Income Tax Fundamentals 2010 edition Gerald E. Whittenburg

Martha Altus-BullerStudent’s Copy

2010 Cengage Learning

Raise revenue

Tool for social and economic policies

◦ Social policy encourages desirable activities and discourages undesirable activities

Credits for investment in solar and wind energy

Can deduct charitable contributions

Credits for higher education expenses

◦ Economic policy as manifested by fiscal policy

Encourage investment in capital assets through depreciation

◦ Both economic and social

Exclude gain on sale of personal residence up to $250,000 ($500,000 if married)

Individuals◦ Taxable income includes wages, salary, self-

employment earnings, rent, interest and dividends◦ An individual may file the simplest tax form that he/she

qualifies for 1040EZ 1040A 1040

◦ If error made on one of the three above forms, can amend with a 1040X.

This model follows Form 1040

Gross Income

less: Deductions for Adjusted Gross Income (AGI)

AGI

less: Greater of Itemized or Standard Deduction

less: Exemptions

Taxable Income

times: Tax Rate

Gross Tax Liability

less: Tax Credits and Prepayments

Tax Due or Refund

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2009 standard deductionSingle $ 5,700

Married Filing Joint (MFJ) $11,400Qualifying Widow(er) $11,400 also known as Surviving Spouse

Head of Household (HOH) $ 8,350

Married Filing Separate (MFS) $ 5,700

*Taxpayers 65 or older and/or blind get an additional amount$1,100 if MFJ, MFS or SS$1,400 if HOH or Single

2009 exemption $3,650 – personal & dependency

Single

◦ Unmarried or legally separated as of 12/31

◦ And not qualified as married filing separately, head of household or qualifying widow[er]

Married Filing Jointly (MFJ)

◦ If married on 12/31 – even if didn’t live together entire year

◦ Same-sex couples may not file jointly

◦ If spouse dies during year you can file MFJ in current year

Married Filing Separately (MFS)

◦ Each file separate returns

◦ Must compute taxes the same way - both itemize or both use standard

◦ If living in community property state, must follow state law to determine community and separate income

Head of Household (HOH)

◦ Tables have lower rates than single or MFS

◦ Taxpayer can file as HOH if: Unmarried or abandoned* as of 12/31 Paid > 50% of cost of keeping up home that was principal

residence of dependent child or other qualifying dependent relative

There is one exception to principal residence requirement: if dependent is taxpayer’s parent, he/she doesn’t have to live with taxpayer

Note: A divorced parent who meets above rules and has signed IRS/legal document, may still

claim HOH even if dependency exemption shifted to ex-spouse

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*See p. 1-10 for requirement for abandoned spouse

Qualifying Widow(er) with Dependent Child◦Also known as surviving spouse◦Available for two subsequent years after death of

spouse Must pay over half the cost of maintaining a

household where a dependent child, stepchild, adopted child or foster child lives

◦Gets benefits of married filing joint tax rates

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Personal exemptions may be taken for self/spouse

Additional exemptions may be taken for individuals who are either ◦ Qualifying child

or

◦ Qualifying relative

For 2009 each exemption = $3,650 Exemption phased out to $2,433 when AGI

exceeds certain AGI thresholds

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Provisions includes Making Work Pay Credit◦ $400 ($800 MFJ) refundable credit on 2009 tax return

Reduced by any automatic rebate received by certain taxpayers in 2009

Reflected in new FIT withholding tables which directly infused cash into economy through increased wages

Phases out $75,000 ($150,000 MFJ) Complete Schedule M to calculate credit

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A capital asset is any property [personal or investment] held by a taxpayer, with certain exceptions as listed in the tax law

◦ Examples: stocks, bonds, land, cars and other items held for investment

◦ Gains/losses on these assets are subject to special rates

Holding period of asset determines treatment

◦ Long-term is held >12 months (taxed at capital rates)

◦ Short-term is held <= 12 months (taxed at ordinary rates)