Liberty Tax Service Online Basic Income Tax Course. Lesson 6

HOMEWORK CHAPTER 5 HOMEWORK 1: Henry H. (SSN 288-40-1920, born 3/18/1967) and Helen N. Howards (SSN 201-21-2121, born 2/10/1969) are married and live at 137 Grover Lane, Denver, CO 80202. They are filing a joint return. Henry is an industrial worker and Helen is a candy maker. They have one child, Herbert (SSN 249-36-4987, born 5/19/1997) whom they claim as their dependent and who is a qualifying child for the child tax credit. They received $90 interest on a CD at Oakwood Bank. Their itemized deductions on their 2007 joint return were $10,850. Using the following documents, complete the front page of Form 1040 and on the second page, line 62. Complete Schedule B, if needed.

HOMEWORK CHAPTER 5

HOMEWORK CHAPTER 5

HOMEWORK CHAPTER 5

HOMEWORK CHAPTER 5

HOMEWORK CHAPTER 5

HOMEWORK CHAPTER 5

HOMEWORK CHAPTER 5 Homework 1 - Answer

HOMEWORK CHAPTER 5 Homework 1 - Answer

HOMEWORK CHAPTER 5 Homework 1 - Answer

HOMEWORK CHAPTER 5 HOMEWORK 2: Frank S. (SSN 061-38-2625, born 11/9/1972) and Karen C. Walt (SSN 078-41-4662, born 4/28/1977) are married filing a joint return and live at 6 Red Fox Parkway, Hialeah, FL 33002. Last year they filed a joint return and did not itemize their deductions. Frank is a greenhouse engineer and Karen is an executive assistant. They have two children, Kara (SSN 031-42-3800, born 8/3/1997) and Abigail (SSN 092-46-5921, born 2/1/2002) Walt, and both are qualifying children for the child tax credit. Complete the front page of Form 1040, line 62 and Schedule B, if needed, for the Walts.

HOMEWORK CHAPTER 5

HOMEWORK CHAPTER 5

HOMEWORK CHAPTER 5

HOMEWORK CHAPTER 5

HOMEWORK CHAPTER 5

HOMEWORK CHAPTER 5 Homework 2 - Answer

HOMEWORK CHAPTER 5 Homework 2 - Answer

HOMEWORK CHAPTER 5 Homework 2 - Answer

HOMEWORK CHAPTER 5 Homework 2 - Answer

Chapter 6: Standard Deduction and Your Income tax Chapter Content Standard Deduction Figuring Your Income Tax Key Ideas Objectives Learn About Standard Deduction Determine Who Can Use The Standard Deduction Know How to Figure Your Income Tax

Deductions Deductions Amounts that can be subtracted from AGI to figure taxable income. You may be able to subtract either the standard deduction or itemized deductions. When allowed to make the choice, use the method that gives you the lower tax. You have determined your total income and then subtracted out any adjustments to arrive at your adjusted gross income (AGI). If you have no adjustments, your AGI is the same amount as your total income on line 22 of Form 1040. You are now ready to subtract the DEDUCTION amount used from your adjusted gross income to figure taxable income. You can subtract either the STANDARD DEDUCTION or ITEMIZED DEDUCTIONS. If you have a choice, you should choose the method that gives you the lower tax.

Standard Deduction Standard Deduction Amount that reduces the amount of income on which you are taxed. Benefits in that it eliminates need to itemize actual deductions. Entered on line 40 of Form 1040. The STANDARD DEDUCTION is a dollar amount that reduces the amount of income on which you are taxed. The standard deduction is a benefit that eliminates the need for many taxpayers to itemize actual deductions. However, if your itemized deductions are higher than your standard deduction, you will want to itemize to get the lower tax liability.

Standard Deduction The standard deduction depends on: Filing status Whether you are 65 or older and/or are blind. Whether you can be claimed as a dependent on another taxpayer’s return. Higher if you are 65 or older and/or are blind. Refer to Tables 6-1, 6-2, and 6-3 to figure standard deductions.

Standard Deduction Form 1040, Page 2 The amount of your standard deduction (or total itemized deductions from line 29 of Schedule A, Itemized Deductions) is entered on line 40 of Form 1040. The standard deduction is higher if you are 65 or older (born before January 2, 1944) and/or blind.

