2-1 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

2-2 DETERMINATION OF TAX (1 of 2)  Formula for individual income tax  Deductions from adjusted gross income  Determining the amount of tax  Business income and business entities  Treatment of capital gains and losses ©2011 Pearson Education, Inc. Publishing as Prentice Hall

2-3 DETERMINATION OF TAX (2 of 2)  Tax planning considerations  Compliance and procedural considerations ©2011 Pearson Education, Inc. Publishing as Prentice Hall

2-4 Formula for Individual Income Tax (1 of 2) Income from whatever source derived - Exclusions (see Table 2) = Gross Income - Deductions for AGI (see Table 4) = Adjusted Gross Income (AGI)  Tax rate schedules, std. deduction, personal exemptions, & other amounts are adjusted for inflation. ©2011 Pearson Education, Inc. Publishing as Prentice Hall

2-5 Formula for Individual Income Tax (2 of 2) = Adjusted Gross Income (AGI) - Deductions from AGI: Greater of itemized deductions or std deduction Personal and dependency exemptions = Taxable Income X Tax rate or rates (tax table or schedule) = Gross tax - Credits and prepayments (see Table 5) = Net tax payable or refund due ©2011 Pearson Education, Inc. Publishing as Prentice Hall

2-6 Deductions from Adjusted Gross Income  Itemized deductions  Standard deduction  Personal exemptions  Dependency exemptions  Child credit ©2011 Pearson Education, Inc. Publishing as Prentice Hall

2-7 Itemized Deductions (1 of 2)  See Table 6 for partial list  Medical expenses  Taxes  Investment and residential interest  Charitable contributions  Personal casualty and theft losses  Miscellaneous deductions ©2011 Pearson Education, Inc. Publishing as Prentice Hall

2-8 Itemized Deductions (2 of 2)  Only claim itemized deductions if greater than standard deduction  Some items limited by varying percentages of adjusted gross income  Prior to 2010, a temporary rule required higher income taxpayers to reduce certain itemized deductions ©2011 Pearson Education, Inc. Publishing as Prentice Hall

2-9 Standard Deduction  Varies based on:  Filing status, age, and vision  $5,700 - $11,400 in 2010  Only minor change from 2009  Used when std. ded. > itemized deductions  Limited std. ded. in certain situations ©2011 Pearson Education, Inc. Publishing as Prentice Hall

2-10 Personal Exemptions  Generally, each taxpayer allowed one  Unless claimed as dependent on another return  $3,650 in 2009 and 2010  Additional allowed for spouse on joint return ©2011 Pearson Education, Inc. Publishing as Prentice Hall

2-11 Dependency Exemptions Requirements for All Dependents  Have a qualifying identification number  Meet a citizenship test  Meet a separate return test  Not themselves claim another person as a dependent ©2011 Pearson Education, Inc. Publishing as Prentice Hall

2-12 Dependency Exemptions Additional Requirements for Qualifying Children  Relationship test  Age test  Abode test  Support Test ©2011 Pearson Education, Inc. Publishing as Prentice Hall

2-13 Dependency Exemptions Requirements for Other Relatives  Relationship test  Gross income test  Support test  Prior to 2010 a temporary provision phased out personal and dependency exemptions for high income taxpayers ©2011 Pearson Education, Inc. Publishing as Prentice Hall

2-14 Child Credit  $1,000 per qualifying child  Under 17 and a “qualifying” child  Credit reduced if MAGI exceeds threshold  Child credit refundable to extent of 15% of taxpayer's earned income in excess of $3,000 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

2-15 Determining the Amount of Tax  Filing status  Joint return  Surviving spouse  Head of household  Single taxpayer  Married filing a separate return  Abandoned spouse  Dependents with unearned income ©2011 Pearson Education, Inc. Publishing as Prentice Hall

2-16 Filing Status (1 of 3)  Married filing jointly  The Federal Defense of Marriage Act of 1996 defines marriage as between a woman. Same sex couples cannot file a joint Federal return  May file jointly state return in certain states ©2011 Pearson Education, Inc. Publishing as Prentice Hall

2-17 Filing Status (2 of 3)  Surviving spouse  Head of household  Single  Married filing separately ©2011 Pearson Education, Inc. Publishing as Prentice Hall

