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The Individual Income Tax Return - PowerPoint PPT Presentation


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CHAPTER 1 . The Individual 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

CHAPTER 1

The Individual

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 $1,500 interest
    • 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

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