Standard Deduction

Standard Deduction If you were born before January 2, 1944 and/or are blind and are not claimed as a dependent on another return, you are entitled to a higher standard deduction. Complete line 39a of Form 1040.

Standard Deduction

Standard Deduction – Problem 1 George is 54 years old and is married to Jenni, age 51. They are filing a joint return (neither is blind or claimed as a dependent on another return). What is their standard deduction? a. $13,000 b. $10,900 c. $ 5,450

Standard Deduction – Problem 1 George is 54 years old and is married to Jenni, age 51. They are filing a joint return (neither is blind or claimed as a dependent on another return). What is their standard deduction? b. $10,900

Standard Deduction – Problem 1 Form 1040, Page 2

Standard Deduction – Problem 2 Bob and Betty are both over 65 years old (born before January 2, 1944) and are filing a joint return. Neither is blind nor claimed as a dependent on another return. They check the appropriate boxes on line 39a and enter 2 in the box. According to Table 6-2, what is their standard deduction? a. $13,000 b. $11,950 c. $10,900

Standard Deduction – Problem 2 Bob and Betty are both over 65 years old (born before January 2, 1944) and are filing a joint return. Neither is blind nor claimed as a dependent on another return. They check the appropriate boxes on line 39a and enter 2 in the box. According to Table 6-2, what is their standard deduction? a. $13,000 Form 1040, Page 2 2

Standard Deduction – Problem 3 Michael is single and claimed as an exemption on his parents' 2008 tax return. He has interest income of $780 and wages of $150. He has no itemized deductions. Using Table 6-3, what is Michael’s standard deduction? a. $5,450 b. $ 900 c. None of the above

Standard Deduction – Problem 3 Michael is single and claimed as an exemption on his parents' 2007 tax return. He has interest income of $780 and wages of $150. He has no itemized deductions. Using Table 6-3, what is Michael’s standard deduction? b. $ 900

Standard Deduction – Problem 3

Standard Deduction – Problem 4 Daniel, a 22-year-old full-time college student, is claimed on his parents’ 2008 tax return. Daniel is married and files a separate return. His wife does not itemize deductions on her separate return. Daniel has $200 in interest income and wages of $3,800. He has no itemized deductions. Using Table 6-3, what is Daniel’s standard deduction? a. $ 900 b. $5,450 c. $4,100

Standard Deduction – Problem 4 Daniel, a 22-year-old full-time college student, is claimed on his parents’ 2008 tax return. Daniel is married and files a separate return. His wife does not itemize deductions on her separate return. Daniel has $200 in interest income and wages of $3,800. He has no itemized deductions. Using Table 6-3, what is Daniel’s standard deduction? c. $4,100

Standard Deduction – Problem 4

Standard Deduction Most taxpayers have a choice of either taking the standard deduction or itemizing their deductions. You are NOT eligible to take the standard deduction if: You are married and filing a separate return, and your spouse itemizes deductions, or You are a nonresident or dual-status alien during the year. NOT eligible to take a standard deduction if: Married filing separately and spouse itemizes Nonresident or dual-status alien during the year.

Standard Deduction Higher Standard Deduction for Real Estate Taxes For 2008, your standard deduction is increased by the state and local real estate taxes you paid, up to $500 ($1,000 if married filing jointly). The real estate taxes must be taxes that would have been deductible on Schedule A if you had itemized your deductions (covered in Chapter 8). Higher Standard Deduction for Net Disaster Loss For 2008, your standard deduction is increased by your net disaster loss. Your net disaster loss is your personal casualty losses from a federally declared disaster minus any personal gains. Casualty losses are covered in Chapter 13. Standard Deduction Amount Check the box on line 39c if you are claiming the standard deduction and the amount includes real estate taxes or a net disaster loss. 42 42

Exemptions For most taxpayers, the exemption amount is determined by multiplying $3,500 (for 2008) by the number of exemptions (personal exemptions plus dependent exemptions) entered on line 6d. Enter your taxable income on line 43 of Form 1040.

Your Income Tax & Withheld Taxes Figuring Income Tax Taxable income = AGI minus standard or itemized deductions and exemptions. 1. If no adjustments, AGI, line 37 is the same as total income on line 22. 2. Exemption amount is determined by multiplying the number of exemptions on line 6d of Form 1040 by $3,500 (line 42). 3. Enter your taxable income on line 43 of Form 1040. YOUR INCOME TAX is a percentage of your taxable income. You figure your taxable income by subtracting either your standard deduction or your itemized deductions and your exemption amounts from your adjusted gross income (AGI). If you have no adjustments to income, your AGI is the same as your total income on line 22. For most taxpayers, the exemption amount is determined by multiplying $3,500 by the number of exemptions (personal exemptions plus dependent exemptions) entered on line 6d. Enter your taxable income on line 43 of Form 1040.

