individual income taxes c3-1 chapter 3 tax formula and tax determination; an overview of property...

C3-C3-11Individual Income TaxesIndividual Income TaxesIndividual Income TaxesIndividual Income Taxes

Chapter 3Chapter 3

Tax Formula and Tax Determination; An Overview of Property Transactions

Tax Formula and Tax Determination; An Overview of Property Transactions

Copyright ©2010 Cengage Learning

Individual Income Taxes


Tax Formula (slide 1 of 2)Tax Formula (slide 1 of 2)

Income (broadly conceived) $x,xxxLess:Exclusions (x,xxx)Gross Income $x,xxxLess:Deductions for AGI (x,xxx)Adjusted Gross Income (AGI) $x,xxxLess:The greater of-

Total itemized deductionsor the standard deduction (x,xxx)Personal & dependency exemptions (x,xxx)

Taxable Income $x,xxx

Income (broadly conceived) $x,xxxLess:Exclusions (x,xxx)Gross Income $x,xxxLess:Deductions for AGI (x,xxx)Adjusted Gross Income (AGI) $x,xxxLess:The greater of-

Total itemized deductionsor the standard deduction (x,xxx)Personal & dependency exemptions (x,xxx)

Taxable Income $x,xxxFIGURE 3–1


Tax Formula (slide 2 of 2)Tax Formula (slide 2 of 2)

Tax on taxable income (see Tax Tables or Tax Rate Schedules) $ x,xxxLess: Tax credits (including income taxes withheld and prepaid) (xxx)Tax due (or refund) $ xxx

Tax on taxable income (see Tax Tables or Tax Rate Schedules) $ x,xxxLess: Tax credits (including income taxes withheld and prepaid) (xxx)Tax due (or refund) $ xxx

FIGURE 3–1


Income -Broadly ConceivedIncome -Broadly Conceived

• Includes all the taxpayer’s income, both taxable and nontaxable– Essentially equivalent to gross receipts

• It does not include a return of capital or receipt of borrowed funds

• Includes all the taxpayer’s income, both taxable and nontaxable– Essentially equivalent to gross receipts

• It does not include a return of capital or receipt of borrowed funds


Partial List of Exclusions from Gross Income

Partial List of Exclusions from Gross Income

• Accident insurance proceeds• Annuities (cost element)• Bequests• Child support payments• Cost-of-living allowance (for military)• Damages for personal injury or sickness• Gifts received• Group term life insurance, premium

paid by employer (for coverage up to $50,000)

• Inheritances• Interest from state and local (i.e.,

municipal) bonds• Life insurance paid on death

• Accident insurance proceeds• Annuities (cost element)• Bequests• Child support payments• Cost-of-living allowance (for military)• Damages for personal injury or sickness• Gifts received• Group term life insurance, premium

paid by employer (for coverage up to $50,000)

• Inheritances• Interest from state and local (i.e.,

municipal) bonds• Life insurance paid on death

• Meals and lodging (if furnished for employer’s convenience)

• Military allowances• Minister’s dwelling rental value

allowance• Railroad retirement benefits (to a

limited extent)• Scholarship grants (to a limited extent)• Social Security benefits (to a limited

extent)• Unemployment compensation (to a

limited extent)• Veterans’ benefits• Welfare payments• Workers’ compensation benefits

• Meals and lodging (if furnished for employer’s convenience)

• Military allowances• Minister’s dwelling rental value

allowance• Railroad retirement benefits (to a

limited extent)• Scholarship grants (to a limited extent)• Social Security benefits (to a limited

extent)• Unemployment compensation (to a

limited extent)• Veterans’ benefits• Welfare payments• Workers’ compensation benefits

Exhibit 3-1


Gross IncomeGross Income

• The Internal Revenue Code defines gross income broadly as ‘‘except as otherwise provided . . . , all income from whatever source derived’’

• Gross income does not include unrealized gains

• The Internal Revenue Code defines gross income broadly as ‘‘except as otherwise provided . . . , all income from whatever source derived’’

• Gross income does not include unrealized gains


Partial List of Gross Income Items (slide 1 of 2)


• Alimony• Annuities (income element)• Awards• Back pay• Bargain purchase from employer• Bonuses• Breach of contract damages• Business income• Clergy fees• Commissions• Compensation for services• Death benefits• Debts forgiven• Director’s fees

• Alimony• Annuities (income element)• Awards• Back pay• Bargain purchase from employer• Bonuses• Breach of contract damages• Business income• Clergy fees• Commissions• Compensation for services• Death benefits• Debts forgiven• Director’s fees

• Dividends• Embezzled funds• Employee awards (in certain cases)• Employee benefits (except certain

fringe benefits)• Estate and trust income• Farm income• Fees• Gains from illegal activities• Gains from sale of property• Gambling winnings• Group term life insurance,

premium paid by employer (for coverage over $50,000)

