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Income Taxation of Individuals. Chapter 11. Individual Income Tax Model. Gross income Less: Deductions for adjusted gross income Equals: Adjusted Gross Income (AGI) Less: Itemized or standard deduction Less: Personal & dependency exemptions Equals: Taxable income.

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individual income tax model
Individual Income Tax Model

Gross income

Less: Deductions for adjusted gross income

Equals:Adjusted Gross Income (AGI)

Less: Itemized or standard deduction

Less: Personal & dependency exemptions

Equals: Taxable income

tax model continued
Tax Model (continued)

Taxable income

Times: Tax rate

Equals: Gross income tax liability

Less: Tax credits

Plus: Additions to tax

Less: Tax prepayments

Equals: Net tax due or tax refund

deductions for agi
Deductions For AGI
  • Deductions discussed in previous chapters
    • Retirement plan contributions including IRAs
    • Moving expenses
    • 50% of self-employment taxes
    • Self-employed health insurance
    • Alimony paid
deductions for agi1
Deductions For AGI
  • Deductions discussed in this chapter
    • Educator expenses
    • Student loan interest expense
    • Tuition and fees deduction
    • Health savings accounts
    • Penalty on early withdrawals of savings
    • Other deductions for AGI
educator expenses
Educator Expenses
  • Kindergarten through 12th grade teachers may deduct up to $250 of unreimbursed expenses for books, supplies, computer equipment, software, and other supplemental materials used in the classroom
    • This provision expired at the end of 2009 but is expected to be extended retroactively by Congress to 1/1/10
student loan interest
Student Loan Interest
  • Deduction allowed for interest paid on qualified student loans incurred and used for tuition, fees, room, board, books, and supplies
  • Deduction limit is $2,500
    • Limit is phased out for modified AGI of $60,000 - $75,000 ($120,000 - $150,000 for married persons filing jointly)
    • Individuals claimed as dependents cannot take deduction on their own tax return
    • Eligible expenses must be reduced for tax-exempt scholarships and education credits
tuition fees deduction
Tuition & Fees Deduction
  • $4,000 deduction for tuition & fees for taxpayer, spouse, and dependents expired at the end of 2009 (but is expected to be extended retroactively)
    • Income limits apply ($65,000 if single and $130,000 if married filing jointly)
    • Deduction is reduced to $2,000 for singles with income $65,000 - $80,000 ($130,000 - $160,000 for joint filers)
    • Individuals who are claimed as dependents cannot take deduction on their own tax return
health savings accounts
Health Savings Accounts
  • Taxpayers covered by high-deductible medical insurance policies only may deduct amounts set aside in an HSA
  • Contributions and earnings on HSAs are not taxed when withdrawn to pay medical expenses
    • Distributions not spent on qualifying expenses are included in income and subject to a 10% penalty
health savings accounts1
Health Savings Accounts
  • To qualify for an HSA in 2010, individuals must have health insurance with deductibles of at least $1,200 ($2,400 for families)
  • Maximum deductible contribution to HSA for 2010 is $3,050 ($6,150 for families)
medical savings accounts
Medical Savings Accounts
  • MSAs are similar to HSAs but with different limits
    • Qualified policies are those with deductibles of $2,000 - $3,000 for individuals ($4,050 - $6,050 for families) in 2010
    • Contributions to MSAs are limited to 65% of policy deductible for individuals (75% for families)
    • Distributions not spent on qualifying expenses are included in income and subject to a 15% penalty
penalty on early withdrawals
Penalty on Early Withdrawals
  • Penalties assessed on premature withdrawals from certificates of deposits or other savings accounts are deductible
    • Gross interest income, unreduced by the penalty, is included in taxable income
    • Deducting the penalty ensures that only net interest income is included in taxable income
other deductions for agi
Other Deductions For AGI
  • Unreimbursed travel expenses to attend National Guard or military reserve meetings more than 100 miles from home
    • Maximum deduction is general government per diem rate for the area
  • Expenses of fee-basis government officials
  • Expenses of performing artists
exemptions
Exemptions
  • Each taxpayer (who is not a dependent) is entitled to one personal exemption
  • Exemption deduction is $3,650 for 2010 and 2009
  • Additional exemptions allowed for each person who is considered a dependent
    • Anyone who is claimed as a dependent cannot claim a personal exemption
    • For purposes of the dependency exemption, a dependent is a qualifying child or qualifying relative
