Individual Income Tax Formula
Gross income
Minus: For AGI deductions
Equals Adjusted gross income
Minus: From AGI deductions:
Greater of (a) Standard deduction or
(b) Itemized deductions
and
Personal and dependency exemption
Equals Taxable income
Individual Income Tax Formula
Taxable income
Times: Tax rates
Equals: Income tax liability (Line 44) Credit deduct Tax liability.
Add: Other taxes
Equals: Total tax
Minus: Credits
Minus: Prepayments
Equals: Taxes due or (refund)
Individual Income Tax Formula
Individuals report taxable income to the IRS
Reported on Form 1040
. tax laws use all-inclusive gross income concept
Realized income
measurable change in property rights
All realized income included in gross income unless specifically excluded or deferred
Recognized income
Reported on tax return
Individual Income Tax Formula
Excluded and Deferred income not included in gross income
Excluded income
Income never included in taxable income
Municipal bond interest
Gain on sale of personal residence first $5000
Deferred income
Income included in a subsequent tax year
Installment sales
Like-kind exchanges
Individual Income Tax Formula
Character of income or loss
Tax exempt – no tax
Tax deferred – no tax in current year (current year tax rate is zero)
Ordinary – ordinary rates from tax rate schedule
Qualified dividends – 0, 15 or 20%
Capital gain or loss – depends on whether short-term or long-term
Individual Income Tax Formula
Capital assets
Generally all assets except
Accounts receivable
Inventory
Assets used in trade or business, including supplies
Individual Income Tax Formula
Capital gains and losses
Long-term capital gains generally taxed at 0%, 15%, or 20% depending on the taxpayer’s taxable income
Short-term capital gains taxed at ordinary rates
Net capital losses (losses in excess of gains for year)
$3,000 deductible against ordinary income for year
Losses in excess of $3,000 carried forward
Individual Income Tax Formula
Deductions for AGI
Deductions “above the line”
Deducted in determining adjusted gross income
Always reduce taxable income dollar for dollar
Individual Income Tax Formula
Deductions from AGI
Deductions “below the line”
Deducted from adjusted gross income to determine taxable income
Greater of standard deduction or itemized deductions
Personal and dependency exemptions
Individual Income Tax Formula
2014 Standard deduction amounts
$12,400 Married filing jointly
$12,400 Qualifying widow or widower
$6,200 Married filing separately
$9,100 Head of household
$6,200 Single
Additional standard deduction amounts for age and eyesight (discuss in Chapter 6)
Individual Income Tax Formula
Other taxes include:
Alternative minimum tax
Self-employment taxes
Medicare Contribution tax on net-investment income
Tax credits
Reduce tax liability dollar for dollar
Individual Income Tax Formula
Tax prepayments
Payments already made towards tax liability including:
Income taxes withheld from wages by employer
Estimated tax payments made during the year
Taxes overpaid in prior year and applied toward current year’s liability
If prepayments exceed tax liability after credits, taxpayer receives a refund
Personal and Dependency Exemptions
Personal exemptions
For taxpayer and spouse if married filing jointly
Dependency exemptions
For those who qualify as the taxpayers’ dependents
Exemption amount for 2014 is $3,950
Personal and Dependency Exemptions
Dependency requirements
Citizen of . or resident of ., Canada, or Mexico
Must not file joint return with spouse
Exception – if no tax liability filing jointly or separately
Must be qualifying child or qualifying relative of taxpayer
Personal and Dependency Exemptions
Qualifying child
Relationship test
Age test
Residence test
Support test
Qualifying Child
Relationship test
taxpayer’s son, daughter, stepchild, an eligible foster child, brother, sister, half brother, half sister, stepbrother, stepsister or a descendant of any of these relatives. (grand-chilren)
Qualifying Child
Age test: child must be younger than the individual claiming the child as a qualifying child and either
under age 19 at the end of the year,
under age 24 at the end of the year and a full-time student, or
permanently and totally disabled.
Qualifying Child
Residence test
Same residence as taxpayer for more than half the year
Exception for temporary absences such as education.
