2011 Pearson Education Inc Publishing as Prentice Hall
© 2011 Pearson Education, Inc. Publishing as Prentice Hall 2 -1
DETERMINATION OF TAX (1 of 2) ® Formula for individual income tax ® Deductions from adjusted gross income ® Determining the amount of tax ® Business income and business entities ® Treatment of capital gains and losses © 2011 Pearson Education, Inc. Publishing as Prentice Hall 2 -2
DETERMINATION OF TAX (2 of 2) ® Tax planning considerations ® Compliance and procedural considerations © 2011 Pearson Education, Inc. Publishing as Prentice Hall 2 -3
Formula for Individual Income Tax (1 of 2) Income from whatever source derived - Exclusions (see Table 2) = Gross Income - Deductions for AGI (see Table 4) = Adjusted Gross Income (AGI) Tax rate schedules, std. deduction, personal exemptions, & other amounts are adjusted for inflation. © 2011 Pearson Education, Inc. Publishing as Prentice Hall 2 -4
Formula for Individual Income Tax (2 of 2) = Adjusted Gross Income (AGI) - Deductions from AGI: Greater of itemized deductions or std deduction Personal and dependency exemptions = X = - Taxable Income Tax rate or rates (tax table or schedule) Gross tax Credits and prepayments (see Table 5) © 2011 Pearson Education, Inc. Publishing as Prentice Hall 2 -5
Deductions from Adjusted Gross Income ® Itemized deductions ® Standard deduction ® Personal exemptions ® Dependency exemptions ® Child credit © 2011 Pearson Education, Inc. Publishing as Prentice Hall 2 -6
Itemized Deductions (1 of 2) ® See Table 6 for partial list Medical expenses Taxes Investment and residential interest Charitable contributions Personal casualty and theft losses Miscellaneous deductions © 2011 Pearson Education, Inc. Publishing as Prentice Hall 2 -7
Itemized Deductions (2 of 2) ® Only claim itemized deductions if greater than standard deduction ® Some items limited by varying percentages of adjusted gross income ® Prior to 2010, a temporary rule required higher income taxpayers to reduce certain itemized deductions © 2011 Pearson Education, Inc. Publishing as Prentice Hall 2 -8
Standard Deduction ® Varies based on: Filing status, age, and vision $5, 700 - $11, 400 in 2010 ¬Only minor change from 2009 ® Used when std. ded. > itemized deductions ® Limited std. ded. in certain situations © 2011 Pearson Education, Inc. Publishing as Prentice Hall 2 -9
Personal Exemptions ® Generally, each taxpayer allowed one Unless claimed as dependent on another return $3, 650 in 2009 and 2010 ® Additional allowed for spouse on joint return © 2011 Pearson Education, Inc. Publishing as Prentice Hall 2 -10
Dependency Exemptions Requirements for All Dependents ® Have a qualifying identification number ® Meet a citizenship test ® Meet a separate return test ® Not themselves claim another person as a dependent © 2011 Pearson Education, Inc. Publishing as Prentice Hall 2 -11
Dependency Exemptions Additional Requirements for Qualifying Children ® Relationship test ® Age test ® Abode test ® Support Test © 2011 Pearson Education, Inc. Publishing as Prentice Hall 2 -12
Dependency Exemptions Requirements for Other Relatives ® Relationship test ® Gross income test ® Support test ® Prior to 2010 a temporary provision phased out personal and dependency exemptions for high income taxpayers © 2011 Pearson Education, Inc. Publishing as Prentice Hall 2 -13
Child Credit ® $1, 000 Under per qualifying child 17 and a “qualifying” child ® Credit reduced if MAGI exceeds threshold ® Child credit refundable to extent of 15% of taxpayer's earned income in excess of $3, 000 © 2011 Pearson Education, Inc. Publishing as Prentice Hall 2 -14
Determining the Amount of Tax ® Filing status ® Joint return ® Surviving spouse ® Head of household ® Single taxpayer ® Married filing a separate return ® Abandoned spouse ® Dependents with unearned income © 2011 Pearson Education, Inc. Publishing as Prentice Hall 2 -15
Filing Status (1 of 3) ® Married filing jointly The Federal Defense of Marriage Act of 1996 defines marriage as between a woman. Same sex couples cannot file a joint Federal return ¬May file jointly state return in certain states © 2011 Pearson Education, Inc. Publishing as Prentice Hall 2 -16
Filing Status (2 of 3) ® Surviving spouse ® Head of household ® Single ® Married filing separately © 2011 Pearson Education, Inc. Publishing as Prentice Hall 2 -17