• Dividends• Embezzled funds• Employee awards (in certain cases)• Employee benefits (except certain

fringe benefits)• Estate and trust income• Farm income• Fees• Gains from illegal activities• Gains from sale of property• Gambling winnings• Group term life insurance,

premium paid by employer (for coverage over $50,000)

Exhibit 3-2




• Hobby income• Interest• Jury duty fees• Living quarters, meals (unless

furnished for employer’s convenience)

• Mileage allowance• Military pay (unless combat pay)• Notary fees• Partnership income• Pensions• Prizes• Professional fees• Punitive damages

• Hobby income• Interest• Jury duty fees• Living quarters, meals (unless

furnished for employer’s convenience)

• Mileage allowance• Military pay (unless combat pay)• Notary fees• Partnership income• Pensions• Prizes• Professional fees• Punitive damages

• Rents• Rewards• Royalties• Salaries• Severance pay• Strike and lockout benefits• Supplemental unemployment

benefits• Tips and gratuities• Travel allowance (in certain cases)• Treasure trove (found property)• Wages

• Rents• Rewards• Royalties• Salaries• Severance pay• Strike and lockout benefits• Supplemental unemployment

benefits• Tips and gratuities• Travel allowance (in certain cases)• Treasure trove (found property)• Wages

Exhibit 3-2


Deductions - Individual TaxpayersDeductions - Individual Taxpayers

• Individual taxpayers have two categories of deductions: – Deductions for adjusted gross income (AGI) – Deductions from adjusted gross income

• Individual taxpayers have two categories of deductions: – Deductions for adjusted gross income (AGI) – Deductions from adjusted gross income


Deductions For AGI (slide 1 of 2)Deductions For AGI (slide 1 of 2)

• Sometimes known as above-the-line deductions – On the tax return, they are taken before the

‘‘line’’ designating AGI

• Sometimes known as above-the-line deductions – On the tax return, they are taken before the

‘‘line’’ designating AGI


Deductions For AGI (slide 2 of 2)Deductions For AGI (slide 2 of 2)

• Deductions for AGI include:– Ordinary and necessary expenses incurred in a trade or

business– One-half of self-employment tax paid– Alimony paid– Certain payments to an IRA and Health Savings

Accounts– Moving expenses– Fees for college tuition and related expenses– Interest on student loans– The capital loss deduction, and – Others

• Deductions for AGI include:– Ordinary and necessary expenses incurred in a trade or

business– One-half of self-employment tax paid– Alimony paid– Certain payments to an IRA and Health Savings

Accounts– Moving expenses– Fees for college tuition and related expenses– Interest on student loans– The capital loss deduction, and – Others


Adjusted Gross Income (AGI)Adjusted Gross Income (AGI)

• AGI is an important subtotal – Serves as the basis for computing percentage

limitations on certain itemized deductions such as• Medical expenses

• Charitable contributions

• Certain casualty losses

– e.g., Medical expenses are deductible only to the extent they exceed 7.5% of AGI

• This limitation might be described as a 7.5% “floor” under the medical expense deduction

• AGI is an important subtotal – Serves as the basis for computing percentage

limitations on certain itemized deductions such as• Medical expenses

• Charitable contributions

• Certain casualty losses

– e.g., Medical expenses are deductible only to the extent they exceed 7.5% of AGI

• This limitation might be described as a 7.5% “floor” under the medical expense deduction


Deductions From AGI (slide 1 of 3)Deductions From AGI (slide 1 of 3)

• Deductions from AGI include:– The greater of:

• Itemized deductions, or

• The standard deduction

– Personal and dependency exemptions

• Deductions from AGI include:– The greater of:

• Itemized deductions, or

• The standard deduction

– Personal and dependency exemptions



• A partial list of itemized deductions includes:– Medical expenses (in excess of 7.5% of AGI)– Certain taxes and interest– Charitable contributions– Casualty Losses (in excess of 10% of AGI)– Deductions for expenses related to

• The production or collection of income, and

• The management of property held for the production of income

– Certain miscellaneous itemized deductions (in excess of 2% of AGI)

• A partial list of itemized deductions includes:– Medical expenses (in excess of 7.5% of AGI)– Certain taxes and interest– Charitable contributions– Casualty Losses (in excess of 10% of AGI)– Deductions for expenses related to

• The production or collection of income, and

• The management of property held for the production of income

– Certain miscellaneous itemized deductions (in excess of 2% of AGI)



• The standard deduction is the sum of two components: – Basic standard deduction

• Amount allowed is based on taxpayer’s filing status

– Additional standard deductions• Available for taxpayers who are

– Age 65 or over, and/or

– Blind

• Two additional standard deductions are allowed for a taxpayer who is age 65 or over and blind

