Chapter 3

Federal Income Tax CalculationIntroduction - 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

Chap 3: intro to components

Rest of chaps (course): components in depth

Tax Formula- Components Overview

exclusions (exh 3-1)gross income (exh 3-2) (1040 p.1) -

section 61, not unrealizeddeductions 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

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) 850 or (2) earned income (max=standard deduction for filing status) +300

Exemptions prior to 2005

Exemption: dependent cannot claim selfExemptions - personal - t/p and spousedependent - 5 tests1) 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

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 residentphase out=[(AGI - threshold)/2500] x

2% x #exemptions x exemption amount

Tax determination

Tax table v. tax rate scheduleterms: statutory, marginal,

progressive, effectivew/h and estimated paymentsLTCG rate - see separate info

Tax determination (continued)

kiddie tax (<18) and net unearned income=unearned income minus 800 statutory amount minus standard deduction (800 or itemized directly connected)

Form 8615 - child’s

Form 8814 - parent’s

Filing Requirements (chart)

Thresholds, dependents (special), S/E, refund, EIC forms

when and where - 4/15, service center, 4 mo & 6 mo extensions

Filing status

single MFJ h of hMFS

Gains and Losses

Realization v. recognitionAR - AB = G or LCapital asset - section 1221: not a

capital assetLT, ST, netting, MTcapital loss limit - individuals, corpsPlanning

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

Elimination of Exemptions Phase-out - EGTTRA ‘01

Current Phase Out Reduced

2006 – 2007 1/3 2008 – 20009 2/3 2010 & after 100%

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

Qualifying Child (cont’d)

Son/daughter, stepson/daughterBrother or sister, step brother/sisterHalf brother/sisterDescendent of above (grandchildren,

nephews, nieces)Adopted & foster ok

Qualifying child (cont’d)

> ½ yr prin place of abode with t/p

Under 19 or under 24 f/t student