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Taxes

Taxes. Tax Formula. Income (broadly conceived) $ x,xxx Less: Exclusions ( x,xxx ) Gross Income $ x,xxx Less: Deductions ( x,xxx ) Less: Personal & dependency exemptions ( x,xxx ) Taxable Income $ x,xxx

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Taxes

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  1. Taxes

  2. Tax Formula Income (broadly conceived) $x,xxx Less: Exclusions (x,xxx) Gross Income $x,xxx Less: Deductions (x,xxx) Less: Personal & dependency exemptions (x,xxx) Taxable Income $x,xxx Tax on taxable income (see Tax Tables or Tax Rate Schedules) $ x,xxx Less: Tax credits (including income taxes withheld and prepaid) (xxx) Tax due (or refund) $ xxx

  3. Partial List of Exclusions from Gross Income • Accident insurance proceeds • Annuities (cost element) • Bequests • Child support payments • Cost-of-living allowance (for military) • Damages for personal injury or sickness • Gifts received • Group term life insurance, premium paid by employer (for coverage up to $50,000) • Inheritances • Interest from state and local (i.e., municipal) bonds • Life insurance paid on death • Meals and lodging (if furnished for employer’s convenience) • Military allowances • Minister’s dwelling rental value allowance • Railroad retirement benefits (to a limited extent) • Scholarship grants (to a limited extent) • Social Security benefits (to a limited extent) • Unemployment compensation (to a limited extent) • Veterans’ benefits • Welfare payments • Workers’ compensation benefits

  4. Partial List of Gross Income Items (slide 1 of 2) • Alimony • Annuities (income element) • Awards • Back pay • Bargain purchase from employer • Bonuses • Breach of contract damages • Business income • Clergy fees • Commissions • Compensation for services • Death benefits • Debts forgiven • Director’s fees • Dividends • Embezzled funds • Employee awards (in certain cases) • Employee benefits (except certain fringe benefits) • Estate and trust income • Farm income • Fees • Gains from illegal activities • Gains from sale of property • Gambling winnings • Group term life insurance, premium paid by employer (for coverage over $50,000)

  5. Partial List of Gross Income Items (slide 2 of 2) • Hobby income • Interest • Jury duty fees • Living quarters, meals (unless furnished for employer’s convenience) • Mileage allowance • Military pay (unless combat pay) • Notary fees • Partnership income • Pensions • Prizes • Professional fees • Punitive damages • Rents • Rewards • Royalties • Salaries • Severance pay • Strike and lockout benefits • Supplemental unemployment benefits • Tips and gratuities • Travel allowance (in certain cases) • Treasure trove (found property) • Wages

  6. Deductions - Individual Taxpayers • Individual taxpayers have two categories of deductions: • Deductions for adjusted gross income (AGI) (above line) • Deductions from adjusted gross income (below line)

  7. Standard Deduction (slide 1 of 2) • The basic standard deduction (BSD) amount depends on filing status of taxpayer Filing status 2008 2009 . Single $5,450 $5,700 MFJ, SS 10,900 11,400 HH 8,000 8,350 MFS 5,450 5,700

  8. Standard Deduction(slide 2 of 2) • Additional standard deduction (ASD) • For taxpayers age 65 or older and/or legally blind Filing Status 2008 2009 . Single $1,350 $1,400 MFJ, SS 1,050 1,100 HH 1,350 1,400 MFS 1,050 1,100

  9. Personal and Dependency Exemption Amounts • Amounts • 2008: $3,500 per exemption • 2009: $3,650 per exemption • Personal and dependencyexemptions • One per taxpayer (two personal exemptions when married, filing jointly) and for each dependent • Exception: Individual claimed as dependent by another taxpayer does not receive a personal exemption

  10. Dependency Exemptions (slide 1 of 2) • A dependency exemption is available for one who is either a qualifying childor a qualifying relative • A qualifying child must meet the following tests: • Relationship • Abode • Age, and • Support

  11. Relationship Test • The child must be the taxpayer’s: • Son or daughter • Stepson or stepdaughter • Brother or sister • Stepbrother or stepsister • Half brother or half sister, or • A descendant of such individual (e.g., grandchildren, nephews, nieces) • A child who has been adopted, or whose adoption is pending, qualifies • A foster child may also qualify

  12. Abode Test • A qualifying child must live with the taxpayer for more than half of the year • Temporary absences from the household due to special circumstances (e.g., illness, education) are not considered

  13. Age Test • The child must be under age 19 or under age 24 in the case of a student • A student is a child who, during any part of five months of the year, is enrolled full time at a school or government-sponsored on-farm training course • Individuals who are disabled are not subject to the age test