• Amount allowed depends on filing status

• The standard deduction is the sum of two components: – Basic standard deduction

• Amount allowed is based on taxpayer’s filing status

– Additional standard deductions• Available for taxpayers who are

– Age 65 or over, and/or

– Blind

• Two additional standard deductions are allowed for a taxpayer who is age 65 or over and blind

• Amount allowed depends on filing status


Standard Deduction (slide 1 of 2)

Standard Deduction (slide 1 of 2)

• The basic standard deduction (BSD) amount depends on filing status of taxpayer

• The basic standard deduction (BSD) amount depends on filing status of taxpayer

Filing status 2008 2009 .Single $5,450 $5,700MFJ, SS 10,900 11,400HH 8,000 8,350MFS 5,450 5,700

TABLE 3–1


Standard Deduction(slide 2 of 2)

Standard Deduction(slide 2 of 2)

• Additional standard deduction (ASD)– For taxpayers age 65 or older and/or legally

blind

• Additional standard deduction (ASD)– For taxpayers age 65 or older and/or legally

blind

Filing Status 2008 2009 .Single $1,350 $1,400MFJ, SS 1,050 1,100HH 1,350 1,400MFS 1,050 1,100

TABLE 3–2


Determining Standard DeductionDetermining Standard Deduction

• Examples (2009 tax year):– Taxpayer is single, blind, and age 65 or older

• SD = $5,700 (BSD) + $1,400 (ASD) + $1,400 (ASD) = $8,500

– Taxpayers are married, filing jointly, one blind, and both age 65 or older

• SD = $11,400 (BSD) + $1,100 (ASD) + $1,100 (ASD) + $1,100 (ASD) = $14,700

• Examples (2009 tax year):– Taxpayer is single, blind, and age 65 or older

• SD = $5,700 (BSD) + $1,400 (ASD) + $1,400 (ASD) = $8,500

– Taxpayers are married, filing jointly, one blind, and both age 65 or older

• SD = $11,400 (BSD) + $1,100 (ASD) + $1,100 (ASD) + $1,100 (ASD) = $14,700


ARRTA of 2009 - Two New Standard Deductions

ARRTA of 2009 - Two New Standard Deductions

• ARRTA of 2009 provides two new tax incentives to stimulate home ownership and sale of autos– Provisions allow nonitemizers to deduct real property

taxes and sales tax paid on purchase of autos as special standard deduction

– Property taxes on a personal residence and sales taxes on a personal auto normally are deductions from AGI

• Thus, the standard deductions alternative is a tax windfall for taxpayers who do not itemize

• ARRTA of 2009 provides two new tax incentives to stimulate home ownership and sale of autos– Provisions allow nonitemizers to deduct real property

taxes and sales tax paid on purchase of autos as special standard deduction

– Property taxes on a personal residence and sales taxes on a personal auto normally are deductions from AGI

• Thus, the standard deductions alternative is a tax windfall for taxpayers who do not itemize


ARRTA of 2009 - Standard Deduction For Real Property Taxes

ARRTA of 2009 - Standard Deduction For Real Property Taxes

• This temporary standard deduction for real property taxes is available for 2008 and 2009 tax returns– The amount allowed is the lesser of

• The amount paid, or

• $500 ($1,000 on a joint return)

• This temporary standard deduction for real property taxes is available for 2008 and 2009 tax returns– The amount allowed is the lesser of

• The amount paid, or

• $500 ($1,000 on a joint return)


ARRTA of 2009 - Sales Tax Paid On The Purchase Of Autos

ARRTA of 2009 - Sales Tax Paid On The Purchase Of Autos

• This temporary standard deduction is available for auto sales tax paid on purchases that occur from Feb. 17 through Dec. 31, 2009– Deduction cannot exceed tax on first $49,500 of

purchase price

– Deduction is phased-out when taxpayer’s AGI exceeds $125,000 ($250,000 on a joint return)

– Purchased vehicle (e.g., cars, SUVs, light trucks, motorcycles) cannot exceed gross weight of 8,500 lbs.

– Original use must commence with the taxpayer

• This temporary standard deduction is available for auto sales tax paid on purchases that occur from Feb. 17 through Dec. 31, 2009– Deduction cannot exceed tax on first $49,500 of

purchase price

– Deduction is phased-out when taxpayer’s AGI exceeds $125,000 ($250,000 on a joint return)

– Purchased vehicle (e.g., cars, SUVs, light trucks, motorcycles) cannot exceed gross weight of 8,500 lbs.

