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Chapter 13

Chapter 13. Individual Income Tax and Tax Planning. Federal Income Tax Law Objectives. Revenue-raising objectives Economic objectives Social objectives. Individual Income Tax Rates. Ordinary rates Capital gain rates Capital asset/dividends Sale or exchange Long-term holding period

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Chapter 13

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  1. Chapter 13 • Individual Income Tax and Tax Planning

  2. Federal Income Tax Law Objectives • Revenue-raising objectives • Economic objectives • Social objectives

  3. Individual Income Tax Rates • Ordinary rates • Capital gain rates • Capital asset/dividends • Sale or exchange • Long-term holding period • Alternative minimum tax (AMT) rates

  4. Determining Income Tax Liability—Taxable Income • Total income (from whatever source derived) • Less: Exclusions from gross income • Gross income • Less: Deductions for adjusted gross income • Adjusted gross income (AGI) • Less the larger of: standard deduction or itemized deductions • Less: personal and dependency exemptions • Taxable income

  5. Deductions for AGI • Business expenses • Net capital losses ($3,000) • Self-employed expenses • Alimony paid • IRA contributions • Moving expenses • Education expenses

  6. Itemized Deductions • Medical expenses (>7.5% AGI) • State and local income taxes • Property taxes • Mortgage interest • Investment expenses (<Investment income) • Charitable contributions • Casualty/theft losses (>10% AGI + $100) • Miscellaneous (>2% AGI)

  7. IRS Guidance • Letter rulings • Determination letters • Revenue rulings • Private letter rulings • Revenue procedures • Technical advice memoranda • Taxable income and tax rates • Tax credits

  8. The IRS Audit Process • Penalties • Failure-to-file penalties • Failure-to-pay-tax penalties • Accuracy-related penalties • Fraud penalties • Audit process • Selection and screening process • Types of audits • Outcomes of audits

  9. Payroll Taxes • FICA taxes for employers and employees • 6.2% OASDI on $102,800 (2009) and $ (2010) • 1.45% Medicare • Self-employment tax • Double the employee’s rate • FUTA tax calculation • Tax avoidance versus tax evasion

  10. Tax-Advantaged Investments • Investment in tax-exempt securities • Tax shelters • Employee benefits • Acceleration of deductions • Deferral of tax gains • Exemption opportunities

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