Instructions for Individual Income Tax Return (Form S128-I ...
CHAPTER 1 The Individual Income Tax Return
description
Transcript of CHAPTER 1 The Individual Income Tax Return
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
2010 Cengage Learning 5
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
2010 Cengage Learning 7
*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
2010 Cengage Learning 8
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
2010 Cengage Learning 9
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
2010 Cengage Learning 10
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)