Support test
Child must not provide more than half of his or her own support
Scholarships of actual child (not grandchild, for example) are excluded from support computation
Qualifying Child Example
Rodney and Anita have two children: Braxton, age 12, who lives at home and Tara, age 21 who is a full-time student and does not live at home. While Tara earned $9,000 in a summer job, she did not provide more than half of her own support during the year. Are Braxton and Tara qualifying children to Rodney and Anita?
Personal and Dependency Exemptions
Qualifying relative
Relationship test
Support test
Gross income test
Qualifying Relative
Relationship test
a descendant or ancestor of the taxpayer
a sibling of the taxpayer including a stepbrother or stepsister
a son or daughter of the taxpayer’s brother or sister
a sibling of the taxpayer’s mother or father
in-law of the taxpayer, or
unrelated person who lives in taxpayer’s home entire year
Qualifying Relative
Support test
Taxpayer must pay > ½ of living expenses (support)
Scholarships of actual child excluded
Gross income test
Gross income < personal exemption amount
Dependency Exemption Example
John is a 22-year old student who has lived in the dorms for most of the year but spends the rest of the year living with his parents. He earned a $5,000 scholarship for the school year and has worked hard to support himself through school earning $6,000 to pay for his own expenses. His parents have supported him by paying for $7,000 for food, clothing, and lodging expenses. Are John’s parents able to claim him as a dependent?
Personal and Dependency Exemptions
Filing Status
Five different filing statuses
Married filing jointly
Married filing separately
Qualifying widow or widower (surviving spouse)
Single
Head of household
Filing Status
Married filing jointly
Must be married on the last day of the year
If one spouse dies the surviving spouse is considered to be married to decedent spouse at year end
Exception – The surviving spouse remarries before year end
Joint and several liability for tax
Filing Status
Married filing separately
Taxpayers are married but file separate returns
Typically not beneficial from tax perspective
Tax rates and other tax benefits
May be beneficial for non-tax reasons
No joint and several liability
Filing Status
Qualifying widow or widower
Available for the two years following the year of spouse’s death
Surviving spouse does not qualify if remarries during two-year period.
Surviving spouse must maintain household for dependent child
Filing Status
Single
Unmarried unless qualify for head of household
Filing Status
Head of household
Unmarried or considered unmarried at end of year
Not a qualifying widow or widower
Pay more than half the costs of keeping up a home during the year
Lived in taxpayer’s home with a “qualifying person” for more than half of the year
Exception for parents
Filing Status Example
Assume that last year Rodney passed away, and during the current year Anita did not remarry but maintained a household for Braxton and Tara, her dependent children. Under these circumstances, what would Anita’s filing status be?
Filing Status Example
Assume Rodney and Anita divorced last year. During the current year, Braxton lives with Anita and Anita pays all the costs of maintaining the household for herself and Braxton. Under these circumstances, what is Anita’s filing status for the current year?
Filing Status Example
Assume Shawn (Rodney’s brother) lived with the Halls, but Shawn paid more than half the costs of maintaining a separate apartment that is the principal residence of his mother, Sharon, whose gross income is $1,500. Because Shawn provided more than half of Sharon’s support during the year, and because Sharon’s gross income was only $1,500, she qualifies as Shawn’s dependent (as a qualifying relative). In these circumstances, what is Shawn’s filing status?
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Please insert exhibit 4-1 on this slide where indicated
Realized Income doesn't’t mean it is recognized income.
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Sale of personal residence for first$5000 tax free.
Land 1,000,000 base
Sell 3,000,000
have gain 2,000,000
Gain/sale price=2/3= taxable gain
1/3 return on base, no gain.
One year 1: 600,000 x 2/3 =400,000 ( first year taxable income)
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Remember what is not capital gain. There is no definition for it in GAAP.
Ordinary income is not Capital assets.
Investment is capital assets
All the personal position is CA.
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Net capital losses =capital gain-capital loss.
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Base on filing staus
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Everyone get Exemption and deduction deduct
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Dependency exemption
Claiming your son or daughter as a dependent will shelter $3,950 of your income from tax in 2014, saving you a quick $975 if you're in the 25 percent bracket. You get the full-year's exemption no matter when during the year the child was born or adopted.
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If next you are not single, you have file single or head of household
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If you divorce , no child, you will be single.
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In two years you are widows with child, if after the 2 year you still have child you file status turn to head of household
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widow
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Head of household
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Head of household
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