Week 1 Writing Project
OfficialADMIN
Chapter2.pptxFundamentals of Taxation 2020 Edition Cruz, Deschamps, Niswander, Prendergast, Schisler
Chapter 2
Expanded Tax Formula, Form 1040, and Basic Concepts
© 2020 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
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Learning Objective #1: The Expanded Tax Formula and the Major Sections of Form 1040 1
The Tax Return.
Basic Form 1040.
Schedules for Form 1040.
Adjusted Gross Income (A G I).
Gross income minus a list of permitted deductions.
Many deductions and credits are based on A G I.
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Learning Objective #1: The Expanded Tax Formula and the Major Sections of Form 1040 2
The Expanded Tax Formula
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Learning Objective #1: The Expanded Tax Formula and the Major Sections of Form 1040 Concept Check 2-1
When preparing a tax return, you will seldom use any of the schedules. True or False?
False
The concept of Adjusted Gross Income (A G I) is important because many deductions and credits reported on the tax return are computed based on the amount shown as A G I? True or False?
True
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Learning Objective #2: Determine the Proper Filing Status 1
There are five filing statuses:
Single.
Not married as of the last day of the year.
Married Filing Jointly (M F J).
Must be legally married on the last day of the year.
The marital status of a couple is determined under the laws of the state in which they reside.
It does not matter if only one has earned income.
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Learning Objective #2: Determine the Proper Filing Status 2
Married Filing Separately (M F S).
Must be married but elect to file separately.
The standard deduction can be taken only if both make the same selection.
Must show the social security number of the other spouse on the taxpayer’s return.
Only in unusual circumstances is it advantageous for a married couple to file M F S.
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Learning Objective #2: Determine the Proper Filing Status 3
Head of Household.
Must be unmarried at the end of the year.
A married taxpayer living apart from the spouse during the last six months of the year might qualify as unmarried.
Must be a U.S. citizen or resident.
Must maintain a household for a qualifying person for more than half the year.
Exception: Parents can live in a separate household.
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Learning Objective #2: Determine the Proper Filing Status 4
Qualifying Widow(er) with Dependent Child.
Permitted for only two years.
Must be eligible to file a joint return the year the spouse died.
Must be unmarried.
Must pay for more than half the costs of a household that is the principal place of residence of the taxpayer and child for the entire year.
Exception: temporary absences are permitted.
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Learning Objective #2: Determine the Proper Filing Status Concept Check 2-2 1
Even though you are in the process of getting a divorce, you can file as married filing jointly. True or False?
True
The social security number of the taxpayer’s spouse must be shown on the taxpayer’s tax return when filing as married filing separately. True or False?
True
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Learning Objective #2: Determine the Proper Filing Status Concept Check 2-2 2
A surviving spouse who qualified as married filing jointly when the spouse died can file as a qualifying widow(er) for the next two years as long as the surviving spouse pays for more than half the cost of keeping up a household and does not remarry. True or False?
False
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Learning Objective #3: Determine Dependents 1
Taxpayers may have related individuals living with them and/or they may provide financial support for a related individual. As we will see in this section, these individuals may qualify as dependents if they meet certain tests. The existence of dependents is important for determination of child credits, filing status, and other matters.
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Learning Objective #3: Determine Dependents 2
The Dependent must be a qualifying child or relative and meet three general tests:
Dependent taxpayer test:
If the dependent can be claimed by someone else, then the taxpayer cannot claim this person as a dependent.
Joint return test:
The person claimed as a dependent cannot file a joint return with his or her spouse, unless a return is filed only to claim a refund and there is no tax liability on the return.
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Learning Objective #3: Determine Dependents 3
Citizen or resident test.
The dependent must meet one of the following:
be a U.S. citizen, resident, or national.
be resident of Canada or Mexico.
be an adopted child of the taxpayer if the child is a member of the taxpayer’s household all year and the taxpayer is a U.S. citizen or national.
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Learning Objective #3: Determine Dependents 4
A Qualifying Child must meet five specific tests:
Relationship test.
Age test.
Residency test.
Support test.
Special test for qualifying child of more than one taxpayer.
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Learning Objective #3: Determine Dependents Concept Check 2-3 1
What are the five specific tests you need to meet to claim someone as a qualifying child?
Relationship test
Age test
Residency test
Support test
Special test for qualifying child of more than one taxpayer
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Learning Objective #3: Determine Dependents Concept Check 2-3 2
To meet the age test, a child who is not disabled must be
if a full-time student.
Under 19 years of age, or under 24 years of age and a full-time student.
Also, for years after 2008, the child must be younger than the person claiming the dependency.
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Learning Objective #3: Determine Dependents 5
A Qualifying Relative must meet four specific tests:
Not a qualifying child test.
Relationship or member of household test.
Gross income test.
Cannot have gross income equal or greater than $4,200.
Support test.
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Learning Objective #3: Determine Dependents Concept Check 2-4
You must meet one of these four tests to be a qualifying relative: Not a qualifying child test, relationship or member of household test, gross income test and support test. True or False?
