CHAPTER 1 The Individual Income Tax Return
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Transcript of CHAPTER 1 The Individual Income Tax Return
Income Tax Fundamentals 2009 edition Gerald E. Whittenburg
Martha Altus-BullerStudent’s Copy
2009 Cengage Learning
Raise revenue
Tool for social and economic policies
• Social policy encourages desirable activities and discourages undesirable activities
Can’t deduct penalties
Can deduct charitable contributions
Credits for higher education expenses
• Economic policy as manifested by fiscal policy
Encourage investment in capital assets
• 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
2008 standard deductionSingle $ 5,450
Married Filing Joint [MFJ] $10,900Qualifying Widow(er) $10,900 also known as Surviving Spouse
Head of Household [HOH] $ 8,000
Married Filing Separate [MFS] $ 5,450
*Taxpayers 65 or older and/or blind get an additional amount$1050 if MFJ, MFS or SS$1350 if HOH or Single
2008 exemption $3500 – personal & dependency
2009 Cengage Learning
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
There is one exception to principal residence requirement: if dependent is taxpayer’s parent, he/she doesn’t have to live with taxpayer
*See p. 1-10 for requirement for abandoned spouse
Surviving Spouse [SS]• Also known as qualifying widow or widower
• Available in year of spouse’s death and for
two subsequent years Must pay over half the cost of maintaining a
household where a dependent child, stepchild, adopted child or foster child lives
Personal exemptions may be taken for self/spouse
Additional exemptions may be taken for individuals who are either • Qualifying child
or
• Qualifying relative For 2008 each exemption = $3500 Exemption phased out to $2333 when AGI
exceeds thresholds found on p. 1-12
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)