Personal

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Personal DependencyExemptions Filing
StatusDetermination of Tax for an Individual
Filing Requirements
Chapter 4
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Tax Formula (Part)

• AGI
• Less
• 1. Larger of standard deduction or total itemized
  deductions
• 2. Personal and dependency exemptions
• Equals Taxable income
• Calculate tax based on filing status
• Less Credits
• Prepayments
• Equals Taxes payable or refund due

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Types of Filing Status

• Determined on last day of taxable year
• Each filing group has a separate table

Filing Status (rates)

• MFJ, including qualifying widows and widowers
  (surviving spouses). 1948.
• HH (1957)
• Single (1969)
• MFS (originally, the only table)

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Filing Status
Determined Last Day of Tax Year

• Married Filing Joint (MFJ). Used by
• Married Couples
• Widow or Widower
• Surviving Spouse

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Filing Status

• Head of Household (HH).
• Unmarried or legally separated and TP provides
  1/2 cost of maintaining home for qualifying
  relative who lives in home 6 months
• What qualifies as cost of maintaining a home?
• Exceptions
• Dependent parents (need not live in the home)
• Unmarried child does not have to be a dependent
• Custodial parent of unmarried child whose
  exemption has been assigned to ex-spouse
• Abandoned spouses may qualify
• Single (S)
• Married Filing Separate (MFS).

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Innocent Spouse Rules

• General Rule If MFJ, both spouses are liable
  for the full amount of tax.
• Exception Innocent spouse rules apply if two
  conditions are met.
• Innocent spouse didnt know or should not have
  known, and
• It would be inequitable to hold innocent spouse
  liable
• If divorced or separated, a TP may elect
  separate liability.

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Personal Dependency Exemptions

• Personal Exemptions
• Self
• Spouse
• Dependency Exemptions - 5 tests
• Support test - over 1/2 support must be furnished
  by the TP
• What qualifies as support?
• Special cases
• multiple support rules
• children of divorced parents
• Relationship test - almost any blood relative
  qualifies except first cousins and aunts- or
  uncles-in-law also, a member of the TPs
  household for entire year qualifies.

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Personal Dependency Exemptions

• Gross income test dependents gross income must
  be less than the exemption amount
• Exceptions
• full time student under age 24
• child under 19
• disabled person with earnings from a sheltered
  workshop
• Joint-return test
• Exception filing for a refund
• Citizenship/Residency test

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Exemption vs. Standard Deductions
Exemption Basic support should not be taxed
Standard Deduction To simplify tax administration

• Exemption Standard Deductions
  Amount
• Amount Year MFJ HH S MFS
• 2,750 1999 7,200 6,350 4,300 3,600
• 2,800 2000 7,350 6,450 4,400 3,675

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Additional Standard Deductionsfor Elderly or
Blind

• Elderly or Blind Married Unmarried
• 1999 850 1,050
• 2000 850 1,100

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Exemptions Phase-Out

• Exemptions are phased-out for high-income TPs.
• Phase-out Reduce exemptions by 2 for each
  2500 (or fraction thereof) by which TPs AGI
  exceeds these thresholds
• Threshold
• Filing Status 1999 2000
• MFJ 189,950 193,400
• HH 158,300 161,150
• S 126,600 128,950
• MFS 94,975 96,700

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2000 Exemption Phase-Out Example

• Jennifer is single with AGI 193,000 she has
  one exemption.
• 193,000 - 128, 950 64, 050 excess amount
• 64, 050/2,500 25.62, rounded to 26
• 26 x 2 reduction x 2,800 1,456 exemption
  phase-out
• 2,800 - 1,456 phase-out 1,134 allowable
  exemption

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Child Tax Credit

• A 500 credit is available for each of a TPs
  lineal descendents, stepchildren, or foster
  children, who qualify as dependents.
• The child must be a citizen, national, or U.S.
  resident.
• Foster children must reside with the TP for the
  entire year.
• The credit is limited to the TPs tax liability
  (less tenative AMT)
• If a TP has three or more qualifying children,
  the credit is limited to the regular income tax
  plus the Social Security tax.
• Phase-out the allowable credit is reduced by
  50 for each 1,000 (or fraction of 1,000) of
  AGI 75,000 for unmarried TPs, and 110,000 for
  MFJ TPs.