  14. Support • To be a qualifying child, the individual must not be self-supporting • Cannot provide more than one-half of his or her own support • In the case of a full-time student, scholarships are not considered to be support

  15. Tiebreaker Rules • In situations where a child may be a qualifying child for more than one person • Tiebreaker rules specify which person has priority in claiming the dependency exemption

  16. Qualifying Relative • In order to claim a dependency exemption for a qualifying relative, the following tests must be met: • Relationship • Gross income • Support

  17. Relationship Test • The relationship test for a qualifying relative is more expansive than for a qualifying child. Also included are the following relatives: • Lineal ascendants (e.g., parents, grandparents) • Collateral ascendants (e.g., uncles, aunts) • Certain in-laws (e.g., son-, daughter-, father-, mother-, brother-, and sister-in-law) • The relationship test also includes unrelated parties who live with the taxpayer

  18. Gross Income Test • Dependent’s gross income must be less than the exemption amount ($3,650 for 2009)

  19. Support Test • Taxpayer must provide more than 50% of the qualifying relative’s support • Only amounts expended are considered in the support test • Scholarships are not considered in the support test • Two exceptions to the support test: • Multiple support agreements • Children of divorced parents

  20. Multiple Support Agreements • Allows one member of a group providing > 50% of support to claim individual even though no one person provides > 50% support • Eligible parties must provide > 10% of support • Each eligible party must meet all other dependency requirements • Example - Allows children of elderly parent to claim exemption for parent when none individually meets the 50% support test

  21. Children of Divorced Parents • Special rules apply if the parents meet the following conditions: • They would have been entitled to the dependency exemption had they been married and filed a joint return • They have custody (either jointly or singly) of the child for more than half of the year • Under the general rule, the parent having custody of the child for the greater part of the year (i.e., the custodial parent) is entitled to the dependency exemption • General rule does not apply if • A multiple support agreement is in effect • Custodial parent issues a waiver in favor of the noncustodial parent

  22. Other Rules for Dependency Exemptions • In addition to fitting into either the qualifying child or the qualifying relative category, a dependent must also meet: • The joint return, and • The citizenship or residency tests

  23. Joint Return Test • Dependent cannot file a joint return with spouse unless: • Filing solely for refund of tax withheld • No tax liability exists for either spouse • Neither spouse required to file return

  24. Citizenship or Residency Test • Dependent must be a U.S. citizen or a resident of U.S., Canada, or Mexico for some part of the calendar year in which the taxpayer’s tax year begins • An exception provides that an adopted child need not be a citizen or resident of the U.S. (or a contiguous country) as long as his or her principal abode is with a U.S. citizen

  25. Phase-out of Exemptions (slide 1 of 2) Applies when taxpayer’s AGI in 2009 exceeds: • $250,200 for married, filing jointly, or surviving spouse • $208,500 for head of household • $166,800 for single • $125,100 for married, filing separately • The phase-out of exemptions is being repealed in two stages and will not be complete until 2010 • The exemption phaseout remains at two-thirds for 2006 and 2007 and at one-third for 2008 and 2009

  26. Phase-out of Exemptions (slide 2 of 2) • Exemptions deduction is reduced by 2% for every $2,500 ($1,250 for MFS), or part thereof, that AGI exceeds threshold amounts • The amount of the phased-out exemptions is then multiplied by 1/3 (the reduction-of-phaseout fraction) for tax years 2008 and 2009

  27. Child Tax Credit • $1,000 tax credit is allowed for each dependent child under the age of 17 • Qualifying child includes stepchildren and eligible foster children

  28. Filing Requirements (slide 1 of 2) • General Rule: Tax return must be filed if gross income is ≥ the sum of the standard deduction and exemption amount • ASD for blind does not apply for this determination • Special rules apply for dependents and self-employed taxpayers

  29. Filing Requirements (slide 2 of 2) • Tax return of an individual is due on or before the 15th day of the 4th month after taxpayer’s year end • Most individuals are calendar year taxpayers, thus, due date is April 15 • May obtain a 6 month extension of time to file • Excuses a taxpayer from penalty for failure to file, not from penalty for failure to pay • If more tax is owed, extension request (Form 4868) should be accompanied by check for balance of tax due

  30. Filing Status • There are 5 filing statuses • Single • Married, filing jointly • Surviving spouse (qualifying widow or widower) • Head of household • Married, filing separately • Filing status affects tax rate brackets, standard deduction, and other amounts

  31. Single Filing Status • Includes a taxpayer who is unmarried or separated from spouse by a divorce decree or separate maintenance agreement and does not qualify for another filing status • Marital status is determined as of the last day of the tax year • When a spouse dies during the year, marital status is determined as of the date of death

  32. Married Filing Jointly (MFJ) Filing Status • Married as of last day of taxable year, or • Spouse dies during taxable year