Filing Status (3 of 3) ® Relative tax liability by filing status from lowest to highest Married filing jointly Surviving spouse Head of household ¬Includes abandoned spouse Single Married filing separately © 2011 Pearson Education, Inc. Publishing as Prentice Hall 2 -18
Dependents with Unearned Income Personal Exemption & Standard Deduction ® No personal exemption on own return ® Standard deduction reduced to greater of Earned income OR $950 OR Dependent’s earned income plus $300 © 2011 Pearson Education, Inc. Publishing as Prentice Hall 2 -19
Dependents with Unearned Income Kiddie Tax (1 of 2) ® All kids < 18 yrs old Tax rate on child’s net unearned income in excess of $1, 900 same as parents’ rate if higher than child’s rate ® Certain kids age 18 -23 If 18, applies if earned income < ½ support AND unearned income > $950 If 19 -23, same rules as for age 18 ONLY if also a full-time student © 2011 Pearson Education, Inc. Publishing as Prentice Hall 2 -20
Dependents with Unearned Income Kiddie Tax (2 of 2) ® Parents of child subject to kiddie tax may elect to include child’s dividend &interest income on their own return If child’s total gross income ≤ $9, 500 & All child’s income from div. & interest © 2011 Pearson Education, Inc. Publishing as Prentice Hall 2 -21
Business Income & Bus Entities C Corporation Formula Income from whatever source derived - Exclusions = Gross Income - Deductions = Taxable Income X Tax rates = Gross Tax - Credits and prepayments = Net tax payable or refund due © 2011 Pearson Education, Inc. Publishing as Prentice Hall 2 -22
Business Income & Bus Entities C Corporation Tax Rates First $50 K > $50 K But Not > $75 K 15 % of Taxable Inc $7, 500 + 25% of Taxable Inc > $75 K But Not > $100 K 13, 750 + 34% of Taxable Inc > $75 K > $100 K But Not > $335 K $22, 250 + 39% of Taxable Inc > $100 K > $335 K 34% of Taxable Inc > $10 M But Not > $15 M 3. 4 M + 35% of Taxable Inc > $10 M > $15 M But Not > $5. 150 M + 38% > $15 M $18, 333 © 2011 Pearson Education, Inc. Publishing as Prentice Hall 2 -23
Business Income & Bus Entities Flow-through vs. Non Flow-through ® Flow-through entities do not pay tax at the entity level ® C corporations pay tax at the entity level and the owners pay tax on corporate earnings (dividends) when received © 2011 Pearson Education, Inc. Publishing as Prentice Hall 2 -24
Capital Gains & Losses Capital Asset Definition ® Capital asset defined in § 1221 Assets other than inventory, trade receivables, certain self-created works, depreciable business property, business land, and certain government publications © 2011 Pearson Education, Inc. Publishing as Prentice Hall 2 -25
Capital Gains & Losses Classification of Capital Gains and Losses ® Capital gains and losses are divided into 2 categories Long-term is held for over 12 months Short-term is held less than 12 months © 2011 Pearson Education, Inc. Publishing as Prentice Hall 2 -26
Capital Gains & Losses Tax Rates on Net Capital Gains ® Net long-term gain Taxed at maximum of 15% ¬Increases 0% ® Net to 20% in 2011 if in the 10% or 15% tax short-term gain Taxed at the same rate as other income © 2011 Pearson Education, Inc. Publishing as Prentice Hall 2 -27
Capital Gains & Losses Tax Treatment of Net Capital Losses ® Individuals can deduct only up to $3, 000 of net capital losses from their other income ® Unused losses are carried over indefinitely to offset gains in future years © 2011 Pearson Education, Inc. Publishing as Prentice Hall 2 -28
Tax Planning Considerations ®Shifting income between family members ®Splitting income ®Maximizing itemized deductions ®Filing joint or separate returns Innocent spouse provision © 2011 Pearson Education, Inc. Publishing as Prentice Hall 2 -29
Compliance and Procedural Considerations ® Who must file See ® Due Chart on page 33 dates for filing return Individuals and Partnerships ¬ 15 th day of 4 th month after year end ¬Forms 1040, 1040 EZ, and 1040 A Corporations ¬ 15 th day of 3 rd month after year end © 2011 Pearson Education, Inc. Publishing as Prentice Hall 2 -30
Comments or questions about Power. Point Slides? Contact Dr. Richard Newmark at University of Northern Colorado’s Kenneth W. Monfort College of Business richard. newmark@Ph. Duh. com © 2011 Pearson Education, Inc. Publishing as Prentice Hall 2 -31
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