Standard Deduction and Tax Computation Objectives Standard Deduction

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Standard Deduction and Tax Computation

Standard Deduction and Tax Computation

Objectives – Standard Deduction and Tax Computation • Determine the standard deduction for most

Objectives – Standard Deduction and Tax Computation • Determine the standard deduction for most taxpayers • Determine the standard deduction for taxpayers claimed as dependents • Identify how taxable income and income tax are computed and reported. Standard Deduction and Tax Computation 2

Topics • Deductions • Age and Blindness • Taxpayers who can be Claimed as

Topics • Deductions • Age and Blindness • Taxpayers who can be Claimed as Dependents • Standard Deduction vs. Itemizing • Determining Taxable Income and Tax Standard Deduction and Tax Computation 3

Key Terms • Adjusted Gross Income (AGI) • Exemptions (Personal or Dependency) • Itemized

Key Terms • Adjusted Gross Income (AGI) • Exemptions (Personal or Dependency) • Itemized Deduction • Married Filing Jointly • Married Filing Separately • Standard Deduction and Tax Computation 4

Deductions • Probe to determine if the standard deduction or itemizing will result in

Deductions • Probe to determine if the standard deduction or itemizing will result in the largest possible deduction for the taxpayer. • Filing Status Standard Deduction • Single/MFS $ 6, 350 • MFJ/QW $12, 700 • Head of Household $ 9, 350 • ADDITIONAL STANDARD DEDUCTION (65+ and/or Blind) • Single $ 1, 550 • MFJ $ 1, 250 • QW $ 1, 250 • Head off Household $ 1, 250 • Married, filing separately $ 1, 250 Standard Deduction and Tax Computation 5

Deductions: When Must you Itemize • Taxpayers who cannot take standard deduction and must

Deductions: When Must you Itemize • Taxpayers who cannot take standard deduction and must itemize: • Filing as Married Filing Separately and the spouse itemizes • Nonresident or dual-status alien (not married to U. S. citizen at the end of the year) • Refer to the Standard Deduction Worksheet – Line 40 from either Pub 17 or Form 1040 Instructions Standard Deduction and Tax Computation 6

Taxpayers Who Can be Claimed as Dependents • A lower standard deduction is offered

Taxpayers Who Can be Claimed as Dependents • A lower standard deduction is offered for an individual who can be claimed as a dependent on another person’s tax return • Use Form 1040 Instructions, Standard Deduction Worksheet – Line 40 to calculate the deduction • Upper Limit: Greater of $1, 050 or the sum of the individual’s earned income for the year plus $350. Standard Deduction and Tax Computation 7

Example • _____ can be claimed as a dependent on his/her parent’s return. _____

Example • _____ can be claimed as a dependent on his/her parent’s return. _____ earned income of $500 for the year. What is the amount of exemption that _______ is entitled to take? • • • Greater of: a. sum of earned income plus 350= 500 +350=850 0 r b. $1, 050 Which is greater $850 or $1, 050 Answer the amount of exemption is $1, 050

Standard Deduction vs. Itemizing • Examples of types of expenses that generally warrant itemizing

Standard Deduction vs. Itemizing • Examples of types of expenses that generally warrant itemizing deductions: • Large out-of-pocket medical and dental expenses • State and local income taxes, sales tax, real estate taxes, and/or personal property taxes • Mortgage interest • Gifts to charity • Certain other miscellaneous deductions Standard Deduction and Tax Computation 9

Determining Taxable Income and Tax • Taxable income is determined by taking the adjusted

Determining Taxable Income and Tax • Taxable income is determined by taking the adjusted gross income (AGI) and subtracting: • Personal and dependency exemptions • Standard or itemized deductions • A separate worksheet is used to calculate tax for taxpayers with: • Capital gains • Qualifying dividends • Foreign earned income Standard Deduction and Tax Computation 10

Summary This lesson covered: • How to identify those who can take the standard

Summary This lesson covered: • How to identify those who can take the standard deduction and how the deduction is affected by filing status, age, blindness, and status as a dependent • Tax computation is based on taxable income • Additional Resources: Interactive Tax Assistant: How Much is My Standard Deduction? Tax Map: Persons not eligible for the standard deduction Tax Map: Electing to Itemize Tax Topics: Standard Deduction FAQs: If I claim my daughter as a dependent because she is a full-time college student, can she claim herself as a dependent when she files her return? 11 Standard Deduction and Tax Computation

