1. Taxes

2. Tax Formula
Income (broadly conceived) $x,xxx Less: Exclusions (x,xxx) Gross Income $x,xxx Less: Deductions (x,xxx) Less: Personal & dependency exemptions (x,xxx) Taxable Income $x,xxx Tax on taxable income (see Tax Tables or Tax Rate Schedules) $ x,xxx Less: Tax credits (including income taxes withheld and prepaid) (xxx) Tax due (or refund) $ xxx

3. Partial List of Exclusions from Gross Income
Accident insurance proceeds
Annuities (cost element)
Bequests
Child support payments
Cost-of-living allowance (for military)
Damages for personal injury or sickness
Gifts received
Group term life insurance, premium paid by employer (for coverage up to $50,000)
Inheritances
Interest from state and local (i.e., municipal) bonds
Life insurance paid on death
Meals and lodging (if furnished for employer’s convenience)
Military allowances
Minister’s dwelling rental value allowance
Railroad retirement benefits (to a limited extent)
Scholarship grants (to a limited extent)
Social Security benefits (to a limited extent)
Unemployment compensation (to a limited extent)
Veterans’ benefits
Welfare payments
Workers’ compensation benefits

4. Partial List of Gross Income Items (slide 1 of 2)
Alimony
Annuities (income element)
Awards
Back pay
Bargain purchase from employer
Bonuses
Breach of contract damages
Business income
Clergy fees
Commissions
Compensation for services
Death benefits
Debts forgiven
Director’s fees
Dividends
Embezzled funds
Employee awards (in certain cases)
Employee benefits (except certain fringe benefits)
Estate and trust income
Farm income
Fees
Gains from illegal activities
Gains from sale of property
Gambling winnings
Group term life insurance, premium paid by employer (for coverage over $50,000)

5. Partial List of Gross Income Items (slide 2 of 2)
Hobby income
Interest
Jury duty fees
Living quarters, meals (unless furnished for employer’s convenience)
Mileage allowance
Military pay (unless combat pay)
Notary fees
Partnership income
Pensions
Prizes
Professional fees
Punitive damages
Rents
Rewards
Royalties
Salaries
Severance pay
Strike and lockout benefits
Supplemental unemployment benefits
Tips and gratuities
Travel allowance (in certain cases)
Treasure trove (found property)
Wages

6. Deductions - Individual Taxpayers
Individual taxpayers have two categories of deductions:
Deductions for adjusted gross income (AGI) (above line)
Deductions from adjusted gross income (below line)

7. Standard Deduction (slide 1 of 2)
The basic standard deduction (BSD) amount depends on filing status of taxpayer
Filing status
Single $5, $5,700
MFJ, SS 10, ,400
HH , ,350
MFS , ,700

8. Standard Deduction (slide 2 of 2)
Additional standard deduction (ASD)
For taxpayers age 65 or older and/or legally blind
Filing Status
Single $1, $1,400
MFJ, SS 1, ,100
HH 1, ,400
MFS 1, ,100

9. Personal and Dependency Exemption Amounts
2008: $3,500 per exemption
2009: $3,650 per exemption
Personal and dependency exemptions
One per taxpayer (two personal exemptions when married, filing jointly) and for each dependent
Exception: Individual claimed as dependent by another taxpayer does not receive a personal exemption

10. Dependency Exemptions (slide 1 of 2)
A dependency exemption is available for one who is either a qualifying child or a qualifying relative
A qualifying child must meet the following tests:
Relationship
Abode
Age, and
Support

11. Relationship Test The child must be the taxpayer’s:
Son or daughter
Stepson or stepdaughter
Brother or sister
Stepbrother or stepsister
Half brother or half sister, or
A descendant of such individual (e.g., grandchildren, nephews, nieces)
A child who has been adopted, or whose adoption is pending, qualifies
A foster child may also qualify

12. Abode Test
A qualifying child must live with the taxpayer for more than half of the year
Temporary absences from the household due to special circumstances (e.g., illness, education) are not considered

13. Age Test
The child must be under age 19 or under age 24 in the case of a student
A student is a child who, during any part of five months of the year, is enrolled full time at a school or government-sponsored on-farm training course
Individuals who are disabled are not subject to the age test

14. Support
To be a qualifying child, the individual must not be self-supporting
Cannot provide more than one-half of his or her own support
In the case of a full-time student, scholarships are not considered to be support

15. Tiebreaker Rules
In situations where a child may be a qualifying child for more than one person
Tiebreaker rules specify which person has priority in claiming the dependency exemption

