Individual Tax Formula

1
Individual Tax Formula

• Income(broadly conceived) x,xxx
• LessExclusions (x,xxx)
• Gross Income x,xxx
• LessDeductions for AGI (x,xxx)
• AGI x,xxx
• LessThe greater of-
• Total itemized deductions
• or the standard deduction (x,xxx)
• Less Personal dependency exemptions (x,xxx)
• Taxable Income x,xxx
• Tax x,xxx
• Less credits and prepayments (x,xxx)
• Tax due (or refund) x,xxx

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Components of the Tax Formula

• Income
• Includes all income, both taxable and nontaxable
• Exclusions
• A partial list of income exclusions is provided
  in Exhibit 16-1
• Gross income
• A partial list of gross income items is provided
  in Exhibit 16-2

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Components of the Tax Formula

• Deductions for Adjusted Gross Income include
  (Partial List)
• Expenses incurred in a trade or business
• 1/2 of self-employment tax paid
• Alimony paid
• Payments to IRAs and Health Savings Accounts
• Moving expenses
• Capital loss deduction (limited to 3,000)

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Itemized Deductions vs.Standard Deduction

• Deduct the greater of itemized deductions or the
  standard deduction
• Itemized deductions - certain personal expenses
  such as medical expenses and charitable
  contributions
• Standard deduction - a specified amount based on
  filing status, age, and blindness

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Personal and Dependency Exemptions

• Generally, one for each person
• Amount is indexed for inflation each year

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Filing Status

• There are 5 filing statuses
• Married, filing jointly
• Surviving spouse (qualifying widow or widower)
• Married, filing separately
• Single
• Head of household
• Filing status affects tax rate brackets, standard
  deduction, and many other amounts

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Filing Status - Head of Household

• Must be unmarried at end of year
• Must pay gt half the cost of maintaining a
  household
• Home must be the principal home of a dependent
  relative for more than half of tax year
• Exception for temporary absence such as school
• Abandoned spouse
• Same as above plus spouse did not live in home
  last 6 months

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Standard Deduction (Table 16-1)

• The basic standard deduction (BSD) amount depends
  on filing status of taxpayer
• Filing status 2008 2009
• Single 5,450 5,700
• MFJ, SS 10,900 11,400
• HH 8,000 8,350
• MFS 5,450 5,700

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Standard Deduction (Table 16-2)

• The additional standard deduction (ASD) for
  taxpayers age 65 or older and/or legally blind
• Filing status 2008 2009
• Single 1,350 1,400
• MFJ, SS 1,050 1,100
• HH 1,350 1,400
• MFS 1,050 1,100

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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

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Real Property and Auto Sales Tax Standard
Deductions

• New for 2009 to stimulate economy
• Real property tax Lesser of actual or 500
  (1,000 for joint return)
• Auto sales tax
• Purchase between 2/17/09 and 12/31/09
• Must be a new vehicle weighing 8,500 lbs or less
• Tax on only first 49,500 of purchase price
• Phased out where AGI greater than 125,000
  (250,000 for joint return)

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Standard Deduction

• Taxpayers who are ineligible to use the SD
• Married, filing separately when other spouse
  itemizes deductions
• Nonresident aliens
• Individual filing return for tax year of less
  than 12 months due to change in accounting period

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Special Limitations on Basic Standard Deduction

• Individual claimed as dependent has a BSD limited
  to the greater of
• 950 or
• 300 plus earned income (but not exceeding normal
  BSD)
• ASD amount(s) still available

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Standard Deduction Examples for 2009

• A blind child who earns 200 and is claimed by
  parents as a dependent
• SD 950 (BSD) 1,400 (ASD) 2,350
• A child who earns 1,500 and is claimed by
  parents as a dependent
• SD 1,800 BSD equal to greater of 950 or
  (300 1,500 earned income)
• A child who earns 6,500 and is claimed by
  parents as a dependent
• SD 5,700 BSD limited to normal amount