  33. Surviving Spouse Filing Status • Same tax rate brackets as married, filing jointly • File as surviving spouse for 2 years after death of spouse if taxpayer maintains a home in which a dependent child lives

  34. Married Filing Separately Filing Status • Married but not filing a return with spouse and not abandoned spouse

  35. Head of Household (HH) Filing Status • Must be unmarried as of end of year or an abandoned spouse • Must pay > half the cost of maintaining a household which is the principal home of a dependent for more than half of tax year • A dependent must satisfy either the qualifying child or the qualifying relative category • A qualifying relative must also meet the relationship test

  36. Exception to the HH Requirements • HH may be claimed if taxpayer maintains a separate home for his or her parents • At least one parent must qualify as a dependent

  37. Abandoned Spouse • Allows married taxpayer to file as Head of Household if taxpayer: • Does not file a joint return • Paid > half the cost of maintaining a home • Spouse did not live in home during last 6 months of tax year • Home was principal residence of taxpayer’s child for > half of year • Can claim child as a dependent

  38. Taxes Rates • Tax liability is computed using either the Tax Table method or the Tax Rate Schedule method • Most taxpayers must use the Tax Tables • Certain taxpayers may not use the Tax Table method including: • An individual who files a short period return • Individuals whose taxable income exceeds the maximum (ceiling) amount in the Tax Table • The 2007 Tax Table applies to taxable income below $100,000 • An estate or trust • For 2009 the tax rates are 10%, 15%, 25%, 28%, 33%, and 35%

  39. Kiddie Tax (slide 1 of 4) • Net unearned income (NUI) of child is taxed at parents’ rate • Child must be under age 19 at end of year (or under age 24 if a full-time student) • NUI generally equals unearned income less $1,900 (2009 tax year)

  40. Kiddie Tax (slide 2 of 4) • Unearned income includes: • Taxable interest • Dividends • Capital gains • Rents • Royalties • Pension and annuity income, and • Unearned income from trusts

  41. Kiddie Tax (slide 3 of 4) • Computing NUI for Kiddie Tax for 2009: Unearned income Less: $950 Less: The greater of: i) $950, or ii) Allowable itemized deductions connected with production of unearned income Equals: net unearned income

  42. Kiddie Tax (slide 4 of 4) • Net unearned income taxed at parents’ rate • Remainder of taxable income taxed at child’s rate • Two options for computing the tax • A separate return may be filed for the child • The tax on net unearned income (referred to as the allocable parental tax) is computed as though the income had been included on the parents’ return • Form 8615 is used to compute the tax • The parents may elect to report child’s income on their own return • Certain requirements must be met

  43. Gains and Losses from Property Transactions (slide 1 of 3) • In order for gains (losses) to be recognized (included in gross income), they must be realized: • Realized gain (loss) = amount realized - adjusted basis • Amount realized = selling price - costs of disposition • Adjusted basis = cost + capital additions - cost recovery

  44. Gains and Losses from Property Transactions (slide 2 of 3) • All realized gains are recognized unless a specific tax provision provides otherwise (e.g., nontaxable exchanges) • Realized losses may or may not be recognized depending on the circumstances • Generally, losses on the sale or disposition of personal use property are not recognized

  45. Gains and Losses from Property Transactions (slide 3 of 3) • Once recognized gains or losses have been determined, they must be classified as ordinary or capital • Ordinary gains are fully taxable • Ordinary losses are fully deductible • Capital gains and losses are subject to special tax treatment

  46. Gains and Losses from Capital Asset Transactions (slide 1 of 2) • Capital assets are defined as any property other than: • Inventory, • Accounts Receivable, and • Depreciable property or real property used in a business • Most personal use assets owned by individuals are capital assets • Losses on these assets are not deductible

  47. Gains and Losses from Capital Asset Transactions (slide 2 of 2) • Gains and losses from capital asset transactions must be netted • Net gains and losses by holding period • If excess losses result, they are shifted to the category carrying the highest tax rate

  48. Max Tax Rates for Net Capital Gains of Individuals ClassificationMaximum Rate Short-term gains (held ≤ one year) 35% Long-term gains (held > one year) • Collectibles 28% • Certain depreciable property used in a trade or business (unrecaptured § 1250 gain) 25% • All other long-term capital gains 15%, 5%, or 0%

  49. Treatment of Capital Losses • Net capital losses of individuals are deductible for AGI up to $3,000 yearly • Excess capital losses are carried over to the next tax year • When carried over, capital losses retain their classification as short- or long-term

  50. If you have any comments or suggestions concerning this PowerPoint Presentation for South-Western Federal Taxation, please contact: • Dr. Donald R. Trippeer, CPA • trippedr@oneonta.edu • SUNY Oneonta

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