TAX4001 Chapter 4 Individual Income Tax Overview Exemptions and Filing Status The Individual Income Tax Formula Gross Income For AGI Deductions Adjusted Gross Income AGI From AGI Deductions Greater of 1 Standard Deductions 2 Itemized Deductions Personal dependency exemptions Total Taxable Income x Tax Rates Income Tax Liability Other Taxes Total Tax Credits Prepayments Taxes due or refund Tax Rates fixed dollar amount each year indexed for Standard Deduction Adjusted Gross Income AGI Personal dependency exemption inflation statement if too high the IRS will take away deductions If line 38 is less than 152 525 multiply 3 950 by number on line 6d total number of dependents Total number of dependents x 3 950 subtract AGI determining factor for income Schedule X Single Taxable income 9 000 x 10 Taxable income 10 000 9 075 925 x 15 1 Secure society OASDI Old Age survivors disability income 2 Largest amount of heath expenses occur within last few weeks months of your life Ex Medicare self employer social security tax to encourage certain behavior government gives you money back and save on certain things you would rather have 1 of credit than deduction estimates paid in during the year ended Self employment Tax Credits Social Security 138 75 907 5 Prepayments FOR AGI Deductions Alimony paid TAX4001 Health insurance deduction for self employed taxpayers Moving expenses Rental and royalty expenses Capital losses net losses limited to 3 000 for the year One half of self employment taxes paid Business expenses Losses on dispositions of assets used in a trade or business FROM AGI Deductions Medical and dental expenses deductible to the extent these expenses exceed 10 of AGI for taxpayers under age 65 at year end and 7 5 otherwise Taxes state and local income taxes real estate taxes personal property taxes and other taxes Interest expense mortgage home equity and investment interest expense Charitable contributions Casualty and theft losses deductible to the extent they exceed 10 of AGI Job expenses and certain miscellaneous deductions deductible to the extent the sum of these expenses exceeds 2 of AGI Other miscellaneous deductions gambling losses net winnings Page 1 of 1040 Filing status Deductions Realized income Recognized income Excluded income Deferred delayed income realized income is included by a third party on sale of personal residence Installment sales like kind exchange measureable change in property rights All reported on tax return when you get paid permanently excluded municipal bond gain income included in subsequent year Character of Income or Loss Determines rates applicable to income or loss in current year Tax exempt income realized during the year that is exclude Tax deferred income realized during the year that is not Ordinary income 9a wages net income interest alimony Qualified Dividend 9b taxed at 0 15 20 depending on form gross income and is never taxed included in gross income until a a later year taxed at ordinary rates income o Ex Public Company C Corp Board of Directors gives dividends ordinary TAX4001 Shareholder rewarded on stock rise only taxed when you sell stock o Qualified dividend from U S domestic public corporation o Increases gross income only split dividends to compute o Why have qualified To incentivize people to put money in Capital gain or loss 13 realized vs recognized only recognize taxable income the market when you sell Buy 10 Sell 110 Capital gain 100 Net long term capital gain Taxed at 0 15 20 Gross income goes up taxable income goes up Capital Asset These are gains or losses on the disposition or sale of capital assets In general capital assets are all assets other than o Accounts Receivable from the sale of goods or services o Inventory and other assets held for sale in the ordinary o Assets used in a trade or business including supplies course of business Ex business bought 1 million piece of equipment you would capitalize it but not a capital asset for tax purposes Personal assets such as a personal automobile or personal residence and assets held for investment such as stocks and bonds are capital assets Capital gains Losses taxed at 0 15 20 o Net long term capital gains in excess short term loss o Short term capital gain taxed at ordinary rates o Net capital losses losses in excess of gains for the year 3 000 deductible against ordinary income for the year losses in excess of 3 000 carried forward Wages Ordinary 100 000 Interest Ordinary 1 000 Stock 5 000 sale 1 000 4 000 Stock 3 000 1 000 carried to next year Other taxes alternative minimum tax uses numbers finds new formula TAX4001 Tax prepayments prepayments already made income taxes withheld by wages from employer o Include Withholdings income taxes withheld from the taxpayer s salary or wages by her employer Estimated tax payments the taxpayers makes for the year paid directly to IRS Taxes the taxpayer overpaid on the prior year tax return that the taxpayer elects to apply as an estimated payment for the next tax year instead of receiving the overpayment as a refund Personal Dependency Exemptions Dependency Requirements o Qualifying Child either Relationship must be an eligible relative Child or descendant of a child ex adopted child stepchild and eligible foster child Sibling or descendant of sibling ex half brother half sister stepbrother stepsister includes taxpayers grandchild taxpayer s sister s grandchild Age Test must be younger than the taxpayer and or 1 under age 19 at the end of the year 2 under age 24 at the end of the year a full time student 5 months of the year met the age test a person totally disabled is deemed to have Residence Test same principal residence as the taxpayer for more than half the yea Time that a child or taxpayer is temporarily away from the taxpayers home because the child or taxpayer is ill pursuing and education or has other special circumstances is counted as though the child were living in the taxpayers home Support test must not have provided more than half his or her own support for the year o Qualifying Relative Relationship test A descendant or ancestor of the taxpayer ex adopted child stepchild eligible foster child step mother father A sibling of the taxpayer TAX4001 taxpayer cousins do not qualify A son or daughter of the brother or sister of the A sibling of the taxpayers mother or father An in law father mother sister brother son daughter Any person who has the same principal place of abode as the taxpayer for the entire year even