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Personal and Dependency Exemptions

• Amounts Adjusted annually for inflation
• 2008 3,500 per exemption
• 2009 3,650 per exemption
• Personal exemption
• One per taxpayer
• Two personal exemptions when married filing
  jointly)
• Dependency Exemption tests
• Qualifying child or Qualifying relative
• Joint return
• Citizenship or residency

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Dependents Qualifying Child Tests

• Relationship
• Abode
• Age
• Support

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Dependents Qualifying Relative

• Qualifying relative or member of household
• Gross income less than exemption amount (3,650
  for 2009)
• Support

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Dependency Exemptions - Relationship

• Dependent must be a qualified relative or a
  member of the taxpayers household for the entire
  year
• Once a relationship is established by marriage,
  it continues even if there is a change in marital
  status

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Dependency Exemptions Support Test

• gt50 of the dependents support
• Two exceptions to the support test
• Multiple support agreements
• Children of divorced parents

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Dependency Exemptions Gross Income

• Dependents gross income must be less than amount
  allowed for an exemption (i.e., 3,650 for 2009)
• Example - Grandparent (age 70) meets all
  dependency tests for taxpayer except has gross
  income of 3,800
• Grandparent fails gross income test and cannot be
  claimed by taxpayer as dependency exemption

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Qualifying Child Qualifying Relative
Requirements - Joint Return

• Dependent cannot file a joint return with spouse
  unless
• Filing solely for refund of all taxes withheld
• No tax liability exists for either spouse on
  separate returns
• Neither spouse required to file return

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Qualifying Child Qualifying Relative
Requirements Citizen or Residency

• Dependent must be a U.S. citizen, or
• a resident of U.S., Canada, or Mexico

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Personal and Dependency Exemptions

• Phase-out of exemption benefits applies when
  taxpayers 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
• Exemption deduction is reduced by 2 for every
  2,500 (1,250 for MFS) or part thereof, that AGI
  exceeds threshold amounts

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Individual Income Taxes Rates

• Tax rates for 2009 are 10, 15, 25, 28, 33,
  and 35
• Rates were higher prior to 2003 Tax Act
• Proposed 5.3 increase for taxpayers over
  500,000 (1,000,000 MFJ) taxable income for
  2010.
• Tax rate brackets are inflation adjusted yearly
• Maximum rate for long-term capital gains and
  dividends is 15 (0 in 2009 for persons in the
  10 or 15 bracket for ordinary income)

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Computing Income Tax

• Example 1 MFJ with taxable income of 96,000 in
  2008
• TI lt 100,000, so use Table (Page A-14) 16,694
• Example 2 MFJ with taxable income of 120,000
  in 2009
• TI gt 100,000, so use Schedule (Inside front
  cover)
• Step 1 (Tax on 67,900) 9,350
• Step 2 (Tax on next 52,100 at 25) 13,025
• Total 22,375
• 120,000 67,900 52,100

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Kiddie Tax

• Net unearned income (e.g., interest, dividends,
  capital gains) of child is taxed at parents rate
• Child must be under age 19 at end of year or
  under age 24 and a full time student
• NUI generally equals unearned income less 1,900
  (2009 tax year)

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Kiddie Tax

• Computing NUI for Kiddie Tax
• Unearned income
• Less 950
• Less the greater of
• i) 950 of the standard deduction, or
• ii) allowable itemized deductions for unearned
  income
• Equals net unearned income

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Filing Requirements

• Tax return
• Must file if gross income equals or exceeds the
  standard deduction and personal exemption amount
• ASD for blindness does not apply for this
  determination
• Special rules for dependents and self-employed
  taxpayers

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Filing Requirements

• Tax return
• Individual returns are due on or before the 15th
  day of the 4th month after taxpayers year end
• Most individuals are calendar year taxpayers,
  thus, due date is April 15
• May obtain an extension of time to file until
  October 15
• IRS is pushing e-filing