Your Income Tax & Withheld Taxes There are various methods for computing your tax. Depends on: amount of your taxable income whether required to use Schedule D, Capital Gains and Losses, to report a capital gain. If not reporting capital gain income or qualified dividends, use either the Tax Table or the Tax Rate Schedules to determine your income tax. There are various methods for computing your tax. The method that applies to you usually depends on the amount of your taxable income and whether you are required to use Schedule D, Capital Gains and Losses, to report a capital gain. If you are not reporting capital gain income or qualified dividends, you generally will use either the Tax Table or the Tax Rate Schedules to determine your income tax.

FIGURING YOUR INCOME TAX After your taxable income reaches a certain level, each additional dollar is taxed at a progressively higher rate. Your tax is based on filing status and taxable income. Capital gains (income from the sale of property such as stocks, etc.) and qualified dividends are taxed at different rates. The federal income tax is a progressive tax, which means as your taxable income increases, the amount of your income tax increases. After your taxable income reaches a certain level, each additional dollar is taxed at a progressively higher rate. The amount of taxable income taxed at each rate depends on your filing status. Capital gains (income from sale of property such as stocks) are taxed at different rates.

FIGURING YOUR INCOME TAX The tax computation methods used by most taxpayers depend on the amount of taxable income reported on line 43 of Form 1040. Do not use AGI to determine the tax computation method. Figure your tax on line 44. Form 1040, Page 2 Your tax is based on your filing status and taxable income. Whether you use the Tax Table or the Tax Rate Schedules depends on the amount of taxable income you report on line 43 of Form 1040. Do not use your adjusted gross income to determine your tax. Enter your tax on line 44 of Form 1040.

TAX TABLE Use if taxable income is less than $100,000. Taxable income is arranged in rows of taxable income groups. Each group is called a bracket. Filing status is arranged in columns. Use MFJ column for QW. Tax on the taxable income is found where income bracket row and filing status column meet. If your taxable income is less than $100,000, use the Tax Table to find your tax liability (See Appendix A, 1040 instructions). First look down the column of tax BRACKETS (taxable income groups) to find the bracket that includes your taxable income. Then read across the table to the column for your filing status. If your filing status is qualifying widow(er), use the column for married filing jointly. Your tax is shown where the income line and filing status meet.

TAX TABLE – Problem 1 Cliff and Kate are married filing a joint return. Their taxable income on Form 1040, line 43 is $32,704. They will use the Tax Table. How much tax are Cliff and Kate liable for on their income of $32,704? a. $4,009 b. $4,106 c. $4,525

TAX TABLE – Problem 1 Cliff and Kate are married filing a joint return. Their taxable income on Form 1040, line 43 is $32,704. They will use the Tax Table. How much tax are Cliff and Kate liable for on their income of $32,704? b. $4,106

TAX TABLE – Problem 1

TAX TABLE – Problem 1 At the income level in this example, your filing status makes a difference in the amount of your income tax. The married filing jointly taxpayers in the example have a tax of $4,106. The tax on the same income for other filing statuses is as follows: single, $4,525; married filing separately, $4,525; head of household, $4,336. The tax for qualifying widow(er) is the same as for married filing jointly.

TAX TABLE Your correct bracket is the one in which your taxable income is at least the lower number and less than the higher number of the bracket. If taxable income is the same as the higher number, you must use the next higher bracket. After income reaches a certain level, filing status makes a difference in the tax. MFJ is generally taxed at the lowest rate; MFS at the highest rate. Your correct tax bracket is the one in which your taxable income is at least the lower number and less than the higher number. If your taxable income is the same as the higher number of the bracket, you must use the next row in the income column.

TAX TABLE – Problem 2 Adam’s filing status is single. His taxable income on line 43 of Form 1040 is $26,150. What is Adam’s tax liability? a. $3,533 b. $3,518 c. $3,525

TAX TABLE – Problem 2 Adam’s filing status is single. His taxable income on line 43 of Form 1040 is $26,150. What is Adam’s tax liability? c. $3,525 He must use the income tax bracket of between $26,150 and $26,200 because his taxable income is at least $26,150. His tax is $3,525 not $3,518.

