </li></ul></ul><ul><ul><li>Qualifying Widow(er) $11,400 </li></ul></ul><ul><ul><li>also known as Surviving Spouse </li></ul></ul><ul><ul><li>Head of Household (HOH) $ 8,350 </li></ul></ul><ul><ul><li>Married Filing Separate (MFS) $ 5,700 </li></ul></ul><ul><ul><li>*Taxpayers 65 or older and/or blind get an additional amount </li></ul></ul><ul><ul><li>$1,100 if MFJ, MFS or SS </li></ul></ul><ul><ul><li>$1,400 if HOH or Single </li></ul></ul><ul><li>2009 exemption $3,650 – personal & dependency </li></ul>
    10. 10. 2010 Cengage Learning <ul><li>Facts: Juan (age 29) is a single taxpayer. In 2009, his salary is $39,000 and he has dividend income of $1000. In addition, he has deductions for AGI of $2,500 and $3,000 of itemized deductions. If Juan claims one exemption for this year, calculate the following amounts: </li></ul><ul><li>Gross income ___________ </li></ul><ul><li>Adjusted gross income ___________ </li></ul><ul><li>Greater of the standard </li></ul><ul><li>deduction or itemized deductions ___________ </li></ul><ul><li>Taxable income ___________ </li></ul>
    11. 11. 2010 Cengage Learning <ul><li>Gross income $40,000 </li></ul><ul><li>Adjusted gross income ___________ </li></ul><ul><li>Greater of the standard </li></ul><ul><li>deduction or itemized deductions ___________ </li></ul><ul><li>Taxable income ___________ </li></ul><ul><li>Gross income = $39,000 + 1,000 </li></ul>
    12. 12. 2010 Cengage Learning Gross income $40,000 Adjusted gross income 37,500 Greater of the standard deduction or itemized deductions ___________ Taxable income ___________ AGI = $40,000 – 2,500
    13. 13. 2010 Cengage Learning Gross income $40,000 Adjusted gross income 37,500 Greater of the standard deduction or itemized deductions 5,700 Taxable income ___________ The standard deduction of $5,700 exceeds itemized deductions of $3,000
    14. 14. 2010 Cengage Learning Gross income $40,000 Adjusted gross income 37,500 Greater of the standard deduction or itemized deductions 5,700 Taxable income $28,150 Taxable income = $37,500 – 5,700 – 3,650 exemption
    15. 15. <ul><li>Based on filing status and gross income </li></ul><ul><ul><li>Generally, if exemptions plus greater of standard or itemized deductions exceed income, then filing is not necessary </li></ul></ul><ul><ul><li>If taxpayer is claimed as a dependent on another’s return, dependent’s standard deduction is: </li></ul></ul><ul><ul><ul><li>Greater of $950 </li></ul></ul></ul><ul><ul><ul><li>or </li></ul></ul></ul><ul><ul><ul><li>Earned income + $300 </li></ul></ul></ul><ul><ul><ul><li>But never more than standard deduction </li></ul></ul></ul><ul><ul><ul><li>See Figures 1 and 2 on pages 1-7 and 1-8 </li></ul></ul></ul>2010 Cengage Learning
    16. 16. Failure to File Penalty <ul><li>The amount of the penalty ranges from 5 percent to 25 percent of the amount required to be shown on the return </li></ul><ul><li>Exception for delinquency in filing due to reasonable cause and not due to willful neglect </li></ul>
    17. 17. Failure to Pay Tax <ul><li>The penalty is one-half of 1% of the tax not paid, for each month (or part of a month) it remains unpaid, up to a maximum of 25% </li></ul><ul><li>The penalty increases to 1% per month the 10th day after notice of levy is given or the day on which notice and demand is made in the case of a jeopardy assessment. </li></ul>
    18. 18. <ul><li>Taxpayer must file if </li></ul><ul><ul><li>Owe any special taxes (See Figure 3 on page 1-8) </li></ul></ul><ul><ul><li>Received Advanced Earned Income Credit payments from employer </li></ul></ul><ul><ul><li>Had self-employment (SE) income >= $400 </li></ul></ul><ul><ul><li>Other situations outlined on Chart C </li></ul></ul>2010 Cengage Learning
    19. 19. <ul><li>Note: Must analyze each independent situation to determine if the taxpayers are required to file a return for 2009 </li></ul><ul><li>Miles (age 45) is a single waiter and has unreported tips of $1,510; is he required to file? </li></ul><ul><li>Yes, because taxpayer owes social security taxes on unreported tips. </li></ul>2010 Cengage Learning
    20. 20. <ul><li>Taxpayer is single (age 31) and blind and has income of $9,950; is the taxpayer required to file? </li></ul><ul><li>No, because standard deduction = $7,100 ($5,700 + 1,400); exemption= $3,650. These amounts total to $10,750 and exceed income. </li></ul>2010 Cengage Learning
    21. 21. <ul><li>Husband (age 67) and wife (age 69) have income of $19,180 and MFJ; are the taxpayers required to file? </li></ul><ul><li>No, because standard deduction = $13,700 ($11,400 + 1,100 + 1,100); exemptions = $7,300. These amounts total to $20,900 and exceed income. </li></ul>2010 Cengage Learning
