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Chapter 3

Chapter 3. Federal Income Tax Calculation Introduction - Overview: computations (Tax formula and Tax Return) and concepts of course Standard deduction amounts, exemptions amounts, filing status, tax rates, tax tables. Federal income tax formula. Chap 1: intro to formula

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Chapter 3

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  1. Chapter 3 • Federal Income Tax Calculation • Introduction - Overview: computations (Tax formula and Tax Return) and concepts of course • Standard deduction amounts, exemptions amounts, filing status, tax rates, tax tables

  2. Federal income tax formula • Chap 1: intro to formula • Chap 3: intro to components • Rest of chaps (course): components in depth

  3. Tax Formula- Components Overview • exclusions (exh 3-1) • gross income (exh 3-2) (1040 p.1) - section 61, not unrealized • deductions for AGI (above the line) (1040 p.1) • From AGI (below the line): either itemized deduction (exh 3-3) (1040 schedule A), personal and production of income, various limits

  4. Or standard deduction (=S.D.)(and additional standard deductions) • S.D. - Claimed as exemption - Individual claimed as a dependent on another’s return; e.g., student, elderly parent - standard deduction limit: greater of (1) 800 or (2) earned income (max=standard deduction for filing status) +250

  5. Exemptions prior to 2005 • Exemption: dependent cannot claim self • Exemptions - personal - t/p and spouse • dependent - 5 tests • 1) support: >1/2, not scholarship, not unexpended; can be capital expenditures, multiple support, divorced - Form 8332 by custodial • 2) relationship: list or member of household

  6. 3) GI test: <dependency exemption amount – Exceptions: children of T/P • 4) joint return: no joint return unless neither required to file and for refund • 5) citizen or resident • phase out=[(AGI - threshold)/2500] x 2% x #exemptions x exemption amount

  7. Tax determination • Tax table v. tax rate schedule • terms: statutory, marginal, progressive, effective • w/h and estimated payments • LTCG rate - see separate info

  8. Tax determination (continued) • kiddie tax (<14) and net unearned income=unearned income minus 800 statutory amount minus standard deduction (800 or itemized directly connected)

  9. Form 8615 - child’s • Form 8814 - parent’s

  10. Filing Requirements (chart) • Thresholds, dependents (special), S/E, refund, EIC forms • when and where - 4/15, service center, 4 mo & 6 mo extensions

  11. Filing status • single • MFJ • h of h • MFS

  12. Gains and Losses • Realization v. recognition • AR - AB = G or L • Capital asset - section 1221: not a capital asset • LT, ST, netting, MT • capital loss limit - individuals, corps • Planning

  13. Child Tax Credit • 1000 per child thru 2010, then 500 (04 law) • Qualifying child under 17 (dependent) • Phaseout - Single 75000 - 95000, MFJ 110000 - 130000 MFS or hoh 55000-75000, using modified AGI, 50/1000

  14. Elimination of Exemptions Phase-out - EGTTRA ‘01 • Current Phase Out Reduced • 2006 – 2007 1/3 • 2008 – 20009 2/3 • 2010 & after 100%

  15. Exemptions-after 2004 (04 Law) • Qualifying child meets relationship, support, and income tests (except for self supporting) • Qualifying relatives • As previously under code • Include any member of household

  16. Qualifying Child (cont’d) • Son/daughter, stepson/daughter • Brother or sister, step brother/sister • Half brother/sister • Descendent of above (grandchildren, nephews, nieces) • Adopted & foster ok

  17. Qualifying child (cont’d) • > ½ yr prin place of abode with t/p • Under 19 or under 24 f/t student

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