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Tax Shifting Techniques and Stopper Laws

• Special rules for using the standard deduction
  prevent these planning techniques
• One spouse takes all itemized deductions and
  files MFS other spouse takes standard deduction
• Child claimed as a dependent on parents return
  has unearned income and takes full standard
  deduction
• Special rules on exemption prevents parents from
  taking dependency exemption for child, while the
  child files a tax return and claims an exemption
  for him/herself
• Kiddie tax restricts parents from shifting
  income to children who are in a lower tax bracket

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Special Rules for Exemptions the Standard
Deduction

• Exemptions A person eligible to be claimed as a
  dependent on another TPs return cannot claim an
  exemption for self on own return.
• Standard Deduction TPs not eligible to use
  standard deduction.
• Person who files MFS if spouse itemizes on other
  return
• Nonresident aliens
• US citizens entitled to Sec. 931 exemption
  relating to income from US possessions.

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Special Rules for Exemptions the Standard
Deduction

• If a dependent has income and files a tax return,
  the dependents standard deduction is limited to
  the greater of
• (700 in 2000) or
• itemized deductions directly related to producing
  unearned income, or
• the dependents earned income ( 250) up to the
  full standard deduction amount for single filing
  status

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Special Rules Examples

• What is the standard deduction for a dependent in
  the following cases?
• A dependent has 5,000 unearned and 0 earned
  income.
• 2000 700
• A dependent has 800 earned income.
• 2000 1,050 (800250)
• A dependent has 5,000 earned income
• 2000 4,400

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Special Rules Examples

• The Kiddie Tax
• If TP 1,400 is taxed at the parents marginal
  (highest) tax rate.
• Example
• H W have child, Sally, age 10.
• Sally has 2,600 of interest income and 200 of
  investment related fees.
• H W have 69,450 of taxable income.
• They do not make the parental election.
• What is Sallys tax liability for 2000?

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Answer to 2000 Example

• Sallys net unearned income
• 2600 unearned income 2600
• less std. ded. which is the greater of
• (a) 700 or
• (b) dependents earned income 250
• up to full std. ded. amount (4,250 for 1998),
  or
• (c) of allowable itemized deductions that relate
  to
• production of unearned income. (700)
• Less first 700 which will be taxed at childs
  rate, i.e. 15 (700)
• 1,200 net unearned income 1,200

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Answer to 2000 Example

• Parental tax of Sallys unearned income
• H Ws taxable income 69,450
• Sallys net unearned income 1,200
• Revised taxable income 70,650
• - Tax on revised income (70,650) 14,082
• - Tax on parents only inc. (69,450) (13,746)
• Parental Tax 337
• Sallys total tax liability
• Parental tax 337
• Tax on 1st 700 (at 15) 105
• Total 442

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Answer to 2000 Example (continued)

• Election to report Sallys taxes on parents tax
  return if
• (a) childs unearned income is between 700 and
  5,000
• (b) childs unearned income is solely interest
  and dividends
• What about the 200 investment expense?
• An itemized deduction of amounts directly
  attributable to production of income. But 700
  (allowable standard deduction) is greater.

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Example of Tax Calculation

• 2000 taxable income for Marcia John is 49,760.
  They file MFJ. Calculate their tax.
• Mechanical calculation (from schedule)
• 15 x 43,850 6,577.50
• 28 x 5,910 1,654.80
• Tot. tax. inc. 49,760 8,232.30 tot. tax
• Tax rate schedule calculation Schedule Y-1 (MFJ),
  see inside cover of book.
• Tax rate table method (required for taxable
  income of

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Filing Requirements

• Who must file
• Generally TPs who gross income the sum of
  (standard deduction personal exemption)
• TP with SE income 400
• A few others
• What to file
• Form 1040
• Form 1040 EZ
• Form 1040 A

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Filing Requirements

• When to File
• Individuals, partnerships, fiduciary returns by
  15th day of 4th month of next tax year
• Automatic 4 month extension with Form 4868
• Two month additional extension with IRS
  permission file Form 2688
• Corporations by 15th day of 3rd month of next
  tax year

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Filing Requirements

• Statute of Limitations
• 3 years generally
• 6 years material omission of income
• None non-filers or fraudulent returns