qualifying child
Qualifying Child
  • Must meet four tests
    • Residency test - live with taxpayer more than 6 months
    • Relationship test - son, daughter, brother, sister, or descendant
    • Age test - under 19 (or under 24 if full-time student)
    • Support test - child cannot provide more than half his/her own support
qualifying relative
Qualifying Relative
  • If not a qualifying child, then three similar tests must be met:
    • Relationship test - must either be a qualifying relative of the taxpayer or a resident in the taxpayer’s household for the entire year
    • Gross income test - the qualifying relative's gross income from taxable sources must be less than the exemption amount ($3,650 for 2010)
    • Support test
the support test
The Support Test
  • Taxpayer must provide more than 50% of the dependent's total support
    • Support includes amounts spent for food, clothing, shelter, medical care, education and capital expenditures such as a car
    • Value of services and scholarship funds are omitted in determining support received by a student
    • Dependent’s nontaxable income used for support must be included
multiple support agreement
Multiple Support Agreement
  • Multiple support agreements allow one member of group of support providers to claim the exemption when
    • Together the group meets the support test
    • All other dependency tests are met
    • Member who claims exemption must provide more than 10% of the total support and other members providing more than 10% support agree to exemption
phaseout of exemptions
Phaseout of Exemptions
  • No exemption phaseout for 2010
  • For 2009, one-third of both personal and dependency exemptions were phased out at a rate of 2% for each $2,500 ($1,250 if MFS), or fraction thereof, of AGI (up to a maximum of 100%) above thresholds of
    • $166,800 if single
    • $208,500 if head of household
    • $250,200 if married filing jointly
    • $125,100 if married filing separately
exemption phaseout
Exemption Phaseout
  • (AGI – threshold AGI)/$2,500 = Phaseout Factor (always rounded up to next whole number)
  • Phaseout Factor x 2 = Phaseout Percentage
  • Phaseout Percentage x Exemption Amount x 1/3 = Exemption Reduction
  • Exemption Amount – Exemption Reduction = Allowable Exemption Deduction
    • Once AGI exceeded the threshold AGI by more than $122,500 ($61,250 for MFS), the maximum deduction was $2,433 per exemption
filing status
Filing Status
  • Taxpayer’s filing status determines standard deduction and tax rate schedule
  • Marital status determined on the last day of the tax year
    • Separated spouses are considered married until divorce becomes final
filing status married
Filing Status - Married
  • Can file jointly if both spouses are US citizens or US residents (or if nonresident alien agrees to be taxed on worldwide income)
  • If the couple files separately, both must itemize deductions or both must use the standard deduction
surviving spouse
Surviving Spouse
  • Marital status is determined at the date of death so a joint return can be filed for the year in which a spouse dies
  • A surviving spouse may continue to use the tax rates and standard deduction for married persons filing jointly for the next 2 years only if a dependent child lives with the taxpayer
filing status unmarried
Filing Status – Unmarried
  • Unmarried taxpayers file as
    • Head of household – an unmarried person who provides more than half of the cost of maintaining a home in which a qualifying child or other qualifying relative lives for more than half the year
    • Single – taxpayer who does not qualify for another filing status
head of household
Head of Household
  • Claimed if taxpayer is unmarried (and not a surviving spouse)
  • Taxpayer pays more than half the cost of maintaining home which is the principal residence for more than half the year of
    • A qualifying child
    • An individual for whom the taxpayer may claim a dependency exemption
      • A parent is not required to live with the taxpayer
abandoned spouse
Abandoned Spouse
  • A taxpayer who is married but whose spouse did not live with him or her at any time during the last six months of the tax year and who provides more than half the cost of maintaining the home in which a dependent child lives
  • A qualifying abandoned spouse uses head of household tax rates and standard deduction
standard deductions
Standard Deductions
  • Standard Deductions for 2010 and 2009
    • $11,400 married filing a joint return
    • $5,700 married filing separately
    • $8,400 head of household ($8,350 for 2009)
    • $5,700 single individual
  • Additional standard deduction if taxpayer is elderly (age 65 or older) or blind
    • $1,400 if single or head of household
    • $1,100 if married
2009 temporary additions to standard deduction
2009 Temporary Additions toStandard Deduction

