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CHAPTER 1 The Individual Income Tax Return. Income Tax Fundamentals 2011 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 1The Individual Income Tax Return

Income Tax Fundamentals 2011 edition

Gerald E. Whittenburg

Martha Altus-Buller

Student’s Copy

2011 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

      • Credits for investment in solar and wind energy

      • Can deduct charitable contributions

      • Credits for higher education expenses

    • Economic policy as manifested by fiscal policy

      • Encourage investment in capital assets through depreciation

    • Both economic and social

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

2011 Cengage Learning

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.

2011 Cengage Learning

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

2011 Cengage Learning

Standard deductions exemption
Standard Deductions & Exemption

  • 2010 standard deduction ($)

    • Single 5,700

    • Married Filing Joint (MFJ) 11,400

    • Qualifying Widow(er) 11,400

    • also known as Surviving Spouse (SS)

    • Head of Household (HOH) 8,400

    • Married Filing Separate (MFS) 5,700

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

    • $1,100 if MFJ, MFS or SS

    • $1,400 if HOH or Single

  • 2010 exemption$3,650 – personal & dependency

2011 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

2011 Cengage Learning

Filing status1
Filing Status

  • 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 child or other qualifying dependent relative

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

          Note: A divorced parent who meets above rules and

          has signed IRS/legal document, may still claim HOH even if dependency exemption shifted to ex-spouse

*See pages 1-10 and 1-11 for requirement for abandoned spouse

2011 Cengage Learning

Filing status2
Filing Status

  • Qualifying Widow(er) with Dependent Child

    • Also known as surviving spouse

    • Available for two subsequent years after death of spouse

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

    • Gets benefits of married filing joint tax rates

2011 Cengage Learning

Personal dependency exemptions
Personal/Dependency Exemptions

  • Personal exemptions may be taken for self and spouse

  • Additional exemptions may be taken for individuals who are either taxpayer’s

    • Qualifying child


    • Qualifying relative

  • For 2010 each exemption = $3,650

    In years prior to 2010, exemptions phased-out for high-

    income taxpayers. It is anticipated that the phase-out

    will be reintroduced in 2011

2011 Cengage Learning

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 – see next screen)

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

2011 Cengage Learning