McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc., 2002 Principles of Taxation Chapter 13 The Individual Tax Formula

Slide 13-2 McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc., 2002 Objectives  Filing status  Computing taxable income  Standard deduction versus itemized deductions  Exemptions  Tax rates  Credits and AMT  Payment and filing requirements

Slide 13-3 McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc., 2002 Filing Status - Married  If married on the ______ day of the year.  MFJ (married filing joint) rates  If spouse incomes very similar, single rates generate lower tax  If spouse incomes dissimilar, married rates generate lower tax.  MFJ rates apply to surviving spouse  widow or widower with a _______ child for how many more years after death of spouse?  MFS (married filing separately) rates are less favorable than single.

Slide 13-4 McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc., 2002 Filing Status - Unmarried  Single is the default category for unmarried individuals (neither surviving spouse nor head of household).  SeeAP1 for filing status examples.

Slide 13-5 McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc., 2002 Taxable Income Computation  Calculate total income totaling Line ___ on  Calculate Adjusted Gross Income (AGI) on Line ___ of  Subtract the greater of:  __________________ or  __________________  Subtract total exemptions.

Slide 13-6 McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc., 2002 Standard Deduction  Depends on filing status. For 2001:  MFJ = $  MFS = $  HOH = $  Single = $  Blind or aged (>=age _____)  MJF, MFS = $ extra  HOH or Single = $  See AP2 for standard deduction examples.

Slide 13-7 McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc., 2002 Itemized Deductions  See Schedule A (Chapter 16 details).  Bunching. If itemized deductions are about equal to standard deduction each year, bunch deductions on alternate years and claim standard deduction on other years.  Example: My dad gives $5,000 to charity each year. He is 77 and single. What is his standard deduction each year? Does he itemize? Suppose he gave $10,000 to the church every other year?

Slide 13-8 McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc., 2002 Exemptions  Personal exemption for the taxpayer (2 for MFJ).  If you are a dependent on someone else’s return, can you still claim yourself?  Exemption = $_______ in 2001 for each personal or dependency exemption.

Slide 13-9 McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc., 2002 Exemptions for Dependents  Family member OR live in your home for entire year.  You provide > _______ financial support.  Dependent’s gross income < $________________  waived for child < ___ OR student-child<___.  Dependent may not generally file a joint return.  Dependent must be a U.S. citizen OR a resident of US, Mex, Can.  See AP3 for practice with rules.

Slide McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc., 2002 Rich People  Phase-out of itemized deductions - If AGI greater than $ (MFJ) in 2001, itemized deductions are reduced by 3% of income > $ Can’t reduce itemized deductions below 20% of the total.  Phase-out of exemptions - IF AGI greater than $ (MFJ) in 2001, reduce exemption by 2% for each $2500 that AGI is above the threshold. Can reduce to 0.  See appendices at back of chapter for computations.

Slide McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc., 2002 Tax Computations  See AP 4 and 5 for practice with tax rate schedules. What do you notice about married versus single rates?  AP4 Would Ms. G and Mr. H prefer married or single?  AP5 Would Mr. P and Mrs. P prefer married or single?

Slide McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc., 2002 Credits  Child Credit = $____ per child in Phases out for rich.  Dependent care credit (child < 13 years old). Credit amount between 30% and 20% of child care costs depending on income range.  Earned income credit. This is refundable - a transfer payment to working poor. Increases progressivity of tax rates. Credit is higher for taxpayers with children and phases out as income increases.  Excess FICA withholding is refunded through a tax return claim.

Slide McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc., 2002 AMT (again!!)  Why do we need AMT?  Taxable income + or - adjustments + preferences = AMTI before exemption - exemption = AMTI x ______% (or 28% for higher AMTI levels) = TMT

Slide McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc., 2002 Examples of AMT Adjustments and Preferences  Locate a form 6521 on your Turbotax program or on the IRS web site. What are examples of preferences and adjustments for individual AMT?

Slide McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc., 2002 Payment and Filing Requirements  Taxes on wages are withheld each pay period.  Estimated taxes on other income due on what months?  Pay ___% of current year tax, ____% of prior year (or _____% of prior year if 2000 AGI>$150,000).  Tax return due ___/15, but may be extended to ___/15 then ____/15 (LAST DATE).