Taxpayers were allowed an additional standard deduction in 2009 (with retroactive extension expected to 2010) equal to the lesser of

State and local real property taxes paid or

$500 ($1,000 if married filing a joint return)

Taxpayers with personal casualty losses incurred in federally declared disaster areas that occurred before 1/1/2010

Could increase their standard deduction for their casualty loss or

Claim the casualty losses with itemized deductions

2009 temporary additions to standard deduction1
2009 Temporary Additions toStandard Deduction
  • To promote the sales of automobiles, taxpayers could increase their standard deduction for sales tax paid on the purchase of an automobile purchased after 2/16/09 and before 1/1/2010
    • Deduction limited to tax on no more than $49,500
    • Deduction was phased out for modified AGI between $125,000 and $135,000 ($250,000 and $260,000 if MFJ)
  • Taxpayers who itemized claimed the sales tax on an automobile as part of their overall sales tax deduction
dependent s standard deduction
Dependent’s Standard Deduction
  • Dependent’s standard deduction is limited to the greater of:
    • $950 or
    • Earned income + $300 (up to otherwise allowable standard deduction)
    • Earned income includes salary and wages
    • Earned income does not include interest income, dividend income, capital gains, or income as beneficiary of a trust
itemized deductions
Itemized Deductions
  • Itemized deductions provide tax benefit only to the extent that, in total, they exceed the taxpayer’s standard deduction
  • Taxpayers can maximize use of the standard deduction and itemized deductions by timing certain deductible payments
medical expenses
Medical Expenses
  • Medical expenses paid for the taxpayer, spouse and dependents, after reduction for insurance reimbursements, are deductible only to the extent they exceed 7.5% of AGI for the year
  • Qualified medical costs includes prescription drugs and insulin, costs of a hospital, clinic, doctor, dentist, eyeglasses, contract lenses, transportation for medical care and health insurance costs
medical expenses1
Medical Expenses
  • Health insurance premiums for taxpayers and their dependents are deductible only if paid from after-tax income
    • Premiums paid through an employer-sponsored cafeteria plan are not deductible
    • Premiums for disability insurance and for loss of life, limb or income are not deductible
    • Premiums for long-term care insurance are deductible, subject to limits based on age
deductible taxes
Deductible Taxes
  • Deductible taxes include
    • State, local, and foreign real property taxes
    • State and local personal property taxes
    • State, local, and foreign income taxes
    • Other federal, state, local, and foreign taxes incurred in a business or other income-producing activity
deductible taxes1
Deductible Taxes
  • Taxpayers could elect to deduct state and local general sales taxes instead of state and local income taxes as itemized deductions for 2009 (an extension to 2010 is expected)
    • Taxpayers who paid sales tax on the purchase of an automobile only received a tax benefit from the sales tax deduction if they did not claim a deduction for state or local income taxes
    • Taxpayers could use the actual sales tax paid or IRS-published tables (if tables used, the actual sales tax paid on an auto was added to the table amount)
nondeductible taxes
Nondeductible Taxes
  • Nondeductible taxes include
    • Federal income taxes
    • Employee's share of payroll taxes
    • Federal excise taxes not incurred for business
    • Assessments on property that increase property value
interest expense
Interest Expense
  • Deductible interest includes
    • Investment interest
    • Home mortgage interest
  • No deduction for most other personal interest (except previously mentioned student loan interest) including interest on
    • Auto loans
    • Life insurance loans
    • Credit card debt
    • Delinquent tax payments
investment interest expense
Investment Interest Expense
  • Investment interest includes interest on loans to acquire or hold investment property and margin account interest paid to a broker
  • Investment interest expense is only deductible to the extent of net investment income
    • Net investment income = excess of investment income over investment expenses
  • Excess is carried forward (indefinitely) subject to same limit in future years
investment interest expense1
Investment Interest Expense
