1.  Click to edit Master text styles  Second level  Third level  Fourth level  Fifth level #13-1 McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. The Individual Tax Formula Chapter 13

2.  Click to edit Master text styles  Second level  Third level  Fourth level  Fifth level #13-2Objectives  filing status  computing taxable income  standard deduction versus itemized deductions  exemptions  tax rates  credits and AMT  payment and filing requirements

3.  Click to edit Master text styles  Second level  Third level  Fourth level  Fifth level #13-3 Filing Status - Married Filing Status - Married  If married on the last 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 dependent child for two more years after death of spouse.  MFS (married filing separately) rates are less favorable than single.

4.  Click to edit Master text styles  Second level  Third level  Fourth level  Fifth level #13-4 Filing Status - Unmarried  Single is the default category for unmarried individuals (neither surviving spouse nor head of household).  Head of household - maintain a home for either  child (need not be dependent)  dependent relative  See AP1 for filing status examples.

5.  Click to edit Master text styles  Second level  Third level  Fourth level  Fifth level #13-5 Taxable Income Computation Taxable Income Computation  Calculate total income totaling Line 22 on 1040.  Calculate Adjusted Gross Income (AGI) on Line 34 of 1040.  Subtract the greater of:  itemized deductions or  the standard deduction  Subtract total exemptions

6.  Click to edit Master text styles  Second level  Third level  Fourth level  Fifth level #13-6 Standard Deduction  Depends on filing status. For 2003:  MFJ = $9,500  MFS = $4,750  HOH = $7,000  Single = $4,750  Blind or aged (>=age 65)  MJF, MFS = additional $950  HOH or Single = additional $1,150  See AP2 for standard deduction examples.

7.  Click to edit Master text styles  Second level  Third level  Fourth level  Fifth level #13-7 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?

8.  Click to edit Master text styles  Second level  Third level  Fourth level  Fifth level #13-8Exemptions  Personal exemption for the taxpayer (2 for MFJ).  If you are a dependent on someone else’s return, can you still claim yourself?  Exemption = $3,100 in 2003 for each personal or dependency exemption.

9.  Click to edit Master text styles  Second level  Third level  Fourth level  Fifth level #13-9 Exemptions for Dependents  Family member OR live in your home for entire year.  You provide > 1/2 financial support  Dependent’s gross income < exemption amount ($3,100)  waived for child < 19 OR student-child<24  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.

10.  Click to edit Master text styles  Second level  Third level  Fourth level  Fifth level #13-10 Rich People  Phase-out of itemized deductions - If AGI greater than $142,700 (MFJ) in 2004, itemized deductions are reduced by 3% of income > $142,700. Can’t reduce itemized deductions below 20% of the total.  Phase-out of exemptions - IF AGI greater than $214,050 (MFJ) in 2004, 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. Phaseouts scheduled to be eliminated gradually starting 2006.

11.  Click to edit Master text styles  Second level  Third level  Fourth level  Fifth level #13-11 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?

12.  Click to edit Master text styles  Second level  Third level  Fourth level  Fifth level #13-12Credits  Child Credit = $1,000 per child in 2003 and 2004. 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.

13.  Click to edit Master text styles  Second level  Third level  Fourth level  Fifth level #13-13 AMT (again!!)  Why do we need AMT?  Taxable income + or - adjustments + preferences = AMTI before exemption - exemption ($58,000 MFJ) = AMTI x 26% (or 28% for higher AMTI levels) = TMT

14.  Click to edit Master text styles  Second level  Third level  Fourth level  Fifth level #13-14 Examples of AMT Adjustments and Preferences  Standard deduction  Exemptions  State and local taxes  Accelerated (MACRS) depreciation > AMT depreciation  Bargain element on exercise of Incentive Stock Option (see Chapter 14).

15.  Click to edit Master text styles  Second level  Third level  Fourth level  Fifth level #13-15 Payment and Filing Requirements  Taxes on wages are withheld each pay period.  Estimated taxes are due on April 15, June 15, September 15, and January 15.  Pay 90% of current year tax, 100% of prior year (or 110% of prior year if 2003 AGI>$150,000).  Tax return due 4/15, but may be extended to 8/15 then 10/15 (LAST DATE).