Prior to class

1
CHAPTER 1

• Prior to class
• Fill in the BLANKS
• Answer any questions and complete HW assignments

2
Primary Entities/Forms

• Individuals
• Taxable income includes?
• An individual may file the simplest tax form that
  he/she qualifies for
• 1040EZ
• 1040A
• 1040

See next slide
3
Primary Entities/Forms

• Individuals
• 1040EZ
• Single or Married Filing Jointly
• Must be not be 65 or older and/or blind
• Must not claim any dependents
• Taxable income must be under 100,000
• Only wages, salaries, scholarships or
  unemployment
• Less than 1,500 interest
• No student loan interest/education credits
• No advanced earned income credit

4
Primary Entities/Forms

• Individuals continued
• 1040A
• Generally used by taxpayers who are not
  self-employed and dont itemize deductions
• Use Schedule 1 to report dividends/interest
  1500
• 1040
• If taxpayer doesnt qualify to use 1040EZ or
  1040A
• Schedule B to report dividends/interest 1500
• Schedule C to report trade/business income
• Schedule F to report farm/ranch activities
• Schedule E to report supplementary income
• Schedule D to report capital gains/losses
• Schedule A to itemize deductions

5
Primary Entities/Forms

• Corporations
• Tax rate schedule found on page 1-4
• 1120 long form or
• 1120-A short form or
• 1120S
• Corporations that elect S Corporation status
• Dont pay regular corporate income taxes
• Passes through items of income or loss to
  shareholders
• Partnerships
• Reporting entity not tax-paying entity
• Passes through items of income or loss to
  partners
• 1065

6
Tax Formula for Individuals

• This follows form 1040
• Gross Income (lines 7-22)
• less ________________________ (lines 23-35)
• AGI (line 37)
• less ____________________________________ (line
  40)
• less ________________ (line 42)
• Taxable Income (line 43)
• x Tax Rate
• Gross Tax Liability (line 63)
• less Tax credits and prepayments (lines
  47-55, lines 64-70)
• equals __________________ (lines 72-75)

7
Standard Deductions Exemption
2005 standard deductions Single
______ Married Filing Joint MFJ
______ Surviving Spouse SS
______ also known as Qualifying
Widow(er) Head of Household HOH
_____ Married Filing Separate MFS
_____ Taxpayers 65 or older and/or blind get an
additional amount _____ if MFJ, MFS or
SS _____ if HOH or Single 2005
exemption _____ per person
8
Using tax formula - Example
Facts Juan is a single taxpayer. In 2005, his
salary is 39,000 and he has dividend income of
1000. In addition, he has deductions for AGI of
2,500 and 3000 of itemized deductions. If Juan
claims one exemption for this year, calculate the
following amounts Gross income
___________ Adjusted gross income ___________
Greater of standard deduction or itemized
deductions ___________ Exemptions ___________
Taxable income ___________
9
Homework

• Page 29-30
• Problems 2, 3

10
Who Must File

• Based on filing status and gross income
• If __________________________ exceed income then
  filing is not necessary
• If taxpayer is claimed as a dependent on
  anothers return, dependents standard deduction
  is

11
Which taxpayers are required to file

• Analyze each independent situation to determine
  if the taxpayers are required to file a return
  for 2005.
• Taxpayer age 45 is a single waiter and has
  unreported tips of 1510 is the taxpayer
  required to file?

12
Which taxpayers are required to file

• Taxpayer is single age 31 and blind and has
  income of 9,250 is the taxpayer required to
  file?

13
Which taxpayers are required to file

• Husband age 67 and wife age 69 have income of
  19,600 and MFJ are the taxpayers required to
  file?

14
Which taxpayers are required to file

• Taxpayer is a single college student with salary
  from a part-time job of 5300, he is claimed as a
  dependent by his parents is the taxpayer
  required to file?

15
Filing Status

• ___________
• Unmarried or legally separated as of 12/31
• ____________________
• If married on 12/31
• Same-sex couples may not file jointly
• If spouse dies during year you can file MFJ
• ____________________
• Each file separate returns
• Must compute taxes the same way
• both itemize or both use standard deduction

16
Filing Status

• _______________________
• Tables have lower rates than single or MFS
• Taxpayer can use if
• Unmarried or abandoned as of 12/31
• Paid 50 of cost of keeping up home that was
  principal residence of dependent
• One exception to principal residence requirement,
  if dependent is taxpayers parent, he/she
  doesnt have to live with taxpayer

17
Filing Status

• ___________________
• Also known as qualifying widower
• Tables same as MFJ
• Applies in year of spouses death and in 2
  subsequent years
• Must pay over ½ price of maintaining a household
  where a dependent child, stepchild, adopted child
  or foster child lives

18
Tax Computation

• Six brackets
• ___, ___, ___, ___, ___, ___
• Tax rate schedules for different filing types in
  Appendix A Back cover
• Using Appendix A, find the tax liability of a MFJ
  and Single with taxable income of 84,981.