16. Qualifying Relative
In order to claim a dependency exemption for a qualifying relative, the following tests must be met:
Relationship
Gross income
Support

17. Relationship Test
The relationship test for a qualifying relative is more expansive than for a qualifying child. Also included are the following relatives:
Lineal ascendants (e.g., parents, grandparents)
Collateral ascendants (e.g., uncles, aunts)
Certain in-laws (e.g., son-, daughter-, father-, mother-, brother-, and sister-in-law)
The relationship test also includes unrelated parties who live with the taxpayer

18. Gross Income Test
Dependent’s gross income must be less than the exemption amount ($3,650 for 2009)

19. Support Test
Taxpayer must provide more than 50% of the qualifying relative’s support
Only amounts expended are considered in the support test
Scholarships are not considered in the support test
Two exceptions to the support test:
Multiple support agreements
Children of divorced parents

20. Multiple Support Agreements
Allows one member of a group providing > 50% of support to claim individual even though no one person provides > 50% support
Eligible parties must provide > 10% of support
Each eligible party must meet all other dependency requirements
Example - Allows children of elderly parent to claim exemption for parent when none individually meets the 50% support test

21. Children of Divorced Parents
Special rules apply if the parents meet the following conditions:
They would have been entitled to the dependency exemption had they been married and filed a joint return
They have custody (either jointly or singly) of the child for more than half of the year
Under the general rule, the parent having custody of the child for the greater part of the year (i.e., the custodial parent) is entitled to the dependency exemption
General rule does not apply if
A multiple support agreement is in effect
Custodial parent issues a waiver in favor of the noncustodial parent

22. Other Rules for Dependency Exemptions
In addition to fitting into either the qualifying child or the qualifying relative category, a dependent must also meet:
The joint return, and
The citizenship or residency tests

23. Joint Return Test
Dependent cannot file a joint return with spouse unless:
Filing solely for refund of tax withheld
No tax liability exists for either spouse
Neither spouse required to file return

24. Citizenship or Residency Test
Dependent must be a U.S. citizen or a resident of U.S., Canada, or Mexico for some part of the calendar year in which the taxpayer’s tax year begins
An exception provides that an adopted child need not be a citizen or resident of the U.S. (or a contiguous country) as long as his or her principal abode is with a U.S. citizen

25. Phase-out of Exemptions (slide 1 of 2)
Applies when taxpayer’s AGI in 2009 exceeds:
$250,200 for married, filing jointly, or surviving spouse
$208,500 for head of household
$166,800 for single
$125,100 for married, filing separately
The phase-out of exemptions is being repealed in two stages and will not be complete until 2010
The exemption phaseout remains at two-thirds for 2006 and 2007 and at one-third for 2008 and 2009

26. Phase-out of Exemptions (slide 2 of 2)
Exemptions deduction is reduced by 2% for every $2,500 ($1,250 for MFS), or part thereof, that AGI exceeds threshold amounts
The amount of the phased-out exemptions is then multiplied by 1/3 (the reduction-of-phaseout fraction) for tax years 2008 and 2009

27. Child Tax Credit
$1,000 tax credit is allowed for each dependent child under the age of 17
Qualifying child includes stepchildren and eligible foster children

28. Filing Requirements (slide 1 of 2)
General Rule: Tax return must be filed if gross income is ≥ the sum of the standard deduction and exemption amount
ASD for blind does not apply for this determination
Special rules apply for dependents and self-employed taxpayers

29. Filing Requirements (slide 2 of 2)
Tax return of an individual is due on or before the 15th day of the 4th month after taxpayer’s year end
Most individuals are calendar year taxpayers, thus, due date is April 15
May obtain a 6 month extension of time to file
Excuses a taxpayer from penalty for failure to file, not from penalty for failure to pay
If more tax is owed, extension request (Form 4868) should be accompanied by check for balance of tax due

30. Filing Status There are 5 filing statuses
Single
Married, filing jointly
Surviving spouse (qualifying widow or widower)
Head of household
Married, filing separately
Filing status affects tax rate brackets, standard deduction, and other amounts

31. Single Filing Status
Includes a taxpayer who is unmarried or separated from spouse by a divorce decree or separate maintenance agreement and does not qualify for another filing status
Marital status is determined as of the last day of the tax year
When a spouse dies during the year, marital status is determined as of the date of death

32. Married Filing Jointly (MFJ) Filing Status
Married as of last day of taxable year, or
Spouse dies during taxable year

33. Surviving Spouse Filing Status
Same tax rate brackets as married, filing jointly
File as surviving spouse for 2 years after death of spouse if taxpayer maintains a home in which a dependent child lives