– Original use must commence with the taxpayer


Taxpayers Ineligible For Standard Deduction

Taxpayers Ineligible For Standard Deduction

• Certain taxpayers cannot use the SD:– Married, filing separately, when either spouse

itemizes deductions– Nonresident aliens– Individual filing return for tax year of less than

12 months because of change in annual accounting period

• Certain taxpayers cannot use the SD:– Married, filing separately, when either spouse

itemizes deductions– Nonresident aliens– Individual filing return for tax year of less than

12 months because of change in annual accounting period


SD Limit For Person Claimed as DependentSD Limit For Person Claimed as Dependent

• Individual claimed as dependent has a BSD in 2009 limited to the greater of:– $950 or – $300 plus earned income (but not exceeding

normal BSD)

• ASD amount(s) still available

• Individual claimed as dependent has a BSD in 2009 limited to the greater of:– $950 or – $300 plus earned income (but not exceeding

normal BSD)

• ASD amount(s) still available


Examples of SD Limit (slide 1 of 2)Examples of SD Limit (slide 1 of 2)

• Dependent’s SD (2009 tax year):– A blind child who earns $200 and is claimed by

parents as a dependency exemption• SD = $950 (BSD) + $1,400 (ASD) = $2,350

– A child who earns $1,500 and is claimed by parents as a dependency exemption

• SD = $1,800 [BSD equal to greater of $950 or ($300 + $1,500 earned income)]

• Dependent’s SD (2009 tax year):– A blind child who earns $200 and is claimed by

parents as a dependency exemption• SD = $950 (BSD) + $1,400 (ASD) = $2,350

– A child who earns $1,500 and is claimed by parents as a dependency exemption

• SD = $1,800 [BSD equal to greater of $950 or ($300 + $1,500 earned income)]


Examples of SD Limit (slide 2 of 2)Examples of SD Limit (slide 2 of 2)

• Examples of dependent’s SD (2009 tax year)– A child who earns $6,000 and is claimed by

parents as a dependency exemption• SD = $5,700 [BSD limited to normal amount]

• Examples of dependent’s SD (2009 tax year)– A child who earns $6,000 and is claimed by

parents as a dependency exemption• SD = $5,700 [BSD limited to normal amount]


Personal and Dependency Exemption Amounts

Personal and Dependency Exemption Amounts

• Amounts– 2008: $3,500 per exemption– 2009: $3,650 per exemption

• Personal and dependency exemptions– One per taxpayer (two personal exemptions

when married, filing jointly) and for each dependent

• Exception: Individual claimed as dependent by another taxpayer does not receive a personal exemption

• Amounts– 2008: $3,500 per exemption– 2009: $3,650 per exemption

• Personal and dependency exemptions– One per taxpayer (two personal exemptions

when married, filing jointly) and for each dependent

• Exception: Individual claimed as dependent by another taxpayer does not receive a personal exemption


Personal and Dependency Exemptions In Year Of Death

Personal and Dependency Exemptions In Year Of Death

• Personal exemption allowed on joint return for spouse who dies during the year– Example: Tom and Betty were married in 1990.

Tom dies on February 1, 2009. A personal exemption may be claimed for Tom on the taxpayers’ 2009 joint return.

• Personal exemption allowed on joint return for spouse who dies during the year– Example: Tom and Betty were married in 1990.

Tom dies on February 1, 2009. A personal exemption may be claimed for Tom on the taxpayers’ 2009 joint return.


Dependency Exemptions (slide 1 of 2)Dependency Exemptions (slide 1 of 2)

• A dependency exemption is available for one who is either a qualifying child or a qualifying relative– A qualifying child must meet the following

tests:• Relationship• Abode• Age, and • Support

• A dependency exemption is available for one who is either a qualifying child or a qualifying relative– A qualifying child must meet the following

tests:• Relationship• Abode• Age, and • Support


Dependency Exemptions (slide 2 of 2)Dependency Exemptions (slide 2 of 2)

• One objective of the Working Families Tax Relief Act of 2004 (WFTRA of 2004)– Establish a uniform definition of qualifying

child for purposes of the:• Dependency exemption• Head-of-household filing status• Earned income tax credit• Child tax credit• Credit for child and dependent care expenses

• One objective of the Working Families Tax Relief Act of 2004 (WFTRA of 2004)– Establish a uniform definition of qualifying

child for purposes of the:• Dependency exemption• Head-of-household filing status• Earned income tax credit• Child tax credit• Credit for child and dependent care expenses


