CHAPTER 1 The Individual Income Tax Return

CHAPTER 1 The Individual Income Tax Return

CHAPTER 1 The Individual Income Tax Return Income Tax Fundamentals 2013 Student Slides Gerald E. Whittenburg Martha Altus-Buller Steven Gill 2013 Cengage Learning History of Taxation Since 1913, when 16th amendment was passed, the constitutionality of income tax has never been questioned by federal courts Income taxes serve a multitude of purposes

2013 Cengage Learning Objectives of Tax Law Raise revenue Tool for social and economic policies o Social policy encourages desirable activities and discourages undesirable activities Deductions for charitable contributions Credits for higher education expenses o Economic policy as manifested by fiscal policy Encourage investment in capital assets through depreciation Credits for investment in solar and wind energy

o Both economic and social Exclude gain on sale of personal residence up to $250,000 ($500,000 if married) 2013 Cengage Learning Primary Entities/Forms Individual o o o Taxable income includes wages, salary, selfemployment earnings, rent, interest and dividends An individual may file simplest tax form qualified for

1040EZ 1040A See next slide 1040 If error made on one of the three above forms, can amend with a 1040X 2013 Cengage Learning Tax Formula for Individuals This formula follows Form 1040 Gross Income less: Deductions for Adjusted Gross Income (AGI) AGI less: Greater of Itemized or Standard Deduction less: Exemption(s) Taxable Income times: Tax Rate (using tax tables or rate schedules)

Gross Tax Liability less: Tax Credits and Prepayments Tax Due or Refund 2013 Cengage Learning Standard Deduction and Exemptions 2012 standard deduction Single Married Filing Joint (MFJ) Qualifying Widow(er) $ 5,950 $11,900 $11,900 also known as Surviving Spouse

Head of Household (HOH) Married Filing Separate (MFS) $ 8,700 $ 5,950 *Plus additional amounts for blindness or over 65: $1,150 if MFJ, MFS or qualifying widow(er) and $1,450 if HOH or Single Exemption = $3800/person 2013 Cengage Learning Who Must File Based on filing status and gross income Generally, if exemptions plus greater of standard or itemized deductions exceed income, then filing is not necessary

If taxpayer is claimed as a dependent on another taxpayers return, dependents standard deduction is: Greater of $950 or Earned income + $300 But never more than standard deduction 2013 Cengage Learning See Figures 1.1 and 1.2 on page 1-8 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 didnt 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 2013 Cengage Learning 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 taxpayers parent, he/she doesnt 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 2013 Cengage Learning Tax Computation Six brackets o o

10%, 15%, 25%, 28%, 33%, 35% Tax rate schedules for different filing types Qualifying dividends and net long-term capital gains may be taxed at lower rates o Rates based on ordinary tax bracket 2013 Cengage Learning

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