Skills Quiz: Standard Deduction What is the standard deduction and/or additional standard deduction in

Skills Quiz: Standard Deduction What is the standard deduction and/or additional standard deduction in each of the following situations. A. Mary, who is married, 69, blind, and not a dependent B. Mel, who is Head of Household, 67, not blind. • C. Donald, single, full time student, age 19 and can be claimed as a dependent on his parent’s tax return. For 2017, Donald earned $600 from his summer job, and $200 interest income. • D. Brenda, age 20, single, full time student and can be claimed as a dependent on her parent’s tax return. She earned $6, 500 during 2017. 12 Standard Deduction and Tax Computation

Skills Quiz: Standard Deduction What is the standard deduction and/or additional standard deduction in

Skills Quiz: Standard Deduction What is the standard deduction and/or additional standard deduction in each of the following situations? A Mary, who is married, 69, blind, and not a dependent. MFJ: $12, 700 + Age: $1, 250 + Blind: $1, 250 = $15, 200 B. Mel, who is Head of Household, 67, not blind. • HOH: $9, 350 + Age: $1, 250 = $10, 600 • C. Donald, single, full time student, age 19 and can be claimed as a dependent on his parent’s tax return. For 2017, Donald earned $600 from his summer job, and $200 interest income. • Greater of: $1, 050 or Earned Income $600 + $350 ($950) • D. Brenda, age 20, single, full time student and can be claimed as a dependent on her parent’s tax return. She earned $6, 500 during 2017. $6, 350. • Greater of: $1, 050 or (earned income $6, 500+$350; but limited to the basic standard deduction of $6, 350 for a single person. Standard Deduction and Tax Computation 13

Skills Quiz: Standard Deduction Louis and Carmella are married and filing separate returns. Louis

Skills Quiz: Standard Deduction Louis and Carmella are married and filing separate returns. Louis itemizes his deductions on Form 1040. Which of the following can Carmella do? A Take the standard deduction for Married Filing Separately B Take the standard deduction for the Single filing status C Itemize her deductions 14 Standard Deduction and Tax Computation

Skills Quiz: Standard Deduction • C is Correct. A married taxpayer who files separately

Skills Quiz: Standard Deduction • C is Correct. A married taxpayer who files separately and whose spouse itemizes deductions must itemize deductions. 15 Standard Deduction and Tax Computation

Skills Quiz: Standard Deduction Lu is blind. Her daughter and son-in-law claim her as

Skills Quiz: Standard Deduction Lu is blind. Her daughter and son-in-law claim her as a dependent. Which of the following would you use to figure her standard deduction? A Standard deduction shown on the tax return B Standard Deduction Worksheet for Dependents C Schedule A 16 Standard Deduction and Tax Computation

Skills Quiz: Standard Deduction B is Correct. Dependent taxpayers who are 65 years old

Skills Quiz: Standard Deduction B is Correct. Dependent taxpayers who are 65 years old or older or blind can use the Standard Deduction Worksheet for dependents to determine their standard deduction. 17 Standard Deduction and Tax Computation

Skills Quiz: Taxable Income • Charles age 27, is single and his disabled dependent

Skills Quiz: Taxable Income • Charles age 27, is single and his disabled dependent father lives with him. In 2017, Charles earned $42, 000 salary as a high school physical education teacher. His other income consisted of $1, 100 interest on a CD and $500 interest from the city of Athens municipal bonds. During 2017, Charles sold stock that resulted in a $1, 000 deductible capital loss. His itemized deductions are $9, 500. What is Charles’ taxable income? Lesson 3 – Filing Basics 18

Skills Quiz: Taxable Income (broadly defined) Salary Interest on CD Interest on municipal bonds

Skills Quiz: Taxable Income (broadly defined) Salary Interest on CD Interest on municipal bonds $42, 000 1, 100 500 $43, 600 Less: Exclusions from Income- Tax Exempt Interest. (500) Gross Income $43, 100 Less: Ded. for gross income – Capital Loss. (1, 000) Adjusted gross income $42, 100 Less: Greater of itemized deductions ($9, 500) or (9, 500) standard deduction ($9, 300) Personal and dependency exemption (8, 100) (2 x $4, 050) Taxable Income Lesson 3 – Filing Basics $24, 500 19