Tax Determination; Personal + Dependency ExemptionsTax FormulaPersonal + Dependency ExemptionsPersonal ExemptionsDependency ExemptionsPhase Out ExemptionsExemption Phase OutChild Tax Credit (IRC §24)Tax Determination – 2 methods1) Tax Table method - most commonKiddie TaxUnearned income above $1600 of children < 14 taxed at parents’ rateReportingFiling StatusFiling ConsiderationsA) Filing RequirementsB) Tax ReturnsD) Amended Tax ReturnE) PaymentsG/L from Property TransactionsTax Determination; Personal + Dependency ExemptionsGross Income Less exclusions (generally not reported on T/R) Includible gross incomeTax FormulaIncludible Gross Income – Sec.61Deductions for AGIAGILess: greater of1) total itemized aid2) standard deductionLess: personal and dependency exemptionsTaxable income x applicable tax rate (10% - 35%)Sec. 62 Deductions for AGI:1) ordinary – necessary business exp.2) ½ self-employment tax paid3) alimony paid4) certain IRA contributions5) money expenses 6) forfeited interest penalty for premature withdrawals7) capital lossesAGI  important for medical expenses (7.5% excess) + charitable contrib. (50% limit) over AGIItemized Deductions 1) some personal expenses – e.g., medical, certain taxes + interest, char. contrib.2) expenses for production or collection of income – e.g., bank fees3) expenses for management of property held for production of income – e.g., tax prep fees, investment feesStandard Deduction  amount specified by Congress depending on filing status supposed to be equal to poverty level to exempt a certain amount of income from tax2 components: 1) basic standard deduction – see Table 2) additional std. ded. – see Table -for each taxpayer 65 or over or blind (e.g., H + W both over 65 = 2 addit’l std. ded.-not allowed for dependentsstandard deduction = greater of 1) standard deduction or 2) itemized deductionsPersonal + Dependency Exemptions allowed for taxpayer, spouse + each dependent2000 = 2,8002001 = 2,9002002 = 3,0002003= 3,0502004 = 3,100Special RulesA) Std Ded not allowed for:1) married filing separate if either spouse itemizes2) nonresident alien3) T/R < 12 month period due to change in acctg periodB) Personal exemption disallowed for dependents on their T/R if parents claim exempt. C) Dependent’s basic std deduction in 2003 is limited to greater of (1) $750 or (2) sum ofindividual’s earned income +$250, whichever is greater. For 2004 the $750 increases to $800Personal Exemptions-for taxpayer + spouse when married filing joint-if separate, married taxpayer cannot claim exemption for his/her spouse unless spouse has no gross income + is not claimed as a dependent of another taxpayer-married status determined at year end (except for death)-legal separation under decree of divorce are considered unmarriedDependency Exemptions5 tests must be met to claim a dependency exemption:1) Support = over ½ support of individual must be furnished by T/P including food, shelter, clothing, medical/dental, educ. (*exclude scholarships)- Exclude any dependent’s income that has not been spent (e.g., parent earns $$ but puts it in bank)- Include any capital exp. (e.g., cars, furniture, if it is for support)- Exceptions: 1) multiple support agreement allows one of a group of taxpayers providing support even if no individual provides > 50% but group does + has to be > 10% of support- 2) child of parents divorced or separated under decree of separate maintenance filing requirement – form 2120 Multiple Support Declaration exception custodial parent claims child unless written agreement states otherwise + file form 8332 written agreement determines dep. exempt not 50% support Form 8332  Release of Claim to Exemption for Child of Divorced or Separated Parents-attached to noncustodial parent’s T/R for current or all future years2) Relationship/Member of Household test-various blood + marriage relationships qualify (see p. 3-13)-relationship is met IF dependent is relative of other spouse-individual is dependent IF principal place of abode is T/P’s home + is a member of the household for entire year-adopted + foster children qualify3) Gross Income test-dependent’s GI < exemption (see inside front cover of text)-GI  from taxable sources (e.g., scholarships exclude books/tuition but include room/board-IF parent provided > ½ child’s support + child is < 19 or full-time student < 24 then child can earn > $2,800-child = son, stepson, daughter, stepdaughter, adopt /foster alsoStudent application  must be full-time student at an educational institution for 5/12 months of the year + age <244) Joint Return testdependency exemption not allowed IF dependent files married joint unless: -no tax liab. exists for either spouse on separate returns or 2) neither spouse is required tofile a return 5) Citizenship or Residency Test-must be U.S. citizen, U.S. resident or resident of Canada or Mexico for some part of the yearPhase Out Exemptions as AGI approaches following threshold amounts, phase out begins – after 2003 2004Joint 209,250 214,050H of H 174,400 178,350Single 139,500 142,700Married/Separate 104,625 107,025Phase out = 2% for each $2500 AGI > threshold (married sep. 2% for each $1250)Exemption Phase Out1) AGI – threshold = excess2) Excess  2500 = reduction factor (round up) x 2 = phase out %3) Phase out % x exemption = phase out4) Exemption – phase out = allowable exemptionChild Tax Credit (IRC §24)- in addition to dependency exemptioncredit = $1,000 for each dependent < 17-phased out AGI 110,000  $130,000 (joint)lose $50 credit for every $1000 of AGI greater than $110,000; for every single or H of H phase out begins AGI = $75,000Tax Determination – 2 methods1) Tax Table method - most commonSee Appendix A-Not used by: a) Individual filing short periodb) T/I > ceilingc) Estate or trust2) Tax Rate Schedule Method (see inside front cover of text)See inside front cover Statutory (nominal) rates = rates on scheduleMarginal rate = highestAvg. = tax liab/tax inc.Tax-tax credits (e.g., child tax credit, FTC, credit for elderly, earned income credit)-tax payments: 1) withholding (W-2) 2) estimated payments 3) credit applied from prior yearTax Due <Refund>Kiddie TaxApplies to children under age 14 by end of tax year with unearned incomeUnearned income above $1600 of