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CHAPTER 1. TheIndividual Income Tax Return. Objective. Know the history and objectives of U.S. tax law. History of Taxation. Prior to 1913 Only excise taxes & customs duties 1913 16th Constitutional Amendment passed 1939 First IRC 1954 & 1986 Revised IRC.

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CHAPTER 1

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Chapter 1

CHAPTER 1

TheIndividual

Income Tax Return


Objective

Objective

Know the history and objectives

of U.S. tax law


History of taxation

History of Taxation

  • Prior to 1913

    • Only excise taxes & customs duties

  • 1913

    • 16th Constitutional Amendment passed

  • 1939

    • First IRC

  • 1954 & 1986

    • Revised IRC


Objectives of tax law

Objectives of Tax Law

  • Raise Revenue

  • Tool for social and economic policy

    • Social - encourage desirable/discourage undesirable activities, for example:

      • Can’t deduct penalties

      • Can deduct charitable contributions & medical expenses

      • IRAs to promote saving for retirement

    • Economic policy as manifested by fiscal policy

      • Encourage investment in capital assets

      • MACRS depreciation

      • Tax credits - Educational credits, R&D credit


Objective1

Objective

Know the different entities subject to tax and reporting requirements


Primary entities forms

Primary Entities/Forms

  • Individuals

    • 1040EZ

      • Single or Married Filing Jointly

      • Under 65

      • Under $50,000 taxable income

      • Only earned income, scholarships, and less than $1,500interest

    • 1040A

      • No self-employment income or don’t itemize

    • 1040 with schedules attached


Primary entities forms1

Primary Entities/Forms

  • Partnerships

    • 1065 and K-1s to each partner

  • Corporations

    • 1120 (for C corps)

    • 1120S (for S corps) and K-1s to each shareholder

  • Estates/Trust

    • 1041 and K-1s to each beneficiary or trustee


Objective2

Objective

Understand the tax formula for

individual taxpayers


Tax formula

Tax Formula

Look at Form 1040 while we go through following formula:

Gross Income

less:Deductions for AGI

Adjusted Gross Income

less:Greater of Itemized or Standard Deduction

less:Exemptions

Taxable Income

times:X Tax Rate

Gross Tax Liability

less:Tax credits and prepayments (withholdings and estimates)

Tax Due or Refund


Objective3

Objective

Be able to complete a simple

individual tax return


2002 standard deductions exemptions

2002 Standard Deductions & Exemptions

Single$4,700

MFJ or Surviving Spouse$7,850

H of H$6,900

MFS$3,925

*Taxpayers 65 or older and/or blind get an additional amount

Additional*$900 if Married or SS*

Additional*$1150 if Single*

2002 exemption = $3,000 per person


Who must file

Who Must File

Based on filing status and gross income:

  • If exemptions and deductions exceed income then filing is not necessary

  • If you are claimed as a dependent on another’s return, you still must file if:

    • Unearned income > $750

    • Earned income > standard deduction, OR

    • Unearned income + earned income >

      $750 or (earned income + $250)


Who must file1

Who Must File

  • You must file if you

    • Have advanced EIC

    • Have SE income >$400

    • Owe special taxes

      • recapture,

      • SS on unreported tips,

      • AMT


Filing status

Filing Status

Filing status is determined by status on 12/31

  • Single - higher tax tables than SS or HOH

  • MFJ - if married on 12/31

    • Common law recognized by state of residence

    • If spouse dies during year you can file MFJ

  • MFS - each file separate returns

    • Must compute taxes the same (both itemized or both standard deduction)

    • Not often a good choice


Filing status1

Filing Status

  • HOH - tables have lower rates than S. Can use if:

    • Unmarried on 12/31

    • Paid > 50% of cost of keeping up home that was principal residence of dependent

    • Exceptions:

      • taxpayer’s parent doesn’t have to live with taxpayer, and

      • if qualifying individual is an unmarried child, does not have to be dependent


Filing status2

Filing Status

  • Qualifying Widow(er) or SS(Surviving Spouse) - tables same as MFJ.

    • Applies in year of spouse’s death and in 2 subsequent years

      • Must have qualifying dependent

      • Cannot remarry


Personal dependency exemptions

Personal/Dependency Exemptions

  • For taxpayer and each dependent - $3,000 per person

    • Phased out for high income taxpayers at 2% per $2,500 over threshold (see text) for limits based on filing status

  • Example: MFJ with AGI of $215,000 and 2 dependents - what’s the phase out?


