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ACC 331

This chapter provides an introduction to the basic tax structure and filing status. It covers topics such as exemptions, tax computations, economic income, gross income, adjusted gross income, taxable income, and tax due. Learn how filing status affects tax rates and your ability to qualify for various tax benefits.

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ACC 331

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  1. ACC 331 CHAPTER 2

  2. INTRODUCTION • BASIC KNOWLEDGE TO HELP YOU UNDERSTAND DETAILED CHAPTERS THAT FOLLOW • FILING STATUS • EXEMPTIONS • TAX COMPUTATIONS

  3. BASIC TAX STRUCTURE • ECONOMIC INCOME • GROSS INCOME (GI) • ADJUSTED GROSS INCOME (AGI) • TAXABLE INCOME (TI) • TAX • TAX DUE

  4. BASIC TAX STRUCTURE • ECONOMIC INCOME • EXCLUSIONS • GI - GROSS INCOME

  5. BASIC TAX STRUCTURE • GI - GROSS INCOME • DEDUCTIONS “FOR” AGI • AGI - ADJUSTED GROSS INCOME

  6. BASIC TAX STRUCTURE • AGI - ADJUSTED GROSS INCOME • ITEMIZED DEDUCTIONS OR • STANDARD DEDUCTION • PERSONAL AND DEPENDENCY EXEMPTIONS • TI - TAXABLE INCOME

  7. BASIC TAX STRUCTURE • TI - TAXABLE INCOME • APPLY TAX RATES TO GET TAX • CREDITS • TAX DUE

  8. FILING STATUS • AFFECTS TAX RATES • STANDARD DEDUCTION • ABILITY TO QUALIFY FOR VARIOUS TAX BENEFITS

  9. FILING STATUS • IS A FUNCTION OF MARITAL STATUS: • SINGLE or • MARRIED • STATUS DETERMINED UNDER STATE LAW

  10. FILING STATUS • MARITAL STATUS IS DETERMINED ON THE LAST DAY OF THE TAX YEAR (UNLESS SPOUSE DIES) or • THE DATE OF DEATH OF SPOUSE

  11. FILING STATUS • UNMARRIED TAXPAYERS ARE: • SINGLE - NOT MARRIED AND NO ATTACHMENTS • HEAD OF HOUSEHOLD

  12. FILING STATUS • HEAD OF HOUSEHOLD - MUST MAINTAIN A HOUSEHOLD FOR: • UNMARRIED CHILD WHO LIVES WITH YOU - Doesn’t have to be dependent. • or

  13. FILING STATUS • HEAD OF HOUSEHOLD – • MUST MAINTAIN A HOUSEHOLD FOR AND SHARE IT WITH: • DEPENDENT MARRIED CHILD OR OTHER RELATIVE (No bums) • or

  14. FILING STATUS • HEAD OF HOUSEHOLD - MUST MAINTAIN A HOUSEHOLD FOR: • DEPENDENT PARENT (Don’t have to live with.)

  15. FILING STATUS • HEAD OF HOUSEHOLD RULES • Pay over half of costs of household • live with >1/2 of year • custodial parent always qualifies • child = descendent of child • child = adopted, step, foster(all year) • Can’t be nonresident alien.

  16. FILING STATUS • MARRIED: • JOINT RETURN • SEPARATELY - Very rarely beneficial, usually done by necessity or because of mistrust

  17. FILING STATUS • MARRIED - JOINT RETURN: • MARRIED ON DETERMINATION DATE (Not “permanently separated”) • BOTH MUST SIGN - Joint liability • NONRESIDENT ALIENS GENERALLY CAN’T USE (Worldwide income)

  18. FILING STATUS • MARRIED - SEPARATE RETURNS • Any married person who doesn’t or can’t file jointly. • Higher tax in almost all cases!

  19. FILING STATUS • WHY NOT FILE JOINT RETURN? • SPOUSE HAS DISAPPEARED • (Can’t get signature) • SPOUSE IS A (SUSPECTED) CROOK • SPOUSE IS A NONRESIDENT ALIEN

  20. FILING STATUS • EXCEPTIONS TO GENERAL FILING STATUS RULES: • ABANDONED SPOUSE • SURVIVING SPOUSE

  21. FILING STATUS • ABANDONED SPOUSE • LIVE APART LAST 1/2 OF YEAR • SHARE HOME WITH DEPENDENT CHILD • NOT FILE JOINT RETURN • RESULT - SINGLE FOR TAX, probably head of household.

  22. FILING STATUS • SURVIVING SPOUSE • Single taxpayer allowed to use the joint return tax rates and standard deduction.

  23. FILING STATUS • SURVIVING SPOUSE: • SPOUSE MUST HAVE DIED IN PRECEDING TWO YEARS • SHARE HOME WITH DEPENDENT CHILD • ELIGIBLE TO FILE JOINT RETURN AT SPOUSE’S DEATH

  24. STANDARD DEDUCTION • TAXPAYER MAY DEDUCT THE GREATER OF STANDARD DEDUCTION OR ACTUAL ITEMIZED DEDUCTIONS • MUST TAKE STANDARD OR ITEMIZE -You can’t mix and match!!!

  25. STANDARD DEDUCTION • JUSTIFICATION: • Lessen paperwork for taxpayers and service. • Intended to take about 90% of taxpayers out of itemizing.

