2-1 ©2009 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

2-3 DETERMINATION OF TAX (2 of 2)  Tax planning considerations  Compliance and procedural considerations ©2009 Pearson Education, Inc. Publishing as Prentice Hall

2-4 Formula for Individual Income Tax (1 of 2) Income from whatever source derived - Exclusions = Gross Income - Deductions for Adjusted Gross Income = Adjusted Gross Income (AGI) ©2009 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 = Net tax payable or refund due ©2009 Pearson Education, Inc. Publishing as Prentice Hall

2-6 Deductions from Adjusted Gross Income  Itemized deductions  Standard deduction  Personal exemptions  Dependency exemptions  Child credit ©2009 Pearson Education, Inc. Publishing as Prentice Hall

2-7 Itemized Deductions (1 of 2)  See Table I2-5 for partial list  Medical expenses  Taxes  Investment and residential interest  Charitable contributions  Personal casualty and theft losses  Miscellaneous deductions ©2009 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 AGI  Itemized deductions reduced if AGI exceeds certain amount  Max reduction in itemized deductions is 80% of total itemized deductions ©2009 Pearson Education, Inc. Publishing as Prentice Hall

2-9 Standard Deduction  Varies based on:  Filing status  Age  Vision  Used when > itemized deductions  Loss of or limited standard deduction in certain situations ©2009 Pearson Education, Inc. Publishing as Prentice Hall

2-10 Personal Exemptions  Generally, each taxpayer allowed one  Unless claimed as dependent on another return  $3,500 in 2008  Additional allowed for spouse on joint return ©2009 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  Cannot themselves claim another person as a dependent ©2009 Pearson Education, Inc. Publishing as Prentice Hall

2-12 Dependency Exemptions Additional Requirements for Qualifying Children  Relationship test  Age test  Abode test  Support Test ©2009 Pearson Education, Inc. Publishing as Prentice Hall

2-13 Dependency Exemptions Requirements for Other Relatives  Relationship test  Gross income test  Support test  Personal and dependency exemptions phased out for high income taxpayers  Phaseout eliminated for 2010 & beyond ©2009 Pearson Education, Inc. Publishing as Prentice Hall

2-14 Child Credit  $1000 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 12,050 ©2009 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

2-16 Filing Status (1 of 2)  Married filing jointly  Surviving spouse  Head of household  Single  Married filing separately ©2009 Pearson Education, Inc. Publishing as Prentice Hall

2-17 Filing Status (2 of 2)  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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

2-18 Dependents with Unearned Income Personal Exemption & Standard Deduction  No personal exemption on own return  Standard deduction reduced to greater of  Earned income OR  $900 OR  Dependent’s earned income plus $300 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

2-19 Dependents with Unearned Income Kiddie Tax  All kids < 18 yrs old  Tax rate on child’s net unearned income in excess of $900 same as parents’ rate if higher than child’s rate  Certain kids age  If 18, applies if earned income $900  If 19-23, same rules as for age 18 ONLY if also a full-time student ©2009 Pearson Education, Inc. Publishing as Prentice Hall

2-20 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

2-21 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

2-22 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

2-23 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

2-24 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

2-25 Capital Gains & Losses Tax Rates on Net Capital Gains  Net long-term gain  Taxed at maximum of 15%  5% if in the 10% and 15% tax bracket  Net short-term gain  Taxed at the same rate as other income ©2009 Pearson Education, Inc. Publishing as Prentice Hall

2-26 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

2-27 Tax Planning Considerations  Shifting income between family members  Splitting income  Maximizing itemized deductions  Filing joint or separate returns  Innocent spouse provision ©2009 Pearson Education, Inc. Publishing as Prentice Hall

2-28 Compliance and Procedural Considerations  Who must file  See Chart on page 2-33  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 ©2009 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 2-29 ©2009 Pearson Education, Inc. Publishing as Prentice Hall