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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)