Tax Formula
Includes all the taxpayer's income, both taxable and nontaxable
Income -Broadly Conceived
Essentially equivalent to gross receipts It does not include a return of capital or receipt of borrowed funds
Partial List of Exclusions from Gross Income
Accident insurance proceeds
Annuities (cost element)
Bequests
Child support payments
Cost-of-living allowance (for military)
Damages for personal injury or sickness
Gifts received
Group term life insurance, premium paid by employer (for coverage up to $50
Gross Income
The Internal Revenue Code defines gross income broadly as ''except as otherwise provided . . . , all income from whatever source derived'' Gross income does not include unrealized gains
Partial List of Gross Income Items (slide 1 of 2)
Alimony
Annuities (income element)
Awards
Back pay
Bargain purchase from employer
Bonuses
Breach of contract damages
Business income
Clergy fees
Commissions
Compensation for services
Death benefits
Debts forgiven
Director's fees
Hobby income
Interest
Jur
Individual taxpayers have two categories of deductions:
Deductions for adjusted gross income (AGI) Deductions from adjusted gross income
Deductions For AGI (slide 1 of 2)
Sometimes known as above-the-line deductions On the tax return, they are taken before the ''line'' designating AGI
Deductions for AGI include:
Ordinary and necessary expenses incurred in a trade or business
One-half of self-employment tax paid
Alimony paid
Certain payments to an IRA and Health Savings Accounts Unreimbursed moving expenses
Fees for college tuition and related expenses
Interest o
Adjusted Gross Income (AGI)
Serves as the basis for computing percentage limitations on certain itemized deductions such as Medical expenses
Charitable contributions
Certain casualty losses e.g.,
Medical expenses are deductible only to the extent they exceed 7.5% of AGI
This limitat
Deductions from AGI include:
The greater of: Itemized deductions, or The standard deduction Personal and dependency exemptions
A partial list of itemized deductions includes:
Medical expenses (in excess of 7.5% of AGI) Certain taxes and interest Charitable contributions Casualty Losses (in excess of 10% of AGI) Deductions for expenses related to The production or collection of income, and The management of property held for th
The standard deduction is the sum of two components:
Basic standard deduction + Additional standard deductions
Basic standard deduction
Amount allowed is based on taxpayer's filing status
Additional standard deductions Available for taxpayers who are
Age 65 or over, and/or
Blind
Two additional standard deductions are allowed for a taxpayer who is age 65 or over and blind
Amount allowed depends on filing status
Standard Deduction (slide 1 of 2)
The basic standard deduction (BSD) amount depends on filing status of taxpayer
Additional standard deduction (ASD)
For taxpayers age 65 or older and/or legally blind
Determining Standard Deduction
Taxpayer is single, blind, and age 65 or older
SD = $5,950 (BSD) + $1,450 (ASD) + $1,450 (ASD) = $8,850
Determining Standard Deduction
Taxpayers are married, filing jointly, one blind, and both age 65 or older
SD = $11,900 (BSD) + $1,150 (ASD) + $1,150 (ASD) + $1,150 (ASD) = $15,350
Taxpayers Ineligible For Standard Deduction
Certain taxpayers cannot use the SD:
Married, filing separately, when either spouse itemizes deductions
Nonresident aliens
Individual filing return for tax year of less than 12 months because of change in annual accounting period
SD Limit For Person Claimed as Dependent
Individual claimed as dependent has a BSD in 2012 limited to the greater of:
$950 or
$300 plus earned income (but not exceeding normal BSD)
ASD amount(s) still available
Examples of SD Limit - A blind child who earns $200 and is claimed by parents as a dependency exemption
SD = $950 (BSD) + $1,450 (ASD) = $2,400
Examples of SD Limit - A child who earns $1,500 and is claimed by parents as a dependency exemption
SD = $1,800 [BSD equal to greater of $950 or ($300 + $1,500 earned income)]
Examples of SD Limit - A child who earns $6,000 and is claimed by parents as a dependency exemption
SD = $5,950 [BSD limited to normal amount]
Personal and Dependency
Exemption Amounts
2011: $3,700 per exemption
2012: $3,800 per exemption
Personal and dependency exemptions
One per taxpayer (two personal exemptions when married, filing jointly) and for each dependent
Exception: Individual claimed as dependent by another taxpayer does not receive a personal exemption
Personal and Dependency Exemptions In Year Of Death
Personal exemption allowed on joint return for spouse who dies during the year
Example: Tom and Betty were married in 1990. Tom dies on February 1, 2012. A personal exemption may be claimed for Tom on the taxpayers' 2012 joint return.