Personal dependency exemptions example

Personal/Dependency Exemptions Example

Answer:

$215,000 -$206,000 = $9,000

$9,000 / $2,500 = 3.6 (round up to 4*)

4 x 2% = 8%

The original exemption amount of 4 X $3,000 = $12,000 is reduced by 8%.

$12,000 - (.08 x 12,000) = $11,040 allowed.

* always round up to next percentage


Personal dependency exemptions tests

Personal/Dependency Exemptions Tests

Five tests must be met for someone to be claimed as a dependent:

  • Gross income test -

    • Dependent’s gross income must be less than $3,000

    • Exceptions:

      • children under age 19, or

      • under 24 and fulltime student for at least 5 months


Personal dependency exemptions tests1

Personal/Dependency Exemptions Tests

  • Support -

    • Taxpayer must provides more than 50% of dependent’s support (including food, FMV of lodging and clothes, etc.)

    • Custodial parent usually gets child as dependent unless:

      • Custodial parent agrees not to claim

      • Pre-1985 agreement

    • Multiple support agreement - more than one person providing support (i.e. - three children support their father).

      • Each person must sign agreement to give exemption to one, but that one has to provide at least 10% of the dependent’s support


Personal dependency exemptions tests2

Personal/Dependency Exemptions Tests

  • Joint Return - a dependent cannot file MFJ with spouse unless only to get refund

  • Citizenship - must be US citizen, resident of an adjacent country, or, if an alien child, must be adopted and living with US citizen

  • Member of household or relationship test - must be related to, or reside with, the taxpayer for the entire year


Standard deduction

Standard Deduction

  • Use the following standard deduction amounts unless itemized deductions are greater!

  • 2002 numbers (the amounts increase every year)

    • Single$4,700

    • MFJ$7,850

    • MFS$3,925

    • HH$6,900

    • SS$7,850

  • Additional amount for taxpayers over 65 and/or blind:

    • $900 per person for married and SS

    • $1,150 person for others


Standard deduction1

Standard Deduction

The special rule for standard deductions for dependents is “deduction = greater of $750 or earned income + $250 up to standard deduction”

Example 1: Jaime is 23 and a full time student and her folks claim her - she earned $2,000

2,000 earned income

(2,000) standard deduction

$0 taxable income

Example 2: Tia is 18 and has dividends (unearned) income of $1,500

1,500 unearned income

( 750) standard deduction

$ 750 taxable income


Limits on itemized deductions

Limits on Itemized Deductions

  • Phase-out for high income taxpayers

    • 3% x ( AGI - Threshold Amount)

      • Threshold amount = $68,650 for MFSor $137,300 (all other filing types)

    • Phase-out is lesser of

      • (AGI-Threshold) x 3% or

      • 80% x (all itemized deductions except medical, investment interest expense and casualty, and wagering losses to the extent of wagering gains)


Limits on itemized deductions1

Limits on Itemized Deductions

Example:

Itemized Deductions = $20,000,

AGI = $150,000 and MFJ

Answer:

150,000

(137,300)

12,700 x .03 = phase out amount of $381

$20,000 - $381 = $19,619 itemized deduction


Gains and losses

Gains and Losses

Amount Realized*

- Adjusted Basis**

Realized Capital Gain/Loss

*Sales Price - Sales Expenses

**Cost + Capital Improvements - Accumulated Depreciation (also called “book value”)


Capital gains losses

Capital Gains/Losses

  • Capital Assets are

    • Generally, all property except inventory, receivables, or depreciable property used in trade or business

    • Subject to special rates

  • Separate by holding period

    • Long term - held > 12 months

    • Short term - held < 12 months


Capital gains losses1

Capital Gains/Losses

  • Netting procedures

    • Net the ST gains and losses

    • Net the LT gains and losses

    • Net LT Capital Gain - 20% rate if taxpayer is in higher bracket

    • Net LT Capital Gain - 10% rate if taxpayer is in lower bracket

  • $3,000 net capital loss per year can reduce ordinary income; carry-forward any unused balance


Internet and the irs

Internet and the IRS

http://www.irs.gov

Forms & Pubs (publications)

Digital Daily

Electronic filing

Tax Regulations and Interpretations

Tax Info


The end

The End!


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