19
Personal/Dependency Exemptions

• For taxpayer and each dependent - _________ per
  person
• Phased out for high income taxpayers
• 2 per 2,500 1250 if MFS over threshold
• Example
• Sammie and Lolita are MFJ with AGI of 238,000
  and 2 dependents - whats their allowable
  exemption after the phase out?

20
Dependency Qualifying Child

• Six tests must be met for a child to be claimed
  as a dependent
• ___________ Test - child must be taxpayers
  child, stepchild, adopted child or taxpayers
  sibling, half- or step-sibling, or a descendant
  of any of these. Foster child may also qualify.
• ___________ - child must have same principal
  place of abode as taxpayer for more than ½ the
  year.
• _____ Test child must be under 19 or a
  full-time student under 24.

21
Dependency Qualifying Child

• __________ Test child must not file joint
  return with spouse exception if its only to
  claim refund, then considered to have passed this
  test.
• __________ Test dependent must be a US citizen,
  a resident of the US, Canada or Mexico, or an
  alien child adopted by and living with a US
  citizen.
• __________Test child who provides more than ½
  of his/her own support cannot be claimed as a
  dependent of someone else.

22
Dependency Qualifying Relative

• Five tests must be met for a qualifying relative
  who is not a qualifying child to be claimed as
  a dependent
• __________________ Test list of relatives that
  qualify is available at IRS web site a member of
  household for entire year meets the relationship
  test.

23
Dependency Qualifying Relative

• _____________ Test Individual cannot have gross
  income in excess of 3200.
• ____________ Test dependent must receive over ½
  of his/her support from taxpayer.
• ____________ Test dependent must not file a
  joint return.
• ____________ Test dependent must meet the
  citizenship test discussed in the qualifying
  child slide.

24
Homework

• Pages 30-32
• Problems 4, 6, 7, 8, 10, 11

25
Standard Deduction

• Use the following amounts (standard deductions)
  unless itemized deductions are greater!
• 2005 (the amounts increase every year)
• Single _____
• MFJ _____
• MFS _____
• HH _____
• SS _____
• Additional amount for taxpayers over 65 and/or
  blind
• _____ per person for married and SS
• _____ person for unmarried taxpayers

26
Standard Deduction - Dependents
The special rule for standard deduction for
dependents is deduction greater of 800
or earned income 250 but only up to
basic standard deduction Example 1 Jaime is 23
and a full time student and her folks claim her
as a dependent she earned 2,000 in 2005.
2,000 earned income (_____) standard
deduction _____ taxable income Example 2
Tia is 18 and has dividends (unearned) income of
1,500 1,500 unearned income ( ___)
standard deduction ____ taxable income
27
Limits on Itemized Deductions

• Phased out for high income taxpayers
• Threshold amount
• 72,975 for MFS or
• 145,950 (all other filing types)
• What is the Phase-out calculation?

28
Limits on Itemized Deductions
Example Zoe and Josef have AGI 150,000 and
are MFJ. Their itemized deductions 20,000
(mortgage interest and real estate taxes only)
what are their allowable itemized deductions?
29
Gains and Losses
Model Amount Realized - Adjusted Basis
Realized Gain/Loss Define Amount
Realized.______________________________ What is
Adjusted Basis? ______________________________
30
Capital Gains/Losses

• A ______________ is any property personal or
  investment held by a taxpayer, with certain
  exceptions as listed in the tax law
• Gains/losses on these assets are subject to
  special rates
• Holding period of asset determines treatment
• Long term - held _____ months (taxed at capital
  rates)
• Short term - held _____ months (taxed at ordinary
  rates)

31
Capital Gains/Losses

• Long term capital gain
• Special rates depending upon taxpayers bracket
• Ordinary Tax Bracket Capital Gains Tax
  Rate
• 10 or 15 ___
• All Others ___
• Long term capital loss
• Only allowed _____ net capital loss per year
  against ordinary income
• Carry-forward any unused balance

32
Calculating Gain/Loss
Facts Noah purchased Sony AAA bonds in 1998 for
47,600. She recently sold the bonds for 51,500
and paid commission of 515. What is
his Amount realized ___________ Adjust
ed basis ___________ Realized
gain/loss ___________ Recognized gain/loss
___________ Type of gain/loss ___________
33
Homework

• Page 32
• Problems 12, 13

34
The End!