Relationship TestRelationship Test

• The child must be the taxpayer’s: – Son or daughter– Stepson or stepdaughter– Brother or sister– Stepbrother or stepsister– Half brother or half sister, or – A descendant of such individual (e.g., grandchildren,

nephews, nieces)• A child who has been adopted, or whose adoption

is pending, qualifies• A foster child may also qualify

• The child must be the taxpayer’s: – Son or daughter– Stepson or stepdaughter– Brother or sister– Stepbrother or stepsister– Half brother or half sister, or – A descendant of such individual (e.g., grandchildren,

nephews, nieces)• A child who has been adopted, or whose adoption

is pending, qualifies• A foster child may also qualify


Abode Test Abode Test

• A qualifying child must live with the taxpayer for more than half of the year– Temporary absences from the household due to

special circumstances (e.g., illness, education) are not considered

• A qualifying child must live with the taxpayer for more than half of the year– Temporary absences from the household due to

special circumstances (e.g., illness, education) are not considered


Age TestAge Test

• The child must be under age 19 or under age 24 in the case of a student– A student is a child who, during any part of five

months of the year, is enrolled full time at a school or government-sponsored on-farm training course

– Individuals who are disabled are not subject to the age test

• The child must be under age 19 or under age 24 in the case of a student– A student is a child who, during any part of five

months of the year, is enrolled full time at a school or government-sponsored on-farm training course

– Individuals who are disabled are not subject to the age test


SupportSupport

• To be a qualifying child, the individual must not be self-supporting– Cannot provide more than one-half of his or her

own support– In the case of a full-time student, scholarships

are not considered to be support

• To be a qualifying child, the individual must not be self-supporting– Cannot provide more than one-half of his or her

own support– In the case of a full-time student, scholarships

are not considered to be support


Tiebreaker RulesTiebreaker Rules

• In situations where a child may be a qualifying child for more than one person– Tiebreaker rules specify which person has

priority in claiming the dependency exemption

• In situations where a child may be a qualifying child for more than one person– Tiebreaker rules specify which person has

priority in claiming the dependency exemption


Qualifying RelativeQualifying Relative

• In order to claim a dependency exemption for a qualifying relative, the following tests must be met:– Relationship – Gross income– Support

• In order to claim a dependency exemption for a qualifying relative, the following tests must be met:– Relationship – Gross income– Support


Relationship TestRelationship Test

• The relationship test for a qualifying relative is more expansive than for a qualifying child. Also included are the following relatives:– Lineal ascendants (e.g., parents, grandparents)– Collateral ascendants (e.g., uncles, aunts)– Certain in-laws (e.g., son-, daughter-, father-, mother-,

brother-, and sister-in-law)

• The relationship test also includes unrelated parties who live with the taxpayer

• The relationship test for a qualifying relative is more expansive than for a qualifying child. Also included are the following relatives:– Lineal ascendants (e.g., parents, grandparents)– Collateral ascendants (e.g., uncles, aunts)– Certain in-laws (e.g., son-, daughter-, father-, mother-,

brother-, and sister-in-law)

• The relationship test also includes unrelated parties who live with the taxpayer


Gross Income TestGross Income Test

• Dependent’s gross income must be less than the exemption amount ($3,650 for 2009)

• Dependent’s gross income must be less than the exemption amount ($3,650 for 2009)


Support TestSupport Test

• Taxpayer must provide more than 50% of the qualifying relative’s support– Only amounts expended are considered in the support

test

– Scholarships are not considered in the support test

• Two exceptions to the support test:– Multiple support agreements

– Children of divorced parents

• Taxpayer must provide more than 50% of the qualifying relative’s support– Only amounts expended are considered in the support

test

– Scholarships are not considered in the support test

• Two exceptions to the support test:– Multiple support agreements

– Children of divorced parents


Multiple Support AgreementsMultiple Support Agreements

• Allows one member of a group providing > 50% of support to claim individual even though no one person provides > 50% support– Eligible parties must provide > 10% of support

– Each eligible party must meet all other dependency requirements

• Example - Allows children of elderly parent to claim exemption for parent when none individually meets the 50% support test

• Allows one member of a group providing > 50% of support to claim individual even though no one person provides > 50% support– Eligible parties must provide > 10% of support

– Each eligible party must meet all other dependency requirements

• Example - Allows children of elderly parent to claim exemption for parent when none individually meets the 50% support test


Children of Divorced ParentsChildren of Divorced Parents

• Special rules apply if the parents meet the following conditions:– They would have been entitled to the dependency exemption had

they been married and filed a joint return– They have custody (either jointly or singly) of the child for more

than half of the year

• Under the general rule, the parent having custody of the child for the greater part of the year (i.e., the custodial parent) is entitled to the dependency exemption– General rule does not apply if

• A multiple support agreement is in effect• Custodial parent issues a waiver in favor of the noncustodial parent

• Special rules apply if the parents meet the following conditions:– They would have been entitled to the dependency exemption had

they been married and filed a joint return– They have custody (either jointly or singly) of the child for more

than half of the year

• Under the general rule, the parent having custody of the child for the greater part of the year (i.e., the custodial parent) is entitled to the dependency exemption– General rule does not apply if

• A multiple support agreement is in effect• Custodial parent issues a waiver in favor of the noncustodial parent