False
A qualifying relative can earn up to $12,000 for the year 2019. True or False?
False
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Learning Objective #4: Determine the Standard Deduction 1
The Standard Deduction for 2019 is:
| Single | $12,200 |
| Married Filing Jointly | $24,400 |
| Married Filing Separately | $12,200 |
| Head of Household | $18,350 |
| Qualifying Widow(er) | $24,400 |
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Learning Objective #4: Determine the Standard Deduction 2
The Standard Deduction:
Increases for people who are age 65 or older or blind.
If a taxpayer can be claimed as a dependent by another taxpayer, the standard deduction is limited to the higher of $1,100, or the taxpayer’s earned income plus $350.
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Learning Objective #4: Determine the Standard Deduction 3
Additional Standard Deductions for Taxpayers who are 65 or older or blind
| Single | $1,650 |
| Married Filing Jointly | $1,300 |
| Married Filing Separately | $1,300 |
| Head of Household | $1,650 |
| Qualifying Widow(er) | $1,300 |
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Learning Objective #4: Determine the Standard Deduction Concept Check 2-5
What is the amount of the standard deduction in each of the following cases:
Taxpayer is single, 42 years of age, and blind
$13,850 ($12,200 + $1,650)
Taxpayer is head of household, 37 years of age, and not blind
$18,350
Taxpayers are married filing jointly, the husband is 67 and the wife is 61 years of age, and neither is blind
$25,700 ($24,400 + $1,300)
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Learning Objective #5: The Amount of Tax Due to the Internal Revenue Service (I R S) 1
Amount of Tax Liability
The tax liability is computed by using the tax tables or the tax rate schedules.
Tax Payments and Credits Reduce the Tax Liability
Withholding by the employer and estimated payments sent to I R S.
Tax credits:
Nonrefundable.
Refundable.
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Learning Objective #5: The Amount of Tax Due to the Internal Revenue Service (I R S) 2
Tax Refund or Amount Due with Return
Excess payment results in a refund.
Remaining tax liability means an amount is owed to I R S.
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Learning Objective #5: The Amount of Tax Due to the Internal Revenue Service (I R S) Concept Check 2-6
Use the tables in the back of the text to determine the tax amount for the following situations
Single taxpayer with a taxable income of $34,640
$3,961
Married taxpayers filing jointly with a taxable income of $67,706
$7,739
What is the limit on the F I C A (social security) amount for 2019?
$132,900
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Learning Objective #6: Interest and Penalties the I R S Can Assess 1
Interest Charged on Assessments
The rate charged is the federal short-term rate plus 3 percentage points.
Examples of some rates for different periods.
| Jan. 1, 2019, to Mar. 31, 2019 | 6% |
| Apr. 1, 2018, to Dec. 31, 2018 | 5% |
| Jan. 1, 2017, to Mar. 31, 2018 | 4% |
| Apr. 1, 2016, to Dec. 31, 2016 | 4% |
| July 1, 2015, to Mar. 31, 2016 | 3% |
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Learning Objective #6: Interest and Penalties the I R S Can Assess 2
Penalties
Failure to file a tax return.
5 percent per month or fraction of a month, not to exceed 25 percent.
Any income tax return not filed within 60 days of its due date is subject to a minimum penalty of the lesser of $215 or the amount of tax required on the return.
Failure to pay tax penalty.
0.5 percent per month or fraction of a month, not to exceed 25 percent.
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Learning Objective #6: Interest and Penalties the I R S Can Assess 3
Maximum amount is 5 percent per month or fraction of a month, not to exceed 25 percent when both penalties apply to the same situation.
Failure to pay estimated income tax penalty.
Applies if taxpayer fails to pay during the year a minimum of: 90 percent of the current year tax liability, or 100 percent of the prior year’s tax liability if the taxpayer’s A G I in the prior year is less than $150,000.
Accuracy-related penalty.
Applies when there is negligence or any substantial understatement.
The rate is 20 percent of the tax due.
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Learning Objective #6: Interest and Penalties the I R S Can Assess 4
Fraud penalty.
Applies to the understatement of tax that is attributable to fraud.
The rate is 75 percent.
Erroneous claim for refund or credit.
The rate is 20 percent on the disallowed amount of the claim if the claim for refund or credit of income filed is found to be excessive.
Not applicable if the fraud or the accuracy-related penalty has been assessed.
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Learning Objective #6: Interest and Penalties the I R S Can Assess Concept Check 2-7 1
A taxpayer filed an automatic extension before April 15 but sent no money to the I R S. He then filed his return by June 2 and paid the amount due of $3,000. What are the amounts for the failure to file a tax return penalty and the failure to pay penalty?
Failure to file does not apply but failure to pay is
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Learning Objective #6: Interest and Penalties the I R S Can Assess Concept Check 2-7 2
Fraud on a tax return can also lead to criminal charges. True or False?
True
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