  26. STANDARD DEDUCTION • A FUNCTION OF FILING STATUS: • 2000 1999 • SINGLE 4,400/4,300 • H of H 6,450/6,350 • JOINT 7,350/7,200 • M-SEP 3,675/3,600

  27. STANDARD DEDUCTION • ADDITIONAL AMOUNTS: • >65 or BLIND AND: • 2000 1999 • SINGLE 1,100/1,050 • MARRIED 850 / 850

  28. STANDARD DEDUCTION • MARRIED COUPLES THAT FILE SEPARATELYMUST BE CONSISTENT • BOTH MUST ITEMIZE, OR BOTH MUST USE STANDARD DEDUCTION

  29. STANDARD DEDUCTION • DEPENDENT OF ANOTHER IS THE GREATER OF: • 700 or • EARNED INCOME + 250 • CAN’T EXCEED NORMAL STD DED (Including adjustment for age and blindness)

  30. EXEMPTIONS • PERSONAL • ALIVE AND NOT DEPENDENT • DEPENDENCY • ONE FOR EACH PERSON FOR WHOM ALL OF FIVE TESTS ARE PASSED • $2,800 (2000) $2,750 (1999)

  31. EXEMPTIONS • FIVE TESTS • SUPPORT • GROSS INCOME • RELATIONSHIP • CITIZENSHIP OR RESIDENCY • JOINT RETURN

  32. EXEMPTIONS • SUPPORT • PAY MORE THAN HALF OF THE AMOUNT EXPENDED TO SUPPORT THE PERSON FOR THE YEAR • OR MULTIPLE SUPPORT

  33. EXEMPTIONS • GROSS INCOME “DEPENDENT’S” GROSS INCOME MUST BE LESS THAN ONE EXEMPTION AMOUNT (2,800/2,750) EXCEPT

  34. EXEMPTIONS • GROSS INCOME - Exceptions: TAXPAYER’S CHILD: • < 19, or • OVER 18 AND YOUNGER THAN 24 AND A FULL TIME STUDENT • PASS GI TEST REGARDLESS OF INCOME AMOUNT

  35. EXEMPTIONS • RELATIONSHIP • MUST BE CLOSER THAN A COUSIN or • ANY BUM OFF THE STREET WHO LIVES WITH YOU FOR THE ENTIRE YEAR.

  36. EXEMPTIONS • CITIZENSHIP OR RESIDENCY • MUST BE A U.S. CITIZEN or • A RESIDENT OF THE US, CANADA, MEXICO OR OTHER SPECIFIED AREAS

  37. EXEMPTIONS • JOINT RETURN CAN’T HAVE FILED A JOINT RETURN (EXCEPT A JOINT CLAIM FOR REFUND)

  38. EXEMPTIONS • PHASE-OUT • TOTAL EXEMPTION AMOUNT ON RETURN IS PHASED OUT STARTING WHEN AGI EXCEEDS A THRESHOLD AMOUNT

  39. EXEMPTIONS • PHASE-OUT - THRESHOLD AMOUNT 2000 1999 • SINGLE 128,950/126,600 • H of H 161,150/158,300 • JOINT 193,400/189,950 • SEP RET 96,700/ 94,975

  40. EXEMPTIONS • PHASE-OUT LOSE 2% OF TOTAL EXEMPTION AMOUNT FOR EACH $2,500 (OR PART OF) ($1,250 if married filing separately) BY WHICH AGI EXCEEDS THE APPLICABLE THRESHOLD AMOUNT

  41. EXEMPTIONS • PHASE-OUT ALLOWED EXEMPTION = (1-.02(AGI-THRESHOLD)/2,500)*TOTAL EXEMPTION AMT NOTE: (AGI-threshold)/2,500 rounded up!

  42. CHILD TAX CREDIT • For each child of the taxpayer younger than 17 claimed as a dependent on a return: • A $500 (2000&1999) credit can be claimed • Phased out at $50/1,000 of AGI > limit • AGI Limit = 110,000 – MJ, 75,000 S or HH, 55,000 MS • Nonrefundable

  43. ADDITIONAL CHILD TAX CREDIT • IF 3 OR MORE CHILD TAX CREDITS ARE CLAIMED, THE TAXPAYER(S) ARE ELIGIBLE FOR THE • ADDITIONAL CHILD TAX CREDIT

  44. ADDITIONAL CHILD TAX CREDIT • ADDITIONAL CHILD TAX CREDIT • Applies only to low income taxpayers, works off the child tax credit, and is fairly complex • We will not study it

  45. TAX COMPUTATIONS • DETERMINE FILING STATUS AND USE APPROPRIATE TABLES OR RATES • MUST USE TABLES IF THEY APPLY (IF TI < $100,000) • 1999 TABLES pp A-3 - A-14

  46. TAX COMPUTATIONS • BOOK ONLY HAS 1999 TABLES • USE 2000 RATES TO APPROXIMATE TABLES (This is what solution manual does) • ALWAYS NOTE WHEN YOU SHOULD BE USING TABLES

  47. TAX COMPUTATIONS • KIDDIE TAX NET UNEARNED INCOME (NUI) OF CHILD < 14 IS TAXED AT PARENT’S RATES (NOT ON PARENT’S RETURN)

  48. TAX COMPUTATIONS • KIDDIE TAX - NUI: ALL UNEARNED INCOME - 700 - (GREATER OF 700 OR ITEMIZED DEDUCTIONS TRACEABLE TO EARNING UNEARNED INCOME) 700 IS INFLATION ADJUSTED

  49. TAX COMPUTATIONS • KIDDIE TAX • NOT APPLICABLE IF BOTH PARENTS ARE DEAD • USE HIGHEST MARGINAL RATE PARENT, IF STILL MARRIED • CUSTODIAL PARENT, IF DIVORCED • WITH/WITHOUT COMPUTATION

  50. TAX COMPUTATIONS • KIDDIE TAX COMPUTATIONS ARE FAIRLY COMPLEX - SEE BOOK WILL GO OVER PROBLEMS CAREFULLY

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