©2003 South-Western College Publishing, Cincinnati, Ohio CHAPTER 1 TheIndividual Income Tax Return TheIndividual Income Tax Return

©2003 South-Western College Publishing, Cincinnati, Ohio©2003 South-Western College Publishing, Cincinnati, Ohio©2003 South-Western College Publishing, Cincinnati, Ohio©2003 South-Western College Publishing, Cincinnati, Ohio

CHAPTER 1

The Individual

Income Tax Return

The Individual

Income Tax Return

© 2003 South-Western College Publishing Transparency 1-2

Objective

Know the history and objectives

of U.S. tax law


History of TaxationPrior to 1913

Only excise taxes & customs duties

1913 16th Constitutional Amendment passed

1939 First IRC

1954 & 1986 Revised IRC


Objectives of Tax Law Raise Revenue

Tool for social and economic policy

Social - encourage desirable/discourage undesirable activities, for example:

Can’t deduct penalties

Can deduct charitable contributions & medical expenses

IRAs to promote saving for retirement

Economic policy as manifested by fiscal policy

Encourage investment in capital assets

MACRS depreciation

Tax credits - Educational credits, R&D credit


Objective

Know the different entities subject to tax and reporting requirements


Primary Entities/FormsIndividuals

1040EZSingle or Married Filing JointlyUnder 65Under $50,000 taxable incomeOnly earned income, scholarships, and less than $1,500

interest

1040A

No self-employment income or don’t itemize

1040 with schedules attached


Primary Entities/FormsPartnerships

1065 and K-1s to each partner

Corporations

1120 (for C corps)

1120S (for S corps) and K-1s to each shareholder

Estates/Trust

1041 and K-1s to each beneficiary or trustee


Objective

Understand the tax formula for

individual taxpayers


Tax FormulaLook at Form 1040 while we go through following formula:

Gross Income

less: Deductions for AGI

Adjusted Gross Income

less: Greater of Itemized or Standard Deduction

less: Exemptions

Taxable Income

times: X Tax Rate

Gross Tax Liability

less: Tax credits and prepayments (withholdings and estimates)

Tax Due or Refund


Objective

Be able to complete a simple

individual tax return


2002 Standard Deductions & Exemptions

Single $4,700

MFJ or Surviving Spouse $7,850

H of H $6,900

MFS $3,925

*Taxpayers 65 or older and/or blind get an additional amount

Additional* $900 if Married or SS*

Additional* $1150 if Single*

2002 exemption = $3,000 per person


Who Must FileBased on filing status and gross income:

If exemptions and deductions exceed income then filing is not necessary

If you are claimed as a dependent on another’s return, you still must file if:

Unearned income > $750

Earned income > standard deduction, OR

Unearned income + earned income >

$750 or (earned income + $250)


Who Must FileYou must file if you

Have advanced EIC

Have SE income >$400

Owe special taxes

recapture,

SS on unreported tips,

AMT


Filing StatusFiling status is determined by status on 12/31

Single - higher tax tables than SS or HOH

MFJ - if married on 12/31

Common law recognized by state of residence

If spouse dies during year you can file MFJ

MFS - each file separate returns

Must compute taxes the same (both itemized or both standard deduction)

Not often a good choice


Filing StatusHOH - tables have lower rates than S. Can

use if: Unmarried on 12/31 Paid > 50% of cost of keeping up home that was

principal residence of dependent

Exceptions: taxpayer’s parent doesn’t have to live with taxpayer, and if qualifying individual is an unmarried child, does not

have to be dependent


Filing Status

Qualifying Widow(er) or SS(Surviving Spouse) - tables same as MFJ. Applies in year of spouse’s death and in 2

subsequent years Must have qualifying dependentCannot remarry


Personal/Dependency ExemptionsFor taxpayer and each dependent - $3,000

per person Phased out for high income taxpayers at 2% per

$2,500 over threshold (see text) for limits based on filing status

Example: MFJ with AGI of $215,000 and 2 dependents - what’s the phase out?


