Determination of Income Tax Liability  Gross Income  - “Above the Line Deductions”  = AGI (Adjusted Gross Income)  - Standard or Itemized Deductions  -Personal and Dependency Exemptions  = Taxable Income  Tax Based on Filing Status  -Credits  = Tax Due

Types of income  Earned Income Wages, salary Self-employment  Investment Income Interest, dividends, capital gains, rent

Exclusions from income  Gifts Transfer not made as compensation. No strings attached. No consideration given in return Carryover in basis from donor to donee  Inheritances Step up in basis to value at time of death

Exclusions from income  Life insurance proceeds due to death  Disability insurance benefits If you paid the premiums  Long-term care benefits: limit  Interest: state and municipal bonds State income tax? Taxable equivalent yield Sale of muni bonds at gain/loss Impact on taxable social security; AMT

Exclusions from Income  U.S. Treasury bills, notes and bonds Interest not subject to state income taxes  U.S. Savings bonds Bought at a discount. Buy $50 bond for $25 Interest is taxable when bonds are cashed  Exception to normal rule where interest taxable each year Interest not taxable if used for education expenses  Phase out starts at $104,900 for MFJ in 2010

Social Security Benefits  Contributions to social security have already been subjected to income tax  Up to 85% of social security payments represent taxable income As income increases, amount of social security which is taxable increases Formula is very complex to determine amount taxable Even interest income on municipal bonds increases taxable social security income

Exclusions from income  Forgiveness of debt If bankrupt Certain student loans  Otherwise, can be taxable  Gain from sale of home MFJ: $500,000Single: $250,000 Principal residence: 2 of last 5 years

Exclusions from income  Attributable to physical injury or sickness Not taxable  Other damages are Emotional distress Punitive Discrimination

Exclusions from Income  Fringe benefits Meals and lodging for employer convenience No additional cost  Flights Employee discounts: can’t exceed gross profit percentage  Scholarships  Adoption assistance  Return of capital: getting money back

Income timing  Constructive receipt Could you have had the funds?  Pay me for my soybeans next year  Imputed interest Below market interest rate on loan  Lender has imputed income  Lender has generally also made a gift  Prepaid income Generally income in year received if cash basis

Above the Line Deductions  Expenses incurred in sole proprietorship (business)  Expenses associated with rental property  Capital losses: up to $3,000 per year

Above the Line Deductions  Education expenses: up to $4,000 in 2010??? $2,000 if AGI > $130,000 MFJ; $0 if AGI > $160,000  IRA contributions In general, if not covered by employer pension  Traditional vs. Roth  Under age 50: contribute $5,000 in 2010 Over 50: $6,000  Earned income  Student loan interest up to $2,500 in 2010 Single phaseout: $60,000 - $75,000 MFJ phaseout: $120,000 - $150,000

Above the Line Deductions  Alimony  Self-employed health insurance  Moving expense: more than 50 miles increase in commute due to new job  One-half self-employment tax  Sales taxes on vehicle purchases in 2009 Cost of vehicle up to $49,500 Phaseout: $250,000 to $260,000 MFJ

AGI determines  Limitation of itemized deductions Prior to 2010, reduced by 1/3 (in 2009) of lesser of:  3% for AGI above $166,800 in 2009  80% of itemized deductions Example:  Itemized deductions: $10,000  AGI: $270,000 vs. AGI $500,000

AGI determines  Phaseout for personal and dependent exemptions Prior to 2010, reduced by 1/3 of 2% for each $2,500 AGI above $250,200 in Example:  Exemptions: $7,300  AGI: $300,000

Standard Deduction 2009 MFJ: $11,400Single: $5,700 Head of Household: $8,350 Plus $1,050 for each spouse over 65 Plus real estate property taxes up to $1,000 Dependents: > of  $950  Or earned income plus $300

Itemized Deductions  Home mortgage interest First/second homes Home equity loan interest on up to $100,000 loan  Taxes Property taxes State income taxes  Charitable contributions  Medical expenses Above 7.5% of AGI

Personal Exemptions  $3,650 in 2009  Get exemption for self if not claimed as a dependent

Dependent Exemptions  $3,650 in 2009  Get exemption for dependent if Family member Lives with you Provided more than half than support  Divorced parents: custodial  Multiple support agreement If no one provides majority Child under 19 or student under 24 Dependent can’t file joint tax return with spouse