Slide 1DETERMINATION OF TAX (1 of 2)DETERMINATION OF TAX (2 of 2)Formula for Individual Income Tax (1 of 2)Formula for Individual Income Tax (2 of 2)Deductions from Adjusted Gross IncomeItemized Deductions (1 of 2)Itemized Deductions (2 of 2)Standard DeductionPersonal ExemptionsDependency Exemptions Requirements for All DependentsDependency Exemptions Additional Requirements for Qualifying ChildrenDependency Exemptions Requirements for Other RelativesChild CreditDetermining the Amount of TaxFiling Status (1 of 2)Filing Status (2 of 2)Dependents with Unearned IncomeBusiness Income & Bus Entities C Corporation FormulaBusiness Income & Bus Entities C Corporation Tax RatesBusiness Income & Bus Entities Flow-through vs. Non Flow-throughCapital Gains & Losses Capital Asset DefinitionCapital Gains & Losses Classification of Capital Gains and LossesCapital Gains & Losses Tax Rates on Net Capital GainsCapital Gains & Losses Tax Treatment of Net Capital LossesTax Planning ConsiderationsCompliance and Procedural ConsiderationsSlide 282-1©2007 Prentice Hall, Inc.©2007 Prentice Hall, Inc.2-2DETERMINATION OF TAXDETERMINATION OF TAX(1 of 2)(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©2007 Prentice Hall, Inc.2-3DETERMINATION OF TAXDETERMINATION OF TAX(2 of 2)(2 of 2)Tax planning considerationsCompliance and procedural considerations©2007 Prentice Hall, Inc.2-4Formula for IndividualFormula for IndividualIncome TaxIncome Tax (1 of 2)(1 of 2)Income from whatever source derived- Exclusions= Gross Income- Deductions for Adjusted Gross Income= Adjusted Gross Income (AGI)©2007 Prentice Hall, Inc.2-5Formula for IndividualFormula for IndividualIncome TaxIncome Tax (2 of 2)(2 of 2)= Adjusted Gross Income (AGI)- Deductions from AGI: Greater of itemized deductions or std deduction Personal and dependency exemptions= Taxable IncomeX Tax rate or rates (tax table or schedule)= Gross tax- Credits and prepayments= Net tax payable or refund due©2007 Prentice Hall, Inc.2-6Deductions from Deductions from Adjusted Gross IncomeAdjusted Gross IncomeItemized deductionsStandard deductionPersonal exemptionsDependency exemptionsChild credit©2007 Prentice Hall, Inc.2-7Itemized Deductions(1 of 2)See Table I2-5 for partial list Medical expensesTaxesInvestment and residential interestCharitable contributionsPersonal casualty and theft lossesMiscellaneous deductions©2007 Prentice Hall, Inc.2-8Itemized Deductions(2 of 2)Only claim itemized deductions if greater than standard deductionSome items limited by varying percentages of adjusted gross income Itemized deductions reduced if AGI exceeds certain amountMax reduction in itemized deductions is 80% of total itemized deductions©2007 Prentice Hall, Inc.2-9Standard DeductionVaries based on:Filing statusAgeVisionUsed when > itemized deductionsLoss of or limited standard deduction in certain situations©2007 Prentice Hall, Inc.2-10Personal ExemptionsGenerally, each taxpayer allowed oneUnless claimed as dependent on another return$3,300 in 2006Additional allowed for spouse on joint return©2007 Prentice Hall, Inc.2-11Dependency ExemptionsRequirements 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©2007 Prentice Hall, Inc.2-12Dependency Exemptions Additional Requirements for Qualifying ChildrenRelationship testAge testAbode testSupport Test©2007 Prentice Hall, Inc.2-13Dependency Exemptions Requirements for Other RelativesRelationship testGross income testSupport testPersonal and dependency exemptions phased out for high income taxpayers©2007 Prentice Hall, Inc.2-14Child Credit$1000 per qualifying child Under 17 and a “qualifying” childCredit reduced if MAGI exceeds thresholdChild credit refundable to extent of 15% of taxpayer's earned income of 11,000©2007 Prentice Hall, Inc.2-15Determining the Amount Determining the Amount of Taxof TaxFiling statusJoint returnSurviving spouseHead of householdSingle taxpayerMarried filing a separate returnAbandoned spouseDependents with unearned income©2007 Prentice Hall, Inc.2-16Filing Status(1 of 2)Married filing jointlySurviving spouseHead of householdSingleMarried filing separately©2007 Prentice Hall, Inc.2-17Filing Status(2 of 2)Relative tax liability by filing status from lowest to highestMarried filing jointlySurviving spouseHead of householdAbandoned spouseSingleMarried filing separately©2007 Prentice Hall, Inc.2-18Dependents with Unearned IncomeNo personal exemption on own returnStandard deduction reduced to greater ofEarned income OR $800 OR Dependent’s earned income plus $250Kiddie taxTax on child’s net unearned income if < 14 same as parents’ rate if higher than child’s©2007 Prentice Hall, Inc.2-19Business Income & Bus Business Income & Bus Entities Entities C Corporation FormulaC Corporation FormulaIncome from whatever source derived- Exclusions= Gross Income- Deductions= Taxable IncomeX Tax rates= Gross Tax - Credits and prepayments= Net tax payable or refund due©2007 Prentice Hall, Inc.2-20Business Income & Bus Business Income & Bus Entities Entities C Corporation Tax RatesC Corporation Tax RatesFirst $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©2007 Prentice Hall, Inc.2-21Business Income & Bus Business Income & Bus Entities Entities Flow-through vs. Non Flow-throughFlow-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©2007 Prentice Hall, Inc.2-22Capital Gains & LossesCapital Gains & LossesCapital Asset DefinitionCapital Asset DefinitionCapital asset defined in §1221Assets other than inventory, trade receivables, certain self-created works, depreciable business