HANDOUT. Federal Income Taxes Corporations and Individuals. Income Taxes. Cliche - “There are only two things certain in life - death and taxes.” This is one of most written about and discussed topics in American life.
Federal Income Taxes
Corporations and Individuals
The difference between the short and long income tax forms is simple. If you use the short form, the government gets your money. If you use the long form, the accountant gets your money.
A nervous taxpayer was unhappily conversing with the IRS auditor who had come to review his records. At one point the auditor exclaimed, Mr. Carr, we feel it is a great privilege to be allowed to live and work in the USA. As a citizen you have an obligation to pay taxes, and we expect you to eagerly pay them with a smile. Thank God, returned Mr. Carr. I thought you were going to want cash.
Even worse accounting jokes are available on the Web.
We are all experts in this field - NOT!
Which is illegal?
i.e., the amount on which the corp. pays tax.
“The depreciable period or useful life used for tax purposes is based on law and has no relationship to the actual useful life of the asset; thus, no attempt is made to match revenues and expenses.”
i.e., they are never shown on the tax return
These are differences between taxable income and book income caused by items that affect both, but in different periods.
Therefore, they are also calledtiming differences.
Temporary/timing differences include:
Reconciliation of Book Income to Taxable Income (p. 22)
per tax return
A reconciliation must be used to explain why book and taxable income differ.
All temporary differences require the use of interperiod income tax allocation.
Tax on the item causing the difference will be reported in the period in which the item is reported for accounting purposes, regardless of when it is reported for tax purposes. (i.e., there must be a “normal” relationship between Pretax Income and Income Tax Expense on the Income Statement.)
* Note normal 15% relationship each year. This would not be the case if the amount of tax paid (i.e., amount on tax return) were reported as the income tax expense on the income statement.
[Per Tax Return]
[Per Income Statement
Joe P. Taxpayer 123 45 6789
Sally L. Taxpayer 987 65 4321
123 Main Street
Anywhere, USA 55555-5555
Kenny Taxpayer Son
Posh Taxpayer Daughter
Tinkie Winky Taxpayer ???
Whether an individual needs to file a tax return depends on whether their income exceeds the sum of:
Four Filing Statuses
Examples of Excluded IncomeGifts, inheritances, interest on state bonds,
certain Social Security benefits. (NOTE: These items are not deducted! They are just never included.)
Also includes illegal gambling income and other illegal income.
Flow Chart for Determination of Taxable Income for Individual Taxpayer (p. 25)
Know the model!
Gross (Total) Income
Includes all income from whatever source derived except for a few specifically excluded items. Includes such items as wages, dividends, interest, proprietorship earnings, taxpayer’s share of partnership earnings, net rents.
Examples: Individual Retirement Accounts (IRA) and Keogh plans.
Deductions From Gross Income
Consists of business expenses, payments to an individual retirement arrangement, and a few other minor items.
Adjusted Gross Income
Standard Deduction - A specified amount that is permitted by tax law to be deducted in lieu of itemized deductions. It changes each year because it is indexed to inflation.
Standard or Itemized Personal Deductions
Deduct the higher of the standard deduction or itemized personal deductions. Itemized deductions consist of contributions, mortgage interest, certain taxes levied directly against the taxpayer, limited casualty and theft losses, limited medical expenses and certain “nonbusiness” expenses. The standard deduction for a single taxpayer for 1998 was $4,250.
One fixed amount (e.g., $2,700 for 1998)for taxpayer, one for spouse and one for each dependent. At certain levels of Adjusted Gross Income, personal exemptions are phased out.
Types of Itemized Deductions
No longer deductible on consumer loans
Types of Itemized Deductions
(Which you do not need to know)
Your taxable income is understated. You cannotclaim Babe as an exemption!
Marginal Tax Rate - The rate applied to the next dollar of taxable income.
Total Taxes Paid Total Taxable Income
Effective Tax Rate - The average rate of taxation on a given amount of taxable income.
Assume that a Tom (a single taxpayer) has taxable income of $63,000. Using the rate schedule in the handout, his tax liability, marginal tax rate and average tax rate would be determined as follows:
Tax on income up to $49,300 $11,158Tax on income above $49,300 (31% x $13,700 [$63,000 - $49,300]) 4,247Tax Liability $15,405
Marginal tax rate = 31%
Average tax rate = $15,405/$63,000 = 24.5%