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Principles of Taxation

Principles of Taxation. Chapter 13 The Individual Tax Formula. Objectives. filing status computing taxable income standard deduction versus itemized deductions exemptions tax rates credits and AMT payment and filing requirements. Filing Status - Married.

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Principles of Taxation

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  1. Principles of Taxation Chapter 13 The Individual Tax Formula

  2. Objectives • filing status • computing taxable income • standard deduction versus itemized deductions • exemptions • tax rates • credits and AMT • payment and filing requirements

  3. Filing Status - Married • If married on the last day of the year. • MFJ (married filing joint) rates • If spouse incomes very similar, single rates generate lower tax • If spouse incomes dissimilar, married rates generate lower tax. • MFJ rates apply to Surviving Spouse • widow or widower with a dependent child for how many more years after death of spouse? • MFS (married filing separately) rates are less favorable than single.

  4. Filing Status - Unmarried • Single is the default category for unmarried individuals (neither surviving spouse nor head of household). • SeeAP1 for filing status examples.

  5. Taxable Income Computation • Calculate total income totaling Line 22 on 1040. • Calculate Adjusted Gross Income (AGI) on Line 33 of 1040. • Subtract the greater of: • itemized deductions or • the standard deduction • Subtract total exemptions.

  6. Standard Deduction • Depends on filing status. For 2001: • MFJ = $7,600 • MFS = $3.800 • HOH = $6,650 • Single = $4,550 • Blind or aged (>=age 65). • MJF, MFS = additional $900 • HOH or Single = additional $1100 • See AP2 for standard deduction examples.

  7. Itemized Deductions • See Schedule A. (Chapter 16 details) • Bunching. If itemized deductions are about equal to standard deduction each year, bunch deductions on alternate years and claim standard deduction on other years. • Example: My dad gives $5,000 to charity each year. He is 77 and single. What is his standard deduction each year? Does he itemize? Suppose he gave $10,000 to the church every other year?

  8. Exemptions • Personal exemption for the taxpayer (2 for MFJ). • If you are a dependent on someone else’s return, can you still claim yourself? • Exemption = $2,900 in 2001 for each personal or dependency exemption.

  9. Exemptions for Dependents • Family member OR live in your home for entire year. • You provide > 1/2 financial support. • Dependent’s gross income < exemption amount ($2900): • waived for child < 19 OR student-child<24 • Dependent may not generally file a joint return. • Dependent must be a U.S. citizen OR a resident of US, Mex, Can. • See AP3 for practice with rules.

  10. Rich People • Phase-out of itemized deductions - If AGI greater than $132950 (MFJ) in 2001, itemized deductions are reduced by 3% of income > $132950. Can’t reduce itemized deductions below 20% of the total. • Phase-out of exemptions - IF AGI greater than $199450 (MFJ) in 2001, reduce exemption by 2% for each $2500 that AGI is above the threshold. Can reduce to 0. • See appendices at back of chapter for computations.

  11. Tax Computations • See AP 4 and 5 for practice with tax rate schedules. What do you notice about married versus single rates? • AP4 Would Ms. G and Mr. H prefer married or single? • AP5 Would Mr. P and Mrs. P prefer married or single?

  12. Credits • Child Credit = $500 per child in 2000. Phases out for rich. • Dependent care credit (child < 13 years old). Credit amount between 30% and 20% of child care costs depending on income range. • Earned income credit. This is refundable - a transfer payment to working poor. Increases progressivity of tax rates. Credit is higher for taxpayers with children and phases out as income increases. • Excess FICA withholding is refunded through a tax return claim.

  13. AMT (again!!) • Why do we need AMT? • Taxable income+ or - adjustments+ preferences= AMTI before exemption- exemption= AMTIx 26% (or 28% for higher AMTI levels)= TMT

  14. Examples of AMT Adjustments and Preferences • Standard deduction • Exemptions • State and local taxes • Accelerated (MACRS) depreciation > AMT depreciation • Bargain element on exercise of Incentive Stock Option (see Chapter 14)

  15. Payment and Filing Requirements • Taxes on wages are withheld each pay period. • Estimated taxes are due on April 15, June 15, September 15, and January 15. • Pay 90% of current year tax, 100% of prior year (or 110% of prior year if 2000 AGI>$150,000). • Tax return due 4/15, but may be extended to 8/15 then 10/15 (LAST DATE).

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