    22. 22. <ul><li>Taxpayer is a single full time college student, age 21, with wages from a part-time job of $6,340. He is claimed as a dependent by his parents; is the taxpayer required to file? </li></ul><ul><li>Yes, because standard deduction = $5,700; exemption = 0 (as he’s claimed by parents). Income exceeds these amounts. </li></ul>2010 Cengage Learning
    23. 23. <ul><li>Single </li></ul><ul><ul><li>Unmarried or legally separated as of 12/31 </li></ul></ul><ul><ul><li>And not qualified as married filing separately, head of household or qualifying widow(er) </li></ul></ul><ul><li>Married Filing Jointly (MFJ) </li></ul><ul><ul><li>If married on 12/31 – even if didn’t live together entire year </li></ul></ul><ul><ul><li>Same-sex couples may not file jointly </li></ul></ul><ul><ul><li>If spouse dies during year you can file MFJ in current year </li></ul></ul><ul><li>Married Filing Separately (MFS) </li></ul><ul><ul><li>Each file separate returns </li></ul></ul><ul><ul><li>Must compute taxes the same way - both itemize or both use standard </li></ul></ul><ul><ul><li>If living in community property state, must follow state law to determine community and separate income </li></ul></ul>2010 Cengage Learning
    24. 24. <ul><li>Head of Household (HOH) </li></ul><ul><ul><li>Tables have lower rates than single or MFS </li></ul></ul><ul><ul><li>Taxpayer can file as HOH if: </li></ul></ul><ul><ul><ul><li>Unmarried or abandoned* as of 12/31 </li></ul></ul></ul><ul><ul><ul><li>Paid > 50% of cost of keeping up home that was principal residence of dependent child or other qualifying dependent relative </li></ul></ul></ul><ul><ul><ul><ul><li>There is one exception to principal residence requirement: if dependent is taxpayer’s parent, he/she doesn’t have to live with taxpayer </li></ul></ul></ul></ul><ul><ul><li>Note: A divorced parent who meets above rules and has signed IRS/legal document, may still claim HOH even if dependency exemption shifted to ex-spouse </li></ul></ul>2010 Cengage Learning *See p. 1-10 for requirement for abandoned spouse
    25. 25. <ul><li>Qualifying Widow(er) with Dependent Child </li></ul><ul><ul><li>Also known as surviving spouse </li></ul></ul><ul><ul><li>Available for two subsequent years after death of spouse </li></ul></ul><ul><ul><ul><li>Must pay over half the cost of maintaining a household where a dependent child, stepchild, adopted child or foster child lives </li></ul></ul></ul><ul><ul><li>Gets benefits of married filing joint tax rates </li></ul></ul>2010 Cengage Learning
    26. 26. <ul><li>Six brackets (in Appendix) </li></ul><ul><ul><li>10%, 15%, 25%, 28%, 33%, 35% </li></ul></ul><ul><ul><li>Tax rate schedules for different filing types </li></ul></ul><ul><ul><li>Marginal rate may exceed 35% when taxpayers are required to phase-out exemptions and deductions </li></ul></ul><ul><li>Qualifying dividends and net long-term capital gains may be taxed at lower rates </li></ul><ul><ul><li>Rates based on ordinary tax bracket </li></ul></ul>2010 Cengage Learning
    27. 27. <ul><li>Provisions includes Making Work Pay Credit </li></ul><ul><ul><li>$400 ($800 MFJ) refundable credit on 2009 tax return </li></ul></ul><ul><ul><ul><li>Reduced by any automatic rebate received by certain taxpayers in 2009 </li></ul></ul></ul><ul><ul><ul><li>Reflected in new FIT withholding tables which directly infused cash into economy through increased wages </li></ul></ul></ul><ul><ul><ul><li>Phases-out $75,000 ($150,000 MFJ) </li></ul></ul></ul><ul><ul><ul><li>Complete Schedule M to calculate credit </li></ul></ul></ul>2010 Cengage Learning
    28. 28. <ul><li>Personal exemptions may be taken for self/spouse </li></ul><ul><li>Additional exemptions may be taken for individuals who are either </li></ul><ul><ul><li>Qualifying child </li></ul></ul><ul><ul><ul><ul><li> or </li></ul></ul></ul></ul><ul><ul><li>Qualifying relative </li></ul></ul><ul><li>For 2009 each exemption = $3,650 </li></ul><ul><li>Exemption phased-out to $2,433 when AGI exceeds certain AGI thresholds </li></ul>2010 Cengage Learning
    29. 29. <ul><li>Dependency exemption allowed for child when six tests met </li></ul><ul><ul><li>Relationship Test - child is taxpayer’s child, stepchild, adopted child or taxpayer’s sibling, half- or step-sibling, or a descendant of any of these. Foster child may also qualify. Child must be younger than person claiming him/her, unless permanently disabled. </li></ul></ul><ul><ul><li>Domicile Test- child has same principal place of abode as taxpayer for more than ½ the year. </li></ul></ul><ul><ul><li>Age Test – child is under 19 or a full-time student under 24 (enrolled at least 5 months of year). </li></ul></ul>2010 Cengage Learning