TAX COMPUTATION Tax Computation worksheet Use if taxable income is $100,000 or more. Choose the correct section for your filing status. Single uses Section A. MFJ or QW uses Section B. MFS uses Section C. H/H uses Section D. If your taxable income is $100,000 or more, use the Tax Computation Worksheet. Choose the section for your filing status to compute your income tax. Your income tax is the amount in the second column of your bracket times your tax rate minus a set amount for your bracket. The worksheet on page 5 is used to calculate the tax.

TAX COMPUTATION

TAX COMPUTATION

TAX COMPUTATION

TAX COMPUTATION

TAX COMPUTATION – Problem 1 Mona’s 2008 adjusted gross income on Form 1040 is $123,592. Her taxable income on line 43 is $88,589. Will Mona use the Tax Table or the Tax Computation Worksheet to figure her tax liability? a. Tax Table b. Tax Computation Worksheet

TAX COMPUTATION – Problem 1 Mona’s 2008 adjusted gross income on Form 1040 is $123,592. Her taxable income on line 43 is $88,589. Will Mona use the Tax Table or the Tax Computation Worksheet to figure her tax liability? a. Tax Table Her taxable income is less than $100,000

TAX COMPUTATION – Problem 2 In 2008, Camille must use the Tax Computation Worksheet because her taxable income on line 43 is $123,592. She finds the Tax Rate Section for her filing status, which is Section D for head of household. How much will Camille’s income tax be? a. $24,380 b. $26,256 c. $26,289

TAX COMPUTATION – Problem 2 In 2008, Camille must use the Tax Computation Worksheet because her taxable income on line 43 is $123,592. She finds the Tax Rate Section for her filing status, which is Section D for head of household. How much will Camille’s income tax be? c. $26,289 Her taxable income is not over $182,400 so she looks at the bracket for taxable income over $112,650 but not over $182,400. Camille’s income tax will be $26,289. She enters $26,289 on line 44.

TAX COMPUTATION – Problem 2

Determining the Refund or Balance Due If the withheld tax exceeds your tax liability, you are due a refund of the overpayment. If you did not have enough tax withheld to pay your tax liability, you pay the difference with your tax return. To figure the amount of tax you still owe or the amount of the refund you are due, you compare your total payments on line 72 of Form 1040 to the total tax shown on line 63. If you do not owe any other taxes on lines 58-62, or claim any of the credits on lines 47 through 55, your total tax on line 63 is the same as your tax from line 44.

Determining the Refund or Balance Due On their 2008 Form 1040, Gus and Glenda Glenn file MFJ and have an AGI of $37,503. They are both under 65, have no children and do not itemize their deductions. Their taxable income is $19,603 and their income tax on Form 1040, line 46 is $2,141. They do not claim any credits or owe any other taxes, so their total tax on line 61 is $2,141. The combined withheld taxes shown in box 2 of their W-2 forms is $4,242. They have no other payments so they enter $4,242 on lines 62 and 71. What is the amount of refund due to the Glenn’s? a. $4,242 b. $2,101 c. $2,121 d. None of the above

Determining the Refund or Balance Due On their 2008 Form 1040, Gus and Glenda Glenn file MFJ and have an AGI of $37,503. They are both under 65, have no children and do not itemize their deductions. Their taxable income is $19,603 and their income tax on Form 1040, line 46 is $2,141. They do not claim any credits or owe any other taxes, so their total tax on line 61 is $2,141. The combined withheld taxes shown in box 2 of their W-2 forms is $4,242. They have no other payments so they enter $4,242 on lines 62 and 71. What is the amount of refund due to the Glenn’s? b. $2,101 The $4,242 is more than their tax liability of $2,141. They overpaid and are due a refund of $2,101. Page 2 of their Form 1040 is shown next.

Determining the Refund or Balance Due

Determining the Refund or Balance Due

Standard Deduction and Your Income Tax KEY IDEAS ♦ The standard deduction depends upon: Filing status, Age, and/or blindness, If can be claimed as a dependent on another taxpayer’s return. If not itemizing, you can add up to $500 ($1,000 if MFJ) for real estate taxes paid as an addition to the standard deduction. If not itemizing, you take the net disaster loss from a federally declared disaster area as an addition to the standard deduction. ♦ The amount of your tax usually depends on the amount of your taxable income and your filing status. ♦ If your taxable income is less than $100,000, use the Tax Table to figure your tax. If your taxable income is $100,000 or more, use the Tax Computation Worksheet for your filing status.