  • Investment incomeincludesgross income from interest, annuities, and short-term capital gains from investment property
    • Long-term capital gains or dividends taxed at favorable rates are excluded unless election made to forgo the favorable rate
  • Investment expenses include safe deposit box rental fees, investment counsel fees, brokerage account maintenance fees
    • Limited to the lesser of total investment expenses or net miscellaneous itemized deductions after reduction for 2% AGI floor
qualified residence interest
Qualified Residence Interest
  • Interest paid for acquisition debt or home equity debt for up to 2 qualified residences
  • Interest on acquisition debt of up to $1 million principal amount (combined limit for 2 homes) is deductible
    • Acquisition debt includes mortgage to buy, construct, or improve the residence
qualified residence interest1
Qualified Residence Interest
  • Interest on up to $100,000 principal amount of home equity loan is deductible
    • Loan proceeds can be used for any purpose
  • Points (loan origination fees) paid on initial home mortgages are deductible
    • Points paid to refinance an exiting loan must be amortized over life of loan
  • For 2007 – 2010, an additional deduction is allowed for mortgage insurance premiums paid on home acquisition debt
charitable contributions
Charitable Contributions
  • Congress allows individuals, corporations, estates and trusts to deduct contributions to certain qualified organizations
  • Partnerships and S corporations pass the contributions through to their partners and shareholders who then claim the deductions on their own income tax returns
charitable contributions1
Charitable Contributions
  • Qualified charitable organizations
    • Governmental units (federal, state and local governments) and entities formed and operated exclusively for religious, charitable, scientific, literary or educational purposes, including churches, nonprofit hospitals, school and universities, libraries, and social service agencies
  • Direct contributions to needy individuals are notdeductible
charitable contributions2
Charitable Contributions
  • No deduction allowed to the extent that valuable goods or services are received in return for the contribution
    • Exception - contributors to universities who receive preferred rights to purchase tickets for university athletic events may deduct 80% of the amount of their contribution
  • Individual’s deduction limited to 50% of AGI
    • Excess contributions may be carried forward up to 5 years
charitable contributions3
Charitable Contributions
  • No deduction for contributions of the taxpayer’s services and rent-free use of the taxpayer’s property
    • Out-of-pocket costs incurred for volunteer work for a qualifying charity are deductible
  • Property other than long-term capital gain property is valued at lesser of FMV or basis
contributions of ltcg property
Contributions of LTCG Property
  • LTCG property is valued at FMV (which is usually greater than adjusted basis)
    • Tangible personalty given to a charity which does not use the property in its tax-exempt activity is valued at adjusted basis, if lower than FMV
  • Deduction for LTCG property limited to 30% of AGI
    • 30% limit can be avoided (and 50% AGI limit applied) if taxpayer elects to use lower basis
    • If made, election applies to all LTCG contributions that year
charitable contributions4
Charitable Contributions
  • Stocks or other income producing property that have declined in value should be sold so that the loss can be claimed with the sale proceeds donated
  • Fees incurred for appraisals of donated property may be deducted as a miscellaneous itemized deductions
  • Deduction for donated vehicles sold by charity limited to gross sales proceeds
charitable contributions5
Charitable Contributions
  • Since 2007, all cash contributions must be substantiated by a
    • bank record (such as a canceled check, bank copy of a canceled check, credit card statement or bank statement containing the name of the charity, the date, and the amount), or
    • written communication from the charity including the charity’s name, contribution date, and amount
    • Payroll deduction records (pay stub or W-2 form) plus pledge card or other document showing name of organization, date, and amount
charitable contributions6
Charitable Contributions
  • Contributions of $250 or more require
    • A written acknowledgment showing date & amount of contribution along with an estimate of the value of any goods or services you received