    30. 30. <ul><li>Joint Return Test – child doesn’t file joint return with spouse (exception: if it’s only to claim refund, then considered to have passed this test). </li></ul><ul><li>Citizenship Test – child is a US citizen, a resident of the US, Canada or Mexico, or an alien child adopted by and living with a US citizen. </li></ul><ul><li>Self-Support Test – child who provides more than ½ of his/her own support cannot be claimed as a dependent of someone else. Funds received by students as scholarships are excluded from support test. </li></ul>2010 Cengage Learning
    31. 31. <ul><li>Dependency exemption may be granted for a qualifying relative (who is not a qualifying child). </li></ul><ul><li>Note: A taxpayer’s child who does not meet qualifying child test may meet qualifying relative test!! </li></ul>2010 Cengage Learning
    32. 32. <ul><li>Relationship or Member of Household Test – list of relatives that qualify is available at IRS web site </li></ul><ul><ul><li>Note: A member of household (even if unrelated) for entire year meets the relationship test </li></ul></ul><ul><li>Gross Income Test – individual may not have gross income in excess of $3,650 </li></ul><ul><li>Support Test – dependent must receive over ½ of his/her support from taxpayer </li></ul><ul><li>Joint Return Test – dependent may not file a joint return unless it’s solely to claim refund </li></ul><ul><li>Citizenship Test – dependent must meet the citizenship test identified in the qualifying child slide </li></ul>2010 Cengage Learning
    33. 33. 2010 Cengage Learning <ul><li>2009 standard deduction </li></ul><ul><ul><li>Single $ 5,700 </li></ul></ul><ul><ul><li>Married Filing Joint (MFJ) $11,400 </li></ul></ul><ul><ul><li>Qualifying Widow(er) $11,400 </li></ul></ul><ul><ul><li>also known as Surviving Spouse </li></ul></ul><ul><ul><li>Head of Household (HOH) $ 8,350 </li></ul></ul><ul><ul><li>Married Filing Separate (MFS) $ 5,700 </li></ul></ul><ul><ul><li>*Plus additional amounts for blindness or over 65: $1,100 if MFJ, MFS or qualifying widow(er) and $1,400 if HOH or Single </li></ul></ul><ul><li>For 2009 only, may add sales tax on qualified motor vehicle purchased after 2/16/09 and lesser of $500 (or $1,000 MFJ) or actual real estate taxes paid to standard deduction </li></ul>
    34. 34. 2010 Cengage Learning The special rule for standard deduction for dependents is “deduction = greater of $950 or earned income + $300 but only up to basic standard deduction” Example 1: Jaime is 23 and a full time student and her parents claim her as a dependent; she earned $2,000 in 2009. $2,000 earned income ( 2,000 ) standard deduction $0 taxable income Example 2: Tia is 18 and has dividend income of $1,500 (not earned) $1,500 dividend income ( 950 ) standard deduction $ 550 taxable income
    35. 35. 2010 Cengage Learning Basic Gain/Loss Model Amount Realized* - Adjusted Basis** Realized Gain/Loss *Sales Price - Sales Expenses **Cost - Accumulated Depreciation
    36. 36. <ul><li>A capital asset is any property (personal or investment) held by a taxpayer, with certain exceptions as listed in the tax law </li></ul><ul><ul><li>Examples: stocks, bonds, land, cars and other items held for investment </li></ul></ul><ul><ul><li>Gains/losses on these assets are subject to special rates </li></ul></ul><ul><li>Holding period of asset determines treatment </li></ul><ul><ul><li>Long-term is held >12 months (taxed at capital rates – see next screen) </li></ul></ul><ul><ul><li>Short-term is held <= 12 months (taxed at ordinary rates) </li></ul></ul>2010 Cengage Learning
    37. 37. <ul><li>Long term capital gain </li></ul><ul><ul><li>Special rates depending upon taxpayer’s bracket </li></ul></ul><ul><ul><li>Ordinary Tax Bracket Capital Gains Tax Rate </li></ul></ul><ul><ul><li> 10% or 15% 0% </li></ul></ul><ul><ul><li>All other brackets 15% </li></ul></ul><ul><li>Long term capital loss </li></ul><ul><ul><li>Only allowed $3,000 net capital loss per year against ordinary income </li></ul></ul><ul><ul><li>Carry-forward any unused balance </li></ul></ul>2010 Cengage Learning
    38. 38. 2010 Cengage Learning Facts: Noah purchased Sony AAA bonds in 2001 for $47,600. In 2009, he sold the bonds for $51,500, paying commission of $515. What is his: Amount realized ___________ Adjusted basis ___________ Realized gain/loss ___________ Recognized gain/loss ___________ Type of gain/loss ___________
    39. 39. 2010 Cengage Learning Amount realized * $50,985 Adjusted basis 47,600 Realized gain/loss 3,385 Recognized gain/loss 3,385 Type of gain/loss Long term capital gain *Amount realized = $51,500 – 515
    40. 40. 2010 Cengage Learning

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