Standard Deduction and Your Income Tax CLASSWORK 1: Determine the standard deduction for the following taxpayers. Unless indicated, none of the taxpayers are blind or can be claimed as a dependent on another return: Single, age 45 Married filing jointly, ages 30 and 39 Head of household, blind, age 52. Married filing separately, age 56, spouse itemized Qualifying widow with dependent child, age 39 Single, age 69 3. 18 CENTS PER MILE

Standard Deduction and Your Income Tax CLASSWORK 1: Determine the standard deduction for the following taxpayers. Unless indicated, none of the taxpayers are blind or can be claimed as a dependent on another return: Married filing jointly, ages 65 and 60 Married filing jointly, ages 65 and 49, one is blind Single, age 19, earned income $6,250, dependent on parent’s return Single, age 22, interest income $3,200, dependent on parent’s return Married filing separately, age 35, spouse is not itemizing Married filing separately, age 69, spouse is not itemizing

Standard Deduction and Your Income Tax CLASSWORK 1: Determine the standard deduction for the following taxpayers. Unless indicated, none of the taxpayers are blind or can be claimed as a dependent on another return: Single, age 45 $5,450 Married filing jointly, ages 30 and 39 $10,900 Head of household, blind, age 52. $9,350 Married filing separately, age 56, spouse itemized 0 Qualifying widow with dependent child, age 39 $10,900 Single, age 69 $6,800 3. 18 CENTS PER MILE

Standard Deduction and Your Income Tax CLASSWORK 1: Determine the standard deduction for the following taxpayers. Unless indicated, none of the taxpayers are blind or can be claimed as a dependent on another return: Married filing jointly, ages 65 and 60 $11,950 Married filing jointly, ages 65 and 49, one is blind $12,950 Single, age 19, earned income $6,250, dependent on parent’s return $5,450 Single, age 22, interest income $3,200, dependent on parent’s return $900 Married filing separately, age 35, spouse is not itemizing $5,450 Married filing separately, age 69, spouse is not itemizing $6,500

Standard Deduction and Your Income Tax CLASSWORK 2: Using the Tax Tables or the Tax Computation Worksheet, determine the tax for the following taxpayers. Single, taxable income, $7,723 Married filing separately, taxable income, $45,630 Head of household, taxable income, $65,500 Married filing jointly, taxable income, $120,000 Qualifying widower, taxable income, $82,320

Standard Deduction and Your Income Tax CLASSWORK 2: Using the Tax Tables or the Tax Computation Worksheet, determine the tax for the following taxpayers. Single, taxable income, $7,723 $773 Married filing separately, taxable income, $45,630 $7,750 Head of household, taxable income, $65,500 $11,444 Married filing jointly, taxable income, $120,000 $22,668 Qualifying widower, taxable income, $82,320 $13,269

Standard Deduction and Your Income Tax CLASSWORK 3: Brody K. (SSN 034-22-8196, born 10/10/ 1942) and Lori M. (SSN 222-73-9338, born 2/10/1958) Knowles are married and are filing a joint return. Brody is an accountant and Lori is a music director. They have one dependent, Lori’s mother, Callie M. Rivera, (SSN 234-25-5345, born 12/12/1938). Callie lived with them all year and they provided over half of her support. Callie had interest income of $3,300 and received social security benefits of $ 5,300. The Knowles’ live at 4343 Lucera Rd, Panama City, FL, 32401.They will take the standard deduction and they did not itemize their deductions in 2007. Complete their tax return using the following additional information.

Standard Deduction and Your Income Tax

Standard Deduction and Your Income Tax

Standard Deduction and Your Income Tax

Standard Deduction and Your Income Tax

Standard Deduction and Your Income Tax

Standard Deduction and Your Income Tax

Standard Deduction and Your Income Tax

Standard Deduction and Your Income Tax

Standard Deduction and Your Income Tax

Standard Deduction and Your Income Tax

Standard Deduction and Your Income Tax

Standard Deduction and Your Income Tax

Standard Deduction and Your Income Tax

Standard Deduction and Your Income Tax

Questions and Answers