2-18 Filing Status (3 of 3)  Relative tax liability by filing status from lowest to highest  Married filing jointly  Surviving spouse  Head of household  Includes abandoned spouse  Single  Married filing separately ©2011 Pearson Education, Inc. Publishing as Prentice Hall

2-19 Dependents with Unearned Income Personal Exemption & Standard Deduction  No personal exemption on own return  Standard deduction reduced to greater of  Earned income OR  $950 OR  Dependent’s earned income plus $300 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

2-20 Dependents with Unearned Income Kiddie Tax (1 of 2)  All kids < 18 yrs old  Tax rate on child’s net unearned income in excess of $1,900 same as parents’ rate if higher than child’s rate  Certain kids age  If 18, applies if earned income $950  If 19-23, same rules as for age 18 ONLY if also a full-time student ©2011 Pearson Education, Inc. Publishing as Prentice Hall

2-21 Dependents with Unearned Income Kiddie Tax (2 of 2)  Parents of child subject to kiddie tax may elect to include child’s dividend &interest income on their own return  If child’s total gross income ≤ $9,500 &  All child’s income from div. & interest ©2011 Pearson Education, Inc. Publishing as Prentice Hall

2-22 Business Income & Bus Entities C Corporation Formula Income from whatever source derived - Exclusions = Gross Income - Deductions = Taxable Income X Tax rates = Gross Tax - Credits and prepayments = Net tax payable or refund due ©2011 Pearson Education, Inc. Publishing as Prentice Hall

2-23 Business Income & Bus Entities C Corporation Tax Rates First $50K15 % of Taxable Inc > $50K But Not > $75K$7, % of Taxable Inc > $75K But Not > $100K13, % of Taxable Inc > $75K > $100K But Not > $335K $22, % of Taxable Inc > $100K > $335K34% of Taxable Inc > $10M But Not > $15M3.4M + 35% of Taxable Inc > $10M > $15M But Not > $18,333,333$5.150M + 38% > $15M > $18,333,33335% of Taxable Inc ©2011 Pearson Education, Inc. Publishing as Prentice Hall

2-24 Business Income & Bus Entities Flow-through vs. Non Flow-through  Flow-through entities do not pay tax at the entity level  C corporations pay tax at the entity level and the owners pay tax on corporate earnings (dividends) when received ©2011 Pearson Education, Inc. Publishing as Prentice Hall

2-25 Capital Gains & Losses Capital Asset Definition  Capital asset defined in §1221  Assets other than inventory, trade receivables, certain self-created works, depreciable business property, business land, and certain government publications ©2011 Pearson Education, Inc. Publishing as Prentice Hall

2-26 Capital Gains & Losses Classification of Capital Gains and Losses  Capital gains and losses are divided into 2 categories  Long-term is held for over 12 months  Short-term is held less than 12 months ©2011 Pearson Education, Inc. Publishing as Prentice Hall

2-27 Capital Gains & Losses Tax Rates on Net Capital Gains  Net long-term gain  Taxed at maximum of 15%  Increases to 20% in 2011  0% if in the 10% or 15% tax  Net short-term gain  Taxed at the same rate as other income ©2011 Pearson Education, Inc. Publishing as Prentice Hall

2-28 Capital Gains & Losses Tax Treatment of Net Capital Losses  Individuals can deduct only up to $3,000 of net capital losses from their other income  Unused losses are carried over indefinitely to offset gains in future years ©2011 Pearson Education, Inc. Publishing as Prentice Hall

2-29 Tax Planning Considerations  Shifting income between family members  Splitting income  Maximizing itemized deductions  Filing joint or separate returns  Innocent spouse provision ©2011 Pearson Education, Inc. Publishing as Prentice Hall

2-30 Compliance and Procedural Considerations  Who must file  See Chart on page 33  Due dates for filing return  Individuals and Partnerships  15 th day of 4 th month after year end  Forms 1040, 1040EZ, and 1040A  Corporations  15 th day of 3 rd month after year end ©2011 Pearson Education, Inc. Publishing as Prentice Hall

Comments or questions about PowerPoint Slides? Contact Dr. Richard Newmark at University of Northern Colorado’s Kenneth W. Monfort College of Business 2-31 ©2011 Pearson Education, Inc. Publishing as Prentice Hall