34. Married Filing Separately Filing Status
Married but not filing a return with spouse and not abandoned spouse

35. Head of Household (HH) Filing Status
Must be unmarried as of end of year or an abandoned spouse
Must pay > half the cost of maintaining a household which is the principal home of a dependent for more than half of tax year
A dependent must satisfy either the qualifying child or the qualifying relative category
A qualifying relative must also meet the relationship test

36. Exception to the HH Requirements
HH may be claimed if taxpayer maintains a separate home for his or her parents
At least one parent must qualify as a dependent

37. Abandoned Spouse
Allows married taxpayer to file as Head of Household if taxpayer:
Does not file a joint return
Paid > half the cost of maintaining a home
Spouse did not live in home during last 6 months of tax year
Home was principal residence of taxpayer’s child for > half of year
Can claim child as a dependent

38. Taxes Rates
Tax liability is computed using either the Tax Table method or the Tax Rate Schedule method
Most taxpayers must use the Tax Tables
Certain taxpayers may not use the Tax Table method including:
An individual who files a short period return
Individuals whose taxable income exceeds the maximum (ceiling) amount in the Tax Table
The 2007 Tax Table applies to taxable income below $100,000
An estate or trust
For 2009 the tax rates are 10%, 15%, 25%, 28%, 33%, and 35%

39. Kiddie Tax (slide 1 of 4)
Net unearned income (NUI) of child is taxed at parents’ rate
Child must be under age 19 at end of year (or under age 24 if a full-time student)
NUI generally equals unearned income less $1,900 (2009 tax year)

40. Kiddie Tax (slide 2 of 4) Unearned income includes: Taxable interest
Dividends
Capital gains
Rents
Royalties
Pension and annuity income, and
Unearned income from trusts

41. Kiddie Tax (slide 3 of 4) Computing NUI for Kiddie Tax for 2009:
Unearned income
Less: $950
Less: The greater of:
i) $950, or
ii) Allowable itemized deductions connected with production of unearned income
Equals: net unearned income

42. Kiddie Tax (slide 4 of 4) Net unearned income taxed at parents’ rate
Remainder of taxable income taxed at child’s rate
Two options for computing the tax
A separate return may be filed for the child
The tax on net unearned income (referred to as the allocable parental tax) is computed as though the income had been included on the parents’ return
Form 8615 is used to compute the tax
The parents may elect to report child’s income on their own return
Certain requirements must be met

43. Gains and Losses from Property Transactions (slide 1 of 3)
In order for gains (losses) to be recognized (included in gross income), they must be realized:
Realized gain (loss) = amount realized - adjusted basis
Amount realized = selling price - costs of disposition
Adjusted basis = cost + capital additions - cost recovery

44. Gains and Losses from Property Transactions (slide 2 of 3)
All realized gains are recognized unless a specific tax provision provides otherwise (e.g., nontaxable exchanges)
Realized losses may or may not be recognized depending on the circumstances
Generally, losses on the sale or disposition of personal use property are not recognized

45. Gains and Losses from Property Transactions (slide 3 of 3)
Once recognized gains or losses have been determined, they must be classified as ordinary or capital
Ordinary gains are fully taxable
Ordinary losses are fully deductible
Capital gains and losses are subject to special tax treatment

46. Gains and Losses from Capital Asset Transactions (slide 1 of 2)
Capital assets are defined as any property other than:
Inventory,
Accounts Receivable, and
Depreciable property or real property used in a business
Most personal use assets owned by individuals are capital assets
Losses on these assets are not deductible

47. Gains and Losses from Capital Asset Transactions (slide 2 of 2)
Gains and losses from capital asset transactions must be netted
Net gains and losses by holding period
If excess losses result, they are shifted to the category carrying the highest tax rate

48. Max Tax Rates for Net Capital Gains of Individuals
Classification Maximum Rate
Short-term gains (held ≤ one year) 35%
Long-term gains (held > one year)
Collectibles 28%
Certain depreciable property
used in a trade or business
(unrecaptured § 1250 gain) 25%
All other long-term capital gains 15%, 5%,
or 0%

49. Treatment of Capital Losses
Net capital losses of individuals are deductible for AGI up to $3,000 yearly
Excess capital losses are carried over to the next tax year
When carried over, capital losses retain their classification as short- or long-term

50. Dr. Donald R. Trippeer, CPA
If you have any comments or suggestions concerning this PowerPoint Presentation for South-Western Federal Taxation, please contact:
Dr. Donald R. Trippeer, CPA
SUNY Oneonta