Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Principles of Taxation Chapter 13 The Individual Tax Formula

Slide 13-2 Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Objectives  filing status  computing taxable income  standard deduction versus itemized deductions  exemptions  tax rates  credits and AMT  payment and filing requirements

Slide 13-3 Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Filing Status - Married  If married on the LAST day of the year.  MFJ (married filing joint) rates  If spouse incomes very similar, single rates generate lower tax  If spouse incomes dissimilar, married rates generate lower tax.  MFJ rates apply to Surviving Spouse  widow or widower with a dependent child for 2 more years after death of spouse.  MFS (married filing separately) rates are less favorable. Typically used by separated spouses.

Slide 13-4 Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Filing Status - Unmarried  Single is the default category for unmarried individuals (neither surviving spouse nor head of household).  SeeAP1 for filing status examples.

Slide 13-5 Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Taxable Income Computation  Calculate total income totalling Line 22 on  Calculate Adjusted Gross Income (AGI) on Line 32 of  Subtract the greater of:  standard deduction or  itemized deductions  Subtract total exemptions

Slide 13-6 Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Standard Deduction  Depends on filing status. For 1999:  MFJ = $7200  MFS = $3600  HOH = $6350  Single = $4300  Blind or aged (>=age 65)  MJF, MFS = $850 per item  HOH or Single = $1050  See AP2 for standard deduction examples.

Slide 13-7 Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Itemized deductions  See Schedule A (Chapter 16 details)  Bunching. If itemized deductions are about equal to standard deduction each year, bunch deductions on alternate years and claim standard deduction on other years.  Example: My dad gives $5,000 to charity each year. He is 72 and single. What is his standard deduction each year? Does he itemize? Suppose he gave $10,000 to the church every other year?

Slide 13-8 Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Exemptions  Personal exemption for the taxpayer (2 for MFJ).  You cannot claim yourself if someone is claiming you.  Exemption = $2750 in 1999 for each personal or dependency exemption.

Slide 13-9 Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Exemptions for dependents  Family member OR live in your home for entire year.  You provide > 1/2 financial support  Dependent’s gross income < exemption amount  waived for child < 19 OR student-child<24.  Dependent may not generally file a joint return.  Dependent must be a U.S. citizen OR a resident of US, Mex, Can  See AP3 for practice with rules.

Slide Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Rich People  Phase-out of itemized deductions - If AGI greater than $126,600 (MFJ) in 1999, itemized deductions are reduced by 3% of income > $126,600. Can’t reduce itemized deductions below 20% of the total.  Phase-out of exemptions - IF AGI greater than $189,950 (MFJ) in 1999, reduce exemption by 2% for each $2500 that AGI is above the threshold. Can reduce to 0.

Slide Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Tax Formula  Total Income - Adjustments = AGI - stand ard or itemized deductions - exemp tions = Taxabl e Income  Take Tax able Income to the rate schedules at the front of the book.

Slide Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Tax computations  See AP 4 and 5 for practice with tax rate schedules. What do you notice about married versus single rates?  AP4 Would Ms. G and Mr. H prefer married or single?  AP5 Would Mr. P and Mrs. P prefer married or single?

Slide Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Credits  Child Credit = $500 per child in Phases out for rich.  Dependent care credit (child < 13 years old). Credit amount between 30% and 20% of child care costs depending on income range.  Earned income credit. This is refundable - a transfer payment to working poor. Increases progressivity of tax rates. Credit is higher for taxpayers with children and phases out as income increases.  Excess FICA withholding is refunded through a tax return claim.

Slide Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 AMT (again!!)  Same purpose - make sure rich people using “loopholes” pay some tax.  Taxable income + or - adjustments + preferences = AMTI before exemption - exemption = AMTI x 26% or 28% = TMT

Slide Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Payment and Filing Requirements  Taxes on wages are withheld each pay period.  Estimated taxes on other income due 4/15, 5/15, 9/15 and 1/15.  Pay 90% of current year tax, 100% of prior year (or 105% of prior year if 1998 AGI>$150,000).  Tax return due 4/15, but may be extended to 8/15 then 10/15 (LAST DATE).