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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