Tax USA Assignment 3

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Week09.1_pope_phft2014_ind_pp_02.pptx

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Determination of Tax

Chapter 2

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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

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Treatment of capital gains and losses

Tax planning considerations

Provisions applicable to higher-income taxpayers

Compliance and procedural considerations

DETERMINATION OF TAX (2 of 2)

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Formula for Individual Income Tax (1 of 2)

Gross income

See Table 3 for items listed in §61(a)

- 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.

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Formula for Individual Income Tax (2 of 2)

Adjusted Gross Income (AGI)

- Deductions from AGI:

Greater of itemized deductions or std ded.

Personal and dependency exemptions

Taxable Income

X Tax rate or rates (tax table or schedule)

Gross tax

- Credits and prepayments (see Table 5)

Net tax payable or refund due

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Deductions from Adjusted Gross Income

Itemized deductions

Standard deduction

Personal exemptions

Dependency exemptions

Child credit

Making work pay credit and social security tax reduction

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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

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Itemized Deductions (2 of 2)

Only claim itemized deductions if total greater than std. deduction

Some items limited by varying percentages of adjusted gross inc.

Medical expenses

Casualty losses

Miscellaneous itemized deductions

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Standard Deduction

Varies based on:

Filing status, age, and vision

$6,100 - $12,200 in 2013

Increase over 2012 to adjust for inflation

Increase std. ded. if elderly &/or blind

Used when std. ded. > itemized ded.

Limited std. ded. in certain situations

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Personal Exemptions

Generally, each taxpayer allowed one

Unless claimed as dependent on another return

$3,900 in 2012

Additional allowed for spouse on joint return

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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

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Dependency Exemptions Additional Requirements for Qualifying Children

Relationship test

Age test

< 19 or full-time student < 24

Abode test

Live w/taxpayer > ½ of year

Support Test

Dependent provides < ½ own support

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Dependency Exemptions Additional Requirements for Other Relatives

Relationship test

Related to or live w/taxpayer whole yr

Gross income test

Dependent’s gross inc. < exemption amt.

Support test

Taxpayer provides > ½ support

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Child Credit

$1K per qualifying child

Under 17 and a “qualifying” child

Credit reduced if MAGI exceeds

MFJ $110k; Single $75k; MFS $55k

Child credit refundable to extent of 15% of taxpayer's earned income in excess of $3K

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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

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Filing Status (1 of 3)

Married filing jointly

Marital status on last day of tax year

Common law marriages recognized

Spouses must be U.S. citizens or residents

Federal Defense of Marriage Act of 1996 defines marriage as between a man and a woman

Same-sex couples cannot file a joint federal return, but may file joint state return in some states

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Filing Status (2 of 3)

Surviving spouse

Files as married filing jointly

Head of household

Unmarried and maintains home in which dependent lives > ½ yr

Married filing separately

Single - taxpayers not in other categories

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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

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Children with Unearned Income Personal Exemption & Standard Deduction

No personal exemption on own return

Standard deduction reduced to greater of

Earned income OR

$1K OR

Dependent’s earned income plus $350

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Children with Unearned Income Kiddie Tax (1 of 2)

All kids < 18 yrs old

Tax rate on child’s net unearned inc. in excess of $2K 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 > $1K

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Children with Unearned Income Kiddie Tax (2 of 2)

Certain kids 18 – 23 (cont’d)

If 19-23, same rules as for age 18 ONLY if also a full-time student

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 ≤ $10K &

All child’s income from div. & interest

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Business Income & Bus Entities C Corporation Formula

Gross Income

- Exclusions

Gross Income

- Deductions

Taxable Income

X Tax Rates

Gross Tax

- Credits and prepayments

Net tax payable or refund due

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First $50K	15 % of Taxable Inc
> $50K But Not > $75K	$7,500 + 25% of Taxable Inc
> $75K But Not > $100K	13,750 + 34% of Taxable Inc > $75K
> $100K But Not > $335K	$22,250 + 39% of Taxable Inc > $100K
> $335K	34% of Taxable Inc
> $10M But Not > $15M	3.4M + 35% of Taxable Inc > $10M
> $15M But Not > $18,333,333	$5.150M + 38% > $15M
> $18,333,333	35% of Taxable Inc

Business Income & Bus Entities C Corporation Tax Rates

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Business Income & Bus Entities Flowthrough vs. Non Flowthrough

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

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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

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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

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Capital Gains & Losses Tax Rates on Net Capital Gains

Net long-term gain

Taxed at maximum of 15%

0% if in the 10% or 15% tax

Rate scheduled to increase in 2013 to lesser of 20% or regular tax rate

Net short-term gain

Taxed at the same rate as other income

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Capital Gains & Losses Tax Treatment of Net Capital Losses

Individuals can deduct only up to $3K of net capital losses from their other income

Unused losses are carried over indefinitely to offset gains in future years

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Provisions Applicable to Higher-Income Taxpayers (1 of 3)

Top tax brackets increased

Income tax - 39.6%

Tax rate on dividends – 20%

Payroll tax increase

0.9% on earnings >$200K ($250K MFJ)

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Investment tax

3.8% on lesser of investment income or AGI in excess of $200K ($250K MFJ)

Provisions Applicable to Higher-Income Taxpayers (2 of 3)

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Personal and dependency exemptions phased out

Reduced by 2% for each $2.5K ($1.25K MFS), or fraction thereof, above $200K ($250K MFJ)

Itemized deductions reduced by up to 80%

Provisions Applicable to Higher-Income Taxpayers (3 of 3)

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Tax Planning Considerations

Shifting income between family members

Splitting income

Maximizing itemized deductions

Filing joint or separate returns

Innocent spouse provision

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Compliance & Procedural Considerations

Who must file

See Chart on page 35

Due dates for filing return

Individuals and Partnerships

15th day of 4th month after year end

Forms 1040, 1040EZ, and 1040A

Corporations

15th day of 3rd month after year end

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END Chapter 2

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