Dependency Exemptions
A dependency exemption is available for one who is either a qualifying child or a qualifying relative
A qualifying child must meet the following tests:
elationship
Abode
Age, and
Support
Congress has tried to establish a uniform definition of qualifying child for purposes of the:
Dependency exemption
Head-of-household filing status
Earned income tax credit
Child tax credit
Credit for child and dependent care expenses
Relationship Test - The child must be the taxpayer's:
Son or daughter
Stepson or stepdaughter
Brother or sister
Stepbrother or stepsister
Half brother or half sister, or
A descendant of such individual (e.g., grandchildren, nephews, nieces)
A child who has been adopted, or whose adoption is pending, qualifie
Abode Test
A qualifying child must live with the taxpayer for more than half of the year
Temporary absences from the household due to special circumstances (e.g., illness, education) are not considered
Age Test
The child must be under age 19 or under age 24 in the case of a student
A student is a child who, during any part of five months of the year, is enrolled full time at a school or government-sponsored on-farm training course
Individuals who are disabled a
Support
To be a qualifying child, the individual must not be self-supporting
Cannot provide more than one-half of his or her own support
In the case of a full-time student, scholarships are not considered to be support
Tiebreaker Rules - Qualifying Child
In situations where a child may be a qualifying child for more than one person
Tiebreaker rules specify which person has priority in claiming the dependency exemption
In order to claim a dependency exemption for a qualifying relative, the following tests must be met:
Relationship
Gross income
Support
The relationship test for a qualifying relative is more expansive than for a qualifying child. Also included are the following relatives:
Lineal ascendants (e.g., parents, grandparents)
Collateral ascendants (e.g., uncles, aunts)
Certain in-laws (e.g., son-, daughter-, father-, mother-, brother-, and sister-in-law)
The relationship test also includes unrelated parties who live with the taxp
Gross Income Test
Dependent's gross income must be less than the exemption amount ($3,800 for 2012)
Support Test
Taxpayer must provide more than 50% of the qualifying relative's support Only amounts expended are considered in the support test Scholarships are not considered in the support test
Two exceptions to the support test:
Multiple support agreements
Children of divorced parents
Multiple Support Agreements
Allows one member of a group providing > 50% of support to claim individual even though no one person provides > 50% support
Eligible parties must provide > 10% of support
Each eligible party must meet all other dependency requirements
Example - Allows ch
Children of Divorced Parents
Special rules apply if the parents meet the following conditions:
They would have been entitled to the dependency exemption had they been married and filed a joint return
They have custody (either jointly or singly) of the child for more than half of the
Other Rules for Dependency Exemptions
In addition to fitting into either the qualifying child or the qualifying relative category, a dependent must also meet:
The joint return, and
The citizenship or residency tests
Joint Return Test
Dependent cannot file a joint return with spouse unless:
Filing solely for refund of tax withheld
No tax liability exists for either spouse
Neither spouse required to file return
Citizenship or Residency Test
Dependent must be a U.S. citizen or a resident of U.S., Canada, or Mexico for some part of the calendar year in which the taxpayer's tax year begins
An exception provides that an adopted child need not be a citizen or resident of the U.S. (or a contiguou
Child Tax Credit
$1,000 tax credit is allowed for each dependent child under the age of 17
Qualifying child includes stepchildren and eligible foster children
Filing Requirements (slide 1 of 2)
General Rule: Tax return must be filed if gross income is ? the sum of the standard deduction and exemption amount
ASD for blind does not apply for this determination
Special rules apply for dependents and self-employed taxpayers
Tax return of an individu
There are 5 filing statuses
Single
Married, filing jointly