  • Noncash contributions of up to $500 require
    • A written acknowledgment showing name of charity, your name, date and location of the contribution, and a detailed description of the property
    • Documentation of your cost for the property and an explanation of how you determined its fair market value
charitable contributions7
Charitable Contributions
  • Noncash contributions over $500 require an acknowledgement and written records plus
    • How you acquired the property (purchase, gift, inheritance or exchange
    • Date you acquired the property
    • Cost basis of property
  • For noncash contributions over $5,000, you must obtain a qualified appraisal
casualty and theft losses
Casualty and Theft Losses
  • Loss is the lesser of
    • Asset’s adjusted basis or
    • Decline in asset’s fair market value as a result of the casualty
  • Loss is reduced for any insurance proceeds received
  • $100 floor for 2010 ($500 floor for 2009) applies to each casualty
  • Deductible only to extent total losses exceed 10% of AGI
    • 10% threshold does not apply to presidentially declared disasters in 2009
miscellaneous deductions
Miscellaneous Deductions
  • Only excess over 2% of AGI is deductible
    • Unreimbursed employee business expenses
    • Job hunting expenses (in searching for a new job in current line of business)
    • Investment-related expenses
    • Hobby expenses (up to hobby income)
    • Tax preparation and planning advice
2009 phaseout of itemized deductions
2009 Phaseout ofItemized Deductions
  • No itemized deduction phaseout for 2010
  • For 2009, total deductions phased out by 1/3 x 3% of AGI in excess of $166,800 in 2009 ($83,400 if MFS)
  • Exception - deductions not phased out for
    • Medical expenses
    • Investment interest
    • Casualty and theft losses
  • Total deductions were not reduced by more than 80% x 1/3 regardless of type
net operating losses
Net Operating Losses
  • Individuals must make several adjustments to arrive at a potential NOL because an NOL can only result from business losses
    • No deduction for personal or dependency exemptions
    • Nonbusiness capital losses can only offset nonbusiness capital gains
    • Nonbusiness deductions (most itemized deductions) can only offset nonbusiness income (such as interest & dividends)
tax rates for married filing a joint return
Tax Rates forMarried Filing a Joint Return
  • For married filing a joint return for 2010
    • 10% on first $16,750 taxable income
    • 15% on $16,751 - $68,000
    • 25% on $68,001 - $137,300
    • 28% on $137,301 - $209,250
    • 33% on $209,251 - $373,650
    • 35% over $373,650
tax rates for married filing separately
Tax Rates forMarried Filing Separately
  • For married filing separately for 2010
    • 10% on first $8,375 taxable income
    • 15% on $8,376 - $34,000
    • 25% on $34,001 - $68,650
    • 28% on $68,651 - $104,625
    • 33% on $104,626 - $186,825
    • 35% over $186,825
tax rates for head of household
Tax Rates forHead of Household
  • For head of household for 2010
    • 10% on first $11,950 taxable income
    • 15% on $11,951 - $45,550
    • 25% on $45,551 - $117,650
    • 28% on $117,651 - $190,550
    • 33% on $190,551 - $373,650
    • 35% over $373,650
tax rates for single individuals
Tax Rates for Single Individuals
  • For single individuals for 2010
    • 10% on first $8,375 taxable income
    • 15% on $8,376 - $34,000
    • 25% on $34,001 - $82,400
    • 28% on $82,401 - $171,850
    • 33% on $171,851 - $373,650
    • 35% over $373,650
2010 tax rate schedule for single individuals
2010 Tax Rate Schedulefor Single Individuals
  • If taxable income is not over $8,375, tax is 10% of taxable income
  • If taxable income is over $8,375 but not over $34,000, tax is $837.50 + (15% x excess over $8,375)
  • If taxable income is over $34,000 but not over $82,400, tax is $4,681.25 + (25% x excess over $34,000)
  • If taxable income is over $82,400 but not over $171,850, tax is $16,781.25 + (28% x excess over $82,400)
  • If taxable income is over $171,850 but not over $373,650, tax is $41,827.25 + (33% x excess over $171,850)
  • If taxable income is over $373,650, tax is $108,421.25 + (35% x excess over $373,650
special tax rates
Special Tax Rates
  • Dividend income is taxed at a maximum of 15% (zero rate for taxpayers in 10% or 15% tax brackets)
  • Individuals with long-term capital gains file a Schedule D which includes a worksheet for determining the total tax liability