Other Rules for Dependency Exemptions

Other Rules for Dependency Exemptions

• In addition to fitting into either the qualifying child or the qualifying relative category, a dependent must also meet:– The joint return, and – The citizenship or residency tests

• In addition to fitting into either the qualifying child or the qualifying relative category, a dependent must also meet:– The joint return, and – The citizenship or residency tests


Joint Return TestJoint Return Test

• Dependent cannot file a joint return with spouse unless:– Filing solely for refund of tax withheld– No tax liability exists for either spouse – Neither spouse required to file return

• Dependent cannot file a joint return with spouse unless:– Filing solely for refund of tax withheld– No tax liability exists for either spouse – Neither spouse required to file return


Citizenship or Residency TestCitizenship or Residency Test

• Dependent must be a U.S. citizen or a resident of U.S., Canada, or Mexico for some part of the calendar year in which the taxpayer’s tax year begins– An exception provides that an adopted child

need not be a citizen or resident of the U.S. (or a contiguous country) as long as his or her principal abode is with a U.S. citizen

• Dependent must be a U.S. citizen or a resident of U.S., Canada, or Mexico for some part of the calendar year in which the taxpayer’s tax year begins– An exception provides that an adopted child

need not be a citizen or resident of the U.S. (or a contiguous country) as long as his or her principal abode is with a U.S. citizen


Phase-out of Exemptions (slide 1 of 2)Phase-out of Exemptions (slide 1 of 2)

Applies when taxpayer’s AGI in 2009 exceeds:• $250,200 for married, filing jointly, or surviving spouse• $208,500 for head of household• $166,800 for single • $125,100 for married, filing separately

• The phase-out of exemptions is being repealed in two stages and will not be complete until 2010– The exemption phaseout remains at two-thirds for 2006

and 2007 and at one-third for 2008 and 2009

Applies when taxpayer’s AGI in 2009 exceeds:• $250,200 for married, filing jointly, or surviving spouse• $208,500 for head of household• $166,800 for single • $125,100 for married, filing separately

• The phase-out of exemptions is being repealed in two stages and will not be complete until 2010– The exemption phaseout remains at two-thirds for 2006

and 2007 and at one-third for 2008 and 2009


Phase-out of Exemptions (slide 2 of 2)Phase-out of Exemptions (slide 2 of 2)

• Exemptions deduction is reduced by 2% for every $2,500 ($1,250 for MFS), or part thereof, that AGI exceeds threshold amounts– The amount of the phased-out exemptions is

then multiplied by 1/3 (the reduction-of-phaseout fraction) for tax years 2008 and 2009

• Exemptions deduction is reduced by 2% for every $2,500 ($1,250 for MFS), or part thereof, that AGI exceeds threshold amounts– The amount of the phased-out exemptions is

then multiplied by 1/3 (the reduction-of-phaseout fraction) for tax years 2008 and 2009


Child Tax CreditChild Tax Credit

• $1,000 tax credit is allowed for each dependent child under the age of 17– Qualifying child includes stepchildren and eligible

foster children

• $1,000 tax credit is allowed for each dependent child under the age of 17– Qualifying child includes stepchildren and eligible

foster children


Filing Requirements (slide 1 of 2)Filing Requirements (slide 1 of 2)

• General Rule: Tax return must be filed if gross income is ≥ the sum of the standard deduction and exemption amount

• ASD for blind does not apply for this determination

– Special rules apply for dependents and self-employed taxpayers

• General Rule: Tax return must be filed if gross income is ≥ the sum of the standard deduction and exemption amount

• ASD for blind does not apply for this determination

– Special rules apply for dependents and self-employed taxpayers


Filing Requirements (slide 2 of 2)Filing Requirements (slide 2 of 2)

• Tax return of an individual is due on or before the 15th day of the 4th month after taxpayer’s year end– Most individuals are calendar year taxpayers, thus, due

date is April 15

• May obtain a 6 month extension of time to file– Excuses a taxpayer from penalty for failure to file, not

from penalty for failure to pay• If more tax is owed, extension request (Form 4868) should be

accompanied by check for balance of tax due

• Tax return of an individual is due on or before the 15th day of the 4th month after taxpayer’s year end– Most individuals are calendar year taxpayers, thus, due

date is April 15

• May obtain a 6 month extension of time to file– Excuses a taxpayer from penalty for failure to file, not

from penalty for failure to pay• If more tax is owed, extension request (Form 4868) should be

accompanied by check for balance of tax due


Filing StatusFiling Status

• There are 5 filing statuses– Single

– Married, filing jointly

– Surviving spouse (qualifying widow or widower)

– Head of household

– Married, filing separately

• Filing status affects tax rate brackets, standard deduction, and other amounts

• There are 5 filing statuses– Single

– Married, filing jointly

– Surviving spouse (qualifying widow or widower)