Surviving spouse (qualifying widow or widower)
Head of household
Married, filing separately
Filing status affects tax rate brackets, standard deduction, and other amounts
Single Filing Status
Includes a taxpayer who is unmarried or separated from spouse by a divorce decree or separate maintenance agreement and does not qualify for another filing status
Marital status is determined as of the last day of the tax year
When a spouse dies during th
Married Filing Jointly (MFJ) Filing Status
Married as of last day of taxable year, or Spouse dies during taxable year
Surviving Spouse Filing Status
Same tax rate brackets as married, filing jointly
File as surviving spouse for 2 years after death of spouse if taxpayer maintains a home in which a dependent child lives
For the year of death, surviving spouse is treated as being married
Thus, a joint re
Married Filing Separately Filing Status
Married but not filing a return with spouse and not abandoned spouse
Head of Household (HH) Filing Status
Must be unmarried as of end of year or an abandoned spouse
Must pay > half the cost of maintaining a household which is the principal home of a dependent for more than half of tax year
A dependent must satisfy either the qualifying child or the qualifying
Exception to the HH Requirements
HH may be claimed if taxpayer maintains a separate home for his or her parents
At least one parent must qualify as a dependent
Abandoned Spouse
Allows married taxpayer to file as Head of Household if taxpayer:
Does not file a joint return
Paid > half the cost of maintaining a home
Spouse did not live in home during last 6 months of tax year
Home was principal residence of taxpayer's child for > h
Tax liability is computed using either
the Tax Table method or the Tax Rate Schedule method Most taxpayers must use the Tax Tables
Certain taxpayers may not use the Tax Table method including:
An individual who files a short period return
Individuals whose taxable income exceeds the maximum (ceiling) amount in the Tax Table
The 2011 Tax Table applies to taxable income below $100,000
An estate or trust
Kiddie Tax
Net unearned income (NUI) of child is taxed at parents' rate
Child must be under age 19 at end of year (or under age 24 if a full-time student)
NUI generally equals unearned income less $1,900 (2012 tax year)
Net unearned income taxed at parents' rate
Rem
For Kiddie Tax Unearned income includes:
Taxable interest
Dividends
Capital gains
Rents
Royalties
Pension and annuity income, and
Unearned income from trusts
Two options for computing kiddie tax
A separate return may be filed for the child
The tax on net unearned income (referred to as the allocable parental tax) is computed as though the income had been included on the parents' return
Form 8615 is used to compute the tax
The parents may elect to
In order for gains (losses) to be recognized (included in gross income), they must be
realized:
Realized gain (loss) =
amount realized - adjusted basis
Amount realized =
selling price - costs of disposition
Adjusted basis =
cost + capital additions - cost recovery
All realized gains are recognized unless
a specific tax provision provides otherwise (e.g., nontaxable exchanges)
Realized losses may or may not be recognized depending on the circumstances
Generally, losses on the sale or disposition of personal use property are not recognized
Once recognized gains or losses have been determined, they must be classified as
ordinary or capital
Ordinary gains are fully taxable
Ordinary losses are fully deductible
Capital gains and losses are subject to special tax treatment
...
Capital assets are defined as any property other than:
Inventory,
Accounts Receivable, and
Depreciable property or real property used in a business
Most personal use assets owned by individuals are
capital assets
Losses on these assets are not deductible
Gains and losses from capital asset transactions must be netted
Net gains and losses by holding period
If excess losses result, they are shifted to the category carrying the highest tax rate
Max Tax Rates for Net Capital Gains of Individuals
Net capital losses of individuals are deductible for AGI up to $3,000 yearly
Excess capital losses are carried over to the next tax year
When carried over, capital losses retain their classification as short- or long-term