    • LTCG rate generally 15% (zero rate for taxpayers in 10% or 15% tax brackets)
    • 28% rate for collectibles
    • 25% rate for unrecaptured §1250 gain & taxable portion of §1202 small business stock
credits vs deductions
Credits vs. Deductions
  • Deductions only reduce tax liability by a percentage based on the taxpayer’s marginal tax rate
  • Credits are direct dollar-for-dollar reductions in the gross tax liability
    • Tax credits have the same dollar value to all taxpayers, regardless of their marginal tax brackets
child tax credit
Child Tax Credit
  • $1,000 nonrefundable tax credit for each qualifying child under age 17
    • Qualifying children include the taxpayer’s son, daughter, stepson, stepdaughter, grandchild, or eligible foster child that the taxpayer claims as a dependent
  • Phased out at rate of $50 for every $1,000 (or part thereof) of AGI in excess of
    • $110,000 if married filing jointly ($55,000 if MFS)
    • $75,000 if single or head of household
education credits
Education Credits
  • Two elective nonrefundable tax credits are provided for college or vocational tuition and fees for the taxpayer, spouse, or dependents
    • American Opportunity Credit– 100% of first $2,000 and 25% of second $2,000 tuition and fees for first 4 years only (maximum $2,500 per student)
    • Lifetime Learning Credit– 20% of up to $10,000 tuition and fees (maximum $2,000 per taxpayer)
    • A student who is a dependent cannot claim the credit
education credits1
Education Credits
  • Expenses paid with a Pell Grant, scholarship, or employer-provided educational assistance do not qualify
  • Election is separate for each student, so a parent may choose one credit for one child and a different credit for a second child
  • Credits phase out over modified AGI of
    • $80,000 - $90,000 if single ($160,000 - $180,000 if MFJ) for American Opportunity credit
    • $50,000 - $60,000 if single ($100,000 - $120,000 if MFJ) for Lifetime Learning credit
dependent care credit
Dependent Care Credit
  • Nonrefundable credit for taxpayers who pay for child or dependent care so they can work
  • Credit percentage varies from 20% to 35% of up to $3,000 for one qualifying child or $6,000 for 2 or more qualifying children under 13
    • 35% if AGI does not exceed $15,000
    • Reduced by 1% for each $2,000 (or fraction thereof) AGI exceeds $15,000
    • 20% if AGI exceeds $43,000
first time homebuyer credit
First-Time Homebuyer Credit
  • Credit applies to purchase of principal residence if no home owned (by taxpayer or spouse) during 3 prior years. This refundable tax credit is equal to the lesser of
    • 10% of the purchase price of a principal residence
    • $8,000 maximum ($4,000 for married filing separately) if purchased from 1/1/09 through 11/30/09
    • $7,500 maximum ($3,750 if MFS) if purchased from 4/9/08 through 12/31/08
  • Cannot be acquired from a related party
first time homebuyer credit1
First-Time Homebuyer Credit
  • Credit phases out when modified AGI is between $75,000 and $95,000 ($150,000 - $170,000 for married filing jointly)
  • Credit is recaptured (must be repaid)
    • If home purchased in 2009 ceases to be taxpayer’s principal residence within 36 months then lesser of gain on sale or entire credit is recaptured
    • If purchased in 2008, credit must be recaptured over 15 years (effectively an interest-free loan)
expanded homebuyer credit
ExpandedHomebuyer Credit
  • In late 2009 the $8,000 credit was extended to 4/30/10 and expanded to include a long-time resident credit of $6,500
    • $6,500 credit for homebuyers who owned & used their previous home as principal residence for 5 out of last 8 years before sale
    • For all purchases after 11/6/09, the phaseout ranges increased to $125,000-$145,000 for individuals and $225,000-$245,000 for MFJ
    • Credit cannot be claimed for any home with a purchase price exceeding $800,000
earned income credit
Earned Income Credit
  • The purpose is to reduce the impact of payroll taxes for low-income individuals
  • Credit is equal to a percentage of earned income below a maximum
    • With one qualifying child, maximum credit is $3,050 ($8,970 x 34%) for 2010
    • With two qualifying children, maximum credit is $5,036 ($12,590 x 40%)
    • With three or more qualifying children, maximum credit is $5,666 ($12,590 x 45%)
    • Smaller credit available to taxpayers without children
earned income credit1
Earned Income Credit
  • This is a refundable credit