– Head of household

– Married, filing separately

• Filing status affects tax rate brackets, standard deduction, and other amounts


Single Filing StatusSingle Filing Status

• Includes a taxpayer who is unmarried or separated from spouse by a divorce decree or separate maintenance agreement and does not qualify for another filing status – Marital status is determined as of the last day of

the tax year• When a spouse dies during the year, marital status is

determined as of the date of death

• Includes a taxpayer who is unmarried or separated from spouse by a divorce decree or separate maintenance agreement and does not qualify for another filing status – Marital status is determined as of the last day of

the tax year• When a spouse dies during the year, marital status is

determined as of the date of death


Married Filing Jointly (MFJ) Filing Status

Married Filing Jointly (MFJ) Filing Status

• Married as of last day of taxable year, or

• Spouse dies during taxable year

• Married as of last day of taxable year, or

• Spouse dies during taxable year


Surviving Spouse Filing StatusSurviving Spouse Filing Status

• Same tax rate brackets as married, filing jointly

• File as surviving spouse for 2 years after death of spouse if taxpayer maintains a home in which a dependent child lives

• Same tax rate brackets as married, filing jointly

• File as surviving spouse for 2 years after death of spouse if taxpayer maintains a home in which a dependent child lives


Married Filing Separately Filing StatusMarried Filing Separately Filing Status

• Married but not filing a return with spouse and not abandoned spouse

• Married but not filing a return with spouse and not abandoned spouse


Head of Household (HH) Filing StatusHead of Household (HH) Filing Status

• Must be unmarried as of end of year or an abandoned spouse

• Must pay > half the cost of maintaining a household which is the principal home of a dependent for more than half of tax year– A dependent must satisfy either the qualifying child or

the qualifying relative category• A qualifying relative must also meet the relationship test

• Must be unmarried as of end of year or an abandoned spouse

• Must pay > half the cost of maintaining a household which is the principal home of a dependent for more than half of tax year– A dependent must satisfy either the qualifying child or

the qualifying relative category• A qualifying relative must also meet the relationship test


Exception to the HH Requirements

Exception to the HH Requirements

• HH may be claimed if taxpayer maintains a separate home for his or her parents

– At least one parent must qualify as a dependent

• HH may be claimed if taxpayer maintains a separate home for his or her parents

– At least one parent must qualify as a dependent


Abandoned SpouseAbandoned Spouse

• Allows married taxpayer to file as Head of Household if taxpayer:

– Does not file a joint return– Paid > half the cost of maintaining a home– Spouse did not live in home during last 6

months of tax year– Home was principal residence of taxpayer’s

child for > half of year– Can claim child as a dependent

• Allows married taxpayer to file as Head of Household if taxpayer:

– Does not file a joint return– Paid > half the cost of maintaining a home– Spouse did not live in home during last 6

months of tax year– Home was principal residence of taxpayer’s

child for > half of year– Can claim child as a dependent


Taxes RatesTaxes Rates

• Tax liability is computed using either the Tax Table method or the Tax Rate Schedule method– Most taxpayers must use the Tax Tables– Certain taxpayers may not use the Tax Table method

including:• An individual who files a short period return • Individuals whose taxable income exceeds the maximum

(ceiling) amount in the Tax Table – The 2007 Tax Table applies to taxable income below $100,000

• An estate or trust

• For 2009 the tax rates are 10%, 15%, 25%, 28%, 33%, and 35%

• Tax liability is computed using either the Tax Table method or the Tax Rate Schedule method– Most taxpayers must use the Tax Tables– Certain taxpayers may not use the Tax Table method

including:• An individual who files a short period return • Individuals whose taxable income exceeds the maximum

(ceiling) amount in the Tax Table – The 2007 Tax Table applies to taxable income below $100,000

• An estate or trust

• For 2009 the tax rates are 10%, 15%, 25%, 28%, 33%, and 35%


Kiddie Tax (slide 1 of 4)Kiddie Tax (slide 1 of 4)

• Net unearned income (NUI) of child is taxed at parents’ rate– Child must be under age 19 at end of year (or

under age 24 if a full-time student)– NUI generally equals unearned income less

$1,900 (2009 tax year)

• Net unearned income (NUI) of child is taxed at parents’ rate– Child must be under age 19 at end of year (or

under age 24 if a full-time student)– NUI generally equals unearned income less

$1,900 (2009 tax year)



• Unearned income includes:– Taxable interest– Dividends– Capital gains– Rents– Royalties– Pension and annuity income, and – Unearned income from trusts

• Unearned income includes:– Taxable interest– Dividends– Capital gains– Rents– Royalties– Pension and annuity income, and – Unearned income from trusts



