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CHAPTER 1 The Individual Income Tax Return. Income Tax Fundamentals 2009 edition Gerald E. Whittenburg Martha Altus-Buller Student’s Copy. Objectives of Tax Law. Raise revenue Tool for social and economic policies

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Chapter 1 the individual income tax return

CHAPTER 1 The Individual Income Tax Return

Income Tax Fundamentals 2009 edition

Gerald E. Whittenburg

Martha Altus-Buller

Student’s Copy

2009 Cengage Learning

Objectives of tax law
Objectives of Tax Law

  • Raise revenue

  • Tool for social and economic policies

    • Social policy encourages desirable activities and discourages undesirable activities

      • Can’t deduct penalties

      • Can deduct charitable contributions

      • Credits for higher education expenses

    • Economic policy as manifested by fiscal policy

      • Encourage investment in capital assets

    • Both economic and social

      • Exclude gain on sale of personal residence up to $250,000 ($500,000 if married)

Primary entities forms
Primary Entities/Forms

  • Individuals

    • Taxable income includes wages, salary, self-employment earnings, rent, interest and dividends

    • An individual may file the simplest tax form that he/she qualifies for

      • 1040EZ

      • 1040A

      • 1040

    • If error made on one of the three above forms, can amend with a 1040X.

Tax formula for individuals
Tax Formula for Individuals

This model follows Form 1040

Gross Income

less: Deductions for Adjusted Gross Income [AGI]


less: Greater of Itemized or Standard Deduction

less: Exemptions

Taxable Income

times: Tax Rate

Gross Tax Liability

less: Tax Credits and Prepayments

Tax Due or Refund

Standard deductions exemption
Standard Deductions & Exemption

  • 2008 standard deduction

    • Single $ 5,450

    • Married Filing Joint [MFJ] $10,900

    • Qualifying Widow(er) $10,900

    • also known as Surviving Spouse

    • Head of Household [HOH] $ 8,000

    • Married Filing Separate [MFS] $ 5,450

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

    • $1050 if MFJ, MFS or SS

    • $1350 if HOH or Single

  • 2008 exemption$3500 – personal & dependency

2009 Cengage Learning

Filing status
Filing Status

  • Single

    • Unmarried or legally separated as of 12/31

    • And not qualified as married filing separately, head of household or qualifying widow[er]

  • Married Filing Jointly [MFJ]

    • If married on 12/31 – even if didn’t live together entire year

    • Same-sex couples may not file jointly

    • If spouse dies during year you can file MFJ in current year

  • Married Filing Separately [MFS]

    • Each file separate returns

    • Must compute taxes the same way - both itemize or both use standard

    • If living in community property state, must follow state law to determine community and separate income

Filing status1
Filing Status

*See p. 1-10 for requirement for abandoned spouse

  • Head of Household [HOH]

    • Tables have lower rates than single or MFS

    • Taxpayer can file as HOH if:

      • Unmarried or abandoned* as of 12/31

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

        • There is one exception to principal residence requirement:if dependent is taxpayer’s parent, he/she doesn’t have to live with taxpayer

Filing status2
Filing Status

  • Surviving Spouse [SS]

    • Also known as qualifying widow or widower

    • Available in year of spouse’s death and for two subsequent years

      • Must pay over half the cost of maintaining a household where a dependent child, stepchild, adopted child or foster child lives

Personal dependency exemptions
Personal/Dependency Exemptions

  • Personal exemptions may be taken for self/spouse

  • Additional exemptions may be taken for individuals who are either

    • Qualifying child


    • Qualifying relative

  • For 2008 each exemption = $3500

  • Exemption phased out to $2333 when AGI exceeds thresholds found on p. 1-12

Capital gains losses
Capital Gains/Losses

  • A capital asset is any property [personal or investment] held by a taxpayer, with certain exceptions as listed in the tax law

    • Examples: stocks, bonds, land, cars and other items held for investment

    • Gains/losses on these assets are subject to special rates

  • Holding period of asset determines treatment

    • Long term is held >12 months (taxed at capital rates)

    • Short term is held <= 12 months (taxed at ordinary rates)