Personal/Dependency Exemptions Example

Answer:

$215,000 -$206,000 = $9,000

$9,000 / $2,500 = 3.6 (round up to 4*)

4 x 2% = 8%

The original exemption amount of 4 X $3,000 = $12,000 is reduced by 8%.

$12,000 - (.08 x 12,000) = $11,040 allowed.

* always round up to next percentage


Personal/Dependency Exemptions TestsFive tests must be met for someone to be claimed as a dependent:

Gross income test -

Dependent’s gross income must be less than $3,000

Exceptions: children under age 19, orunder 24 and fulltime student for at least 5 months


Support -

Taxpayer must provides more than 50% of dependent’s support (including food, FMV of lodging and clothes, etc.)

Custodial parent usually gets child as dependent unless:

Custodial parent agrees not to claim

Pre-1985 agreement

Multiple support agreement - more than one person providing support (i.e. - three children support their father). Each person must sign agreement to give exemption to one,

but that one has to provide at least 10% of the dependent’s support

Personal/Dependency Exemptions Tests


Personal/Dependency Exemptions Tests Joint Return - a dependent cannot file MFJ with

spouse unless only to get refund

Citizenship - must be US citizen, resident of an adjacent country, or, if an alien child, must be adopted and living with US citizen

Member of household or relationship test - must be related to, or reside with, the taxpayer for the entire year


Standard Deduction Use the following standard deduction amounts unless

itemized deductions are greater!

2002 numbers (the amounts increase every year) Single $4,700 MFJ $7,850 MFS $3,925 HH $6,900 SS $7,850

Additional amount for taxpayers over 65 and/or blind:

$900 per person for married and SS

$1,150 person for others


Standard DeductionThe special rule for standard deductions for dependents is “deduction = greater of $750 or earned income + $250 up to standard deduction”

Example 1: Jaime is 23 and a full time student and her folks claim her - she earned $2,000

2,000 earned income(2,000) standard deduction $0 taxable income

Example 2: Tia is 18 and has dividends (unearned) income of $1,500

1,500 unearned income( 750) standard deduction$ 750 taxable income


Limits on Itemized DeductionsPhase-out for high income taxpayers

3% x ( AGI - Threshold Amount)Threshold amount = $68,650 for MFS or

$137,300 (all other filing types) Phase-out is lesser of

(AGI-Threshold) x 3% or 80% x (all itemized deductions except medical,

investment interest expense and casualty, and wagering losses to the extent of wagering gains)


Example: Itemized Deductions = $20,000, AGI = $150,000 and MFJAnswer:

150,000 (137,300) 12,700 x .03 = phase out amount of $381

$20,000 - $381 = $19,619 itemized deduction

Limits on Itemized Deductions


Gains and Losses

Amount Realized*

- Adjusted Basis**

Realized Capital Gain/Loss

*Sales Price - Sales Expenses

**Cost + Capital Improvements - Accumulated Depreciation (also called “book value”)


Capital Gains/Losses

Capital Assets are

Generally, all property except inventory, receivables, or depreciable property used in trade or business

Subject to special rates

Separate by holding period

Long term - held > 12 months

Short term - held < 12 months


Netting procedures

Net the ST gains and losses

Net the LT gains and losses

Net LT Capital Gain - 20% rate if taxpayer is in higher bracket

Net LT Capital Gain - 10% rate if taxpayer is in lower bracket

$3,000 net capital loss per year can reduce ordinary income; carry-forward any unused balance

Capital Gains/Losses


Internet and the IRS

http://www.irs.gov

Forms & Pubs (publications)

Digital Daily

Electronic filing

Tax Regulations and Interpretations

Tax Info


The End!

Documents

©2003 South-Western College Publishing, Cincinnati, Ohio CHAPTER 1 TheIndividual Income Tax Return TheIndividual Income Tax Return