• Computing NUI for Kiddie Tax for 2009:Unearned income

Less: $950

Less: The greater of:

i) $950, or

ii) Allowable itemized deductions connected with production of unearned income

Equals: net unearned income

• Computing NUI for Kiddie Tax for 2009:Unearned income

Less: $950

Less: The greater of:

i) $950, or

ii) Allowable itemized deductions connected with production of unearned income

Equals: net unearned income



• Net unearned income taxed at parents’ rate– Remainder of taxable income taxed at child’s rate

• Two options for computing the tax – A separate return may be filed for the child

• The tax on net unearned income (referred to as the allocable parental tax) is computed as though the income had been included on the parents’ return

– Form 8615 is used to compute the tax

– The parents may elect to report child’s income on their own return

• Certain requirements must be met

• Net unearned income taxed at parents’ rate– Remainder of taxable income taxed at child’s rate

• Two options for computing the tax – A separate return may be filed for the child

• The tax on net unearned income (referred to as the allocable parental tax) is computed as though the income had been included on the parents’ return

– Form 8615 is used to compute the tax

– The parents may elect to report child’s income on their own return

• Certain requirements must be met


Gains and Losses from Property Transactions (slide 1 of 3)


•In order for gains (losses) to be recognized (included in gross income), they must be realized:

–Realized gain (loss) = amount realized - adjusted basis•Amount realized = selling price - costs of disposition•Adjusted basis = cost + capital additions - cost recovery

•In order for gains (losses) to be recognized (included in gross income), they must be realized:

–Realized gain (loss) = amount realized - adjusted basis•Amount realized = selling price - costs of disposition•Adjusted basis = cost + capital additions - cost recovery




• All realized gains are recognized unless a specific tax provision provides otherwise (e.g., nontaxable exchanges)

• Realized losses may or may not be recognized depending on the circumstances– Generally, losses on the sale or disposition of

personal use property are not recognized

• All realized gains are recognized unless a specific tax provision provides otherwise (e.g., nontaxable exchanges)

• Realized losses may or may not be recognized depending on the circumstances– Generally, losses on the sale or disposition of

personal use property are not recognized




• Once recognized gains or losses have been determined, they must be classified as ordinary or capital– Ordinary gains are fully taxable– Ordinary losses are fully deductible

• Capital gains and losses are subject to special tax treatment

• Once recognized gains or losses have been determined, they must be classified as ordinary or capital– Ordinary gains are fully taxable– Ordinary losses are fully deductible

• Capital gains and losses are subject to special tax treatment


Gains and Losses from Capital Asset Transactions (slide 1 of 2)


• Capital assets are defined as any property other than:– Inventory,

– Accounts Receivable, and

– Depreciable property or real property used in a business

• Most personal use assets owned by individuals are capital assets– Losses on these assets are not deductible

• Capital assets are defined as any property other than:– Inventory,

– Accounts Receivable, and

– Depreciable property or real property used in a business

• Most personal use assets owned by individuals are capital assets– Losses on these assets are not deductible




• Gains and losses from capital asset transactions must be netted– Net gains and losses by holding period– If excess losses result, they are shifted to the

category carrying the highest tax rate

• Gains and losses from capital asset transactions must be netted– Net gains and losses by holding period– If excess losses result, they are shifted to the

category carrying the highest tax rate


Max Tax Rates for Net Capital Gains of Individuals

Max Tax Rates for Net Capital Gains of Individuals

Classification Maximum RateShort-term gains (held ≤ one year) 35%Long-term gains (held > one year)• Collectibles 28%• Certain depreciable property

used in a trade or business (unrecaptured § 1250 gain) 25%

• All other long-term capital gains 15%, 5%,or 0%

Classification Maximum RateShort-term gains (held ≤ one year) 35%Long-term gains (held > one year)• Collectibles 28%• Certain depreciable property

used in a trade or business (unrecaptured § 1250 gain) 25%

• All other long-term capital gains 15%, 5%,or 0%


Treatment of Capital LossesTreatment of Capital Losses

• Net capital losses of individuals are deductible for AGI up to $3,000 yearly– Excess capital losses are carried over to the

next tax year– When carried over, capital losses retain their

classification as short- or long-term

• Net capital losses of individuals are deductible for AGI up to $3,000 yearly– Excess capital losses are carried over to the

next tax year– When carried over, capital losses retain their

classification as short- or long-term


If you have any comments or suggestions concerning this PowerPoint Presentation for South-Western Federal Taxation, please contact:

Dr. Donald R. Trippeer, CPA [email protected]

SUNY Oneonta

If you have any comments or suggestions concerning this PowerPoint Presentation for South-Western Federal Taxation, please contact:

Dr. Donald R. Trippeer, CPA [email protected]

SUNY Oneonta

individual income taxes c3-1 chapter 3 tax formula and tax determination; an overview of property...

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