  • Credit starts phasing out when income exceeds $21,460 if married filing jointly ($16,450 for others)
  • Taxpayers with investment income of $3,100 or more are not eligible
  • Anyone who can be claimed as a dependent is not eligible
  • A taxpayer without a qualifying child, must be between the ages of 25 and 64 to be eligible
making work pay credit
Making Work Pay Credit
  • New refundable credit for 2009 and 2010 for Social Security taxes paid by middle-income workers of 6.2% of earned income
    • Maximum credit $400 ($800 for a joint return)
  • Phased out at rate of 2% of modified AGI in excess of
    • $75,000 for individuals
    • $150,000 for married filing jointly
  • Most taxpayer will get benefit through reduction in income tax withholding
retirement contributions credit
Retirement Contributions Credit
  • To encourage participation by low-income wage earners, a credit is allowed for up to 50% of the first $2,000 contributed to employer-sponsored retirement plans or IRAs
  • Credit varies with AGI
    • 50% credit for joint filers with AGI up to $33,500 ($16,750 if single)
    • 20% for joint filers with AGI of $33,500 - $36,000 ($16,750 - $18,000 if single)
    • 10% for joint filers with AGI of $36,000 - $55,500 ($18,000 - $27,750 if single)
    • Dependents or full-time students are not eligible
excess payroll tax credit
Excess Payroll Tax Credit
  • Taxpayers working for more than one employer during the year with earnings exceeding the Social Security ceiling ($106,800 for 2009 and 2010) usually have too much tax withheld
  • Employee is allowed a refundable credit for any excess Social Security taxes withheld
credits for energy efficiency
Credits for Energy Efficiency
  • 30% for qualified energy efficiency improvements ($1,500 maximum credit per taxpayer)
  • 30% for solar, wind, and geothermal property
  • Credit for hybrid vehicles (varies with type of vehicle)
    • $2,200 credit for Cadillac Escalade 2WD hybrid
    • $2,350 credit for Nisson Altima hybrid
    • Up to $5,000 credit for plug-in electric cars
payment of income tax
Payment of Income Tax
  • Estimated quarterly payments are made by persons with large amounts of income from sources not subject to withholding
    • Due on April 15, June 15, September 15 of current year and January 15 of following year
  • If payments are not 90% or more of the total tax owed (or an amount required based on the prior year’s tax), a penalty may be charged, unless balance due is less than $1,000
filing requirements
Filing Requirements
  • Any taxpayer whose gross income is less than the sum of their standard deduction and their personal exemption (but not dependency exemptions) does not have to file a tax return
    • $9,350 in 2010 for a single individual
  • Returns should be filed if
    • Net self-employment income is $400 or more
    • A child claimed as a dependent has unearned income only of over $950
    • Any married person filing separately has income over $3,650
alternative minimum tax
Alternative Minimum Tax
  • The purpose of the alternative minimum tax is to ensure high-income taxpayers pay their fair share of tax
  • Certain deductions are disallowed or reduced and certain exempt income items are subject to the AMT
  • IF AMT is greater than the regular tax, taxpayers pay the larger amount
  • Rate is 26% on first $175,000 and 28% on excess for individuals
amt model
AMT Model

Taxable income

Plus/minus Adjustments to taxable income

Plus: Tax preferences

Less: Allowable exemptions

Equals: Alternative minimum taxable income

Times: AMT tax rates

Equals: Tentative minimum tax (TMT)

Less: Regular income tax

Equals: AMT

amt exemptions
AMT Exemptions
  • If higher 2009 exemption amounts are not extended by Congress, they will decline for 2010 to
    • $45,000 if married filing jointly ($70,950 for 2009)
    • $22,500 if married filing separately ($35,475)
    • $33,750 if single or head of household ($46,700)
  • Exemptions begin to phase out when AMTI reaches $112,500 for singles and $150,000 for married filing jointly ($75,000 if MFS) at a rate of $1 for every $4 above the threshold
alternative minimum tax1
Alternative Minimum Tax
  • Itemized deductions are different from those calculated for regular income tax
    • Medical expenses must exceed 10% AGI
    • Taxes, home equity loan interest, and miscellaneous itemized deductions are not deductible
  • Tax preferences that are added include
    • Nontaxable interest on private activity bonds
    • Bargain element of incentive stock options