Chapter 2 zFederal Income Tax Calculation zIntroduction - Overview: computations (Tax formula and Tax Return) and concepts of course zStandard deduction amounts, exemptions amounts, filing status, tax rates, tax tables

Federal income tax formula z Chap 1: intro to formula z Chap 2: intro to components z Rest of chaps (course): components in depth

Tax Formula- Components Overview zexclusions (exh 2-1) zgross income (exh 2-2) (1040 p.1) - section 61, not unrealized zdeductions for AGI (above the line) (1040 p.1) zFrom AGI (below the line): either itemized deduction (exh 2-3) (1040 schedule A), personal and production of income, various limits

zOr standard deduction (=S.D.)(and additional standard deductions) zS.D. - Claimed as exemption - Individual claimed as a dependent on another’s return; e.g., student, elderly parent - standard deduction limit: greater of (1) 750 or (2) earned income (max=standard deduction for filing status) +250

Exemptions zExemption: dependent cannot claim self zExemptions - personal - t/p and spouse zdependent - 5 tests z1) support: >1/2, not scholarship, not unexpended; can be capital expenditures, multiple support, divorced - Form 8332 by custodial z2) relationship: list or member of household

z3) GI test: <dependency exemption amount – Exceptions: children of T/P z4) joint return: no joint return unless neither required to file and for refund z5) citizen or resident zphase out=[(AGI - threshold)/2500] x 2% x #exemptions x exemption amount

Tax determination zTax table v. tax rate schedule zterms: statutory, marginal, progressive, effective zw/h and estimated payments zLTCG rate - see separate info

Tax determination ( continued) zkiddie tax (<14) and net unearned income=unearned income minus 750 statutory amount minus standard deduction (750 or itemized directly connected)

z Form child’s z Form parent’s

Filing Requirements (chart) zThresholds, dependents (special), S/E, refund, EIC forms zwhen and where - 4/15, service center, 4 mo & 6 mo extensions

Filing status z single z MFJ z h of h z MFS

Gains and Losses zRealization v. recognition zAR - AB = G or L zCapital asset - section 1221: not a capital asset zLT, ST, netting, MT zcapital loss limit - individuals, corps zPlanning

Child Tax Credit z500 (600 in 01-04) per child (and increasing) zQualifying child under 17 (dependent) zPhaseout - Single (82000 in 98), MFJ ( in 98), MFS or hoh , using modified AGI, 50/1000

Child Tax Credit – EGTRRA ’01; JGTRRA ‘03 zCredit Increase z $600 z2003 – 2004$1000 z2005 – 2008$700 z2009$800 z2010 and after$1,000 yEffective ’01, ‘03

Regular Income Tax Rate Reductions– EGTRRA-01, JGTRRA-03 Calendar Year 28% Rate Reduced to 31% Rate Reduced To %30.5% 2002 – %30% 2003 – %28% %31%

Regular Income Tax Rate Reductions EGTRRA–01, JGTRRA-03 (continued) Calendar Year 36% Rate Reduced To 39.6% Rate Reduced To %39.1% 2002 – %38.6% 2003 – %35% %39.6%

Phase-In of Increased S.D. – MFJ – EGTTRA ’01, JGTRRA ‘01 Calendar Year Standard Deduction for Joint Returns as a Percentage of Standard Deduction for Single Returns % % % % % 2009 and Later 200%

Phase-In of Increased 15% MFJ Bracket for EGTTRA ’01, JGTRRA ‘03 Calendar Year End Point of 15% Tax Bracket for Married Couples Filing Jointly as a Percentage of End Point of 15% Bracket for Single Taxpayers % % % % 2008 and Later 200%

Elimination of Exemptions Phase-out - EGTTRA ‘01 zCurrent Phase Out Reduced y2006 – 20071/3 y2008 – /3 y2010 & after100%