1. ACC 331 CHAPTER 2

2. INTRODUCTION BASIC KNOWLEDGE TO HELP YOU UNDERSTAND DETAILED CHAPTERS THAT FOLLOW FILING STATUS EXEMPTIONS TAX COMPUTATIONS

3. BASIC TAX STRUCTURE ECONOMIC INCOME GROSS INCOME (GI) ADJUSTED GROSS INCOME (AGI) TAXABLE INCOME (TI) TAX TAX DUE

4. BASIC TAX STRUCTURE ECONOMIC INCOME –EXCLUSIONS GI - GROSS INCOME

5. BASIC TAX STRUCTURE GI - GROSS INCOME –DEDUCTIONS “FOR” AGI AGI - ADJUSTED GROSS INCOME

6. BASIC TAX STRUCTURE AGI - ADJUSTED GROSS INCOME –ITEMIZED DEDUCTIONS OR STANDARD DEDUCTION –PERSONAL AND DEPENDENCY EXEMPTIONS TI - TAXABLE INCOME

7. BASIC TAX STRUCTURE TI - TAXABLE INCOME APPLY TAX RATES TO GET TAX –CREDITS TAX DUE

8. FILING STATUS AFFECTS TAX RATES STANDARD DEDUCTION ABILITY TO QUALIFY FOR VARIOUS TAX BENEFITS

9. FILING STATUS IS A FUNCTION OF MARITAL STATUS: –SINGLE or –MARRIED STATUS DETERMINED UNDER STATE LAW

10. FILING STATUS MARITAL STATUS IS DETERMINED ON THE LAST DAY OF THE TAX YEAR (UNLESS SPOUSE DIES) or THE DATE OF DEATH OF SPOUSE

11. FILING STATUS UNMARRIED TAXPAYERS ARE: –SINGLE - NOT MARRIED AND NO ATTACHMENTS –HEAD OF HOUSEHOLD

12. FILING STATUS HEAD OF HOUSEHOLD - MUST MAINTAIN A HOUSEHOLD FOR: –UNMARRIED CHILD WHO LIVES WITH YOU - Doesn’t have to be dependent. –or

13. FILING STATUS HEAD OF HOUSEHOLD – –MUST MAINTAIN A HOUSEHOLD FOR AND SHARE IT WITH: –DEPENDENT MARRIED CHILD OR OTHER RELATIVE (No bums) –or

14. FILING STATUS HEAD OF HOUSEHOLD - MUST MAINTAIN A HOUSEHOLD FOR: –DEPENDENT PARENT (Don’t have to live with.)

15. FILING STATUS HEAD OF HOUSEHOLD RULES –Pay over half of costs of household –live with >1/2 of year –custodial parent always qualifies –child = descendent of child –child = adopted, step, foster(all year) –Can’t be nonresident alien.

16. FILING STATUS MARRIED: –JOINT RETURN –SEPARATELY - Very rarely beneficial, usually done by necessity or because of mistrust

17. FILING STATUS MARRIED - JOINT RETURN: –MARRIED ON DETERMINATION DATE (Not “permanently separated”) –BOTH MUST SIGN - Joint liability –NONRESIDENT ALIENS GENERALLY CAN’T USE (Worldwide income)

18. FILING STATUS MARRIED - SEPARATE RETURNS Any married person who doesn’t or can’t file jointly. Higher tax in almost all cases!

19. FILING STATUS WHY NOT FILE JOINT RETURN? SPOUSE HAS DISAPPEARED –(Can’t get signature) SPOUSE IS A (SUSPECTED) CROOK SPOUSE IS A NONRESIDENT ALIEN

20. FILING STATUS EXCEPTIONS TO GENERAL FILING STATUS RULES: –ABANDONED SPOUSE –SURVIVING SPOUSE

21. FILING STATUS ABANDONED SPOUSE –LIVE APART LAST 1/2 OF YEAR –SHARE HOME WITH DEPENDENT CHILD –NOT FILE JOINT RETURN RESULT - SINGLE FOR TAX, probably head of household.

22. FILING STATUS SURVIVING SPOUSE Single taxpayer allowed to use the joint return tax rates and standard deduction.

23. FILING STATUS SURVIVING SPOUSE: –SPOUSE MUST HAVE DIED IN PRECEDING TWO YEARS –SHARE HOME WITH DEPENDENT CHILD –ELIGIBLE TO FILE JOINT RETURN AT SPOUSE’S DEATH

24. STANDARD DEDUCTION TAXPAYER MAY DEDUCT THE GREATER OF STANDARD DEDUCTION OR ACTUAL ITEMIZED DEDUCTIONS MUST TAKE STANDARD OR ITEMIZE -You can’t mix and match!!!

25. STANDARD DEDUCTION JUSTIFICATION: –Lessen paperwork for taxpayers and service. –Intended to take about 90% of taxpayers out of itemizing.

26. STANDARD DEDUCTION A FUNCTION OF FILING STATUS: 2000 1999 –SINGLE 4,400/4,300 –H of H 6,450/6,350 –JOINT 7,350/7,200 –M-SEP 3,675/3,600

27. STANDARD DEDUCTION ADDITIONAL AMOUNTS: –>65 or BLIND AND: 2000 1999 SINGLE 1,100/1,050 MARRIED 850 / 850

28. STANDARD DEDUCTION MARRIED COUPLES THAT FILE SEPARATELYMUST BE CONSISTENT BOTH MUST ITEMIZE, OR BOTH MUST USE STANDARD DEDUCTION

29. STANDARD DEDUCTION DEPENDENT OF ANOTHER IS THE GREATER OF: –700 or –EARNED INCOME + 250 –CAN’T EXCEED NORMAL STD DED (Including adjustment for age and blindness)

30. EXEMPTIONS PERSONAL –ALIVE AND NOT DEPENDENT DEPENDENCY –ONE FOR EACH PERSON FOR WHOM ALL OF FIVE TESTS ARE PASSED $2,800 (2000) $2,750 (1999)

31. EXEMPTIONS FIVE TESTS –SUPPORT –GROSS INCOME –RELATIONSHIP –CITIZENSHIP OR RESIDENCY –JOINT RETURN

32. EXEMPTIONS SUPPORT PAY MORE THAN HALF OF THE AMOUNT EXPENDED TO SUPPORT THE PERSON FOR THE YEAR OR MULTIPLE SUPPORT

33. EXEMPTIONS GROSS INCOME “DEPENDENT’S” GROSS INCOME MUST BE LESS THAN ONE EXEMPTION AMOUNT (2,800/2,750) EXCEPT

34. EXEMPTIONS GROSS INCOME - Exceptions: TAXPAYER’S CHILD: –< 19, or –OVER 18 AND YOUNGER THAN 24 AND A FULL TIME STUDENT PASS GI TEST REGARDLESS OF INCOME AMOUNT

35. EXEMPTIONS RELATIONSHIP –MUST BE CLOSER THAN A COUSIN or –ANY BUM OFF THE STREET WHO LIVES WITH YOU FOR THE ENTIRE YEAR.

36. EXEMPTIONS CITIZENSHIP OR RESIDENCY –MUST BE A U.S. CITIZEN or –A RESIDENT OF THE US, CANADA, MEXICO OR OTHER SPECIFIED AREAS

37. EXEMPTIONS JOINT RETURN CAN’T HAVE FILED A JOINT RETURN (EXCEPT A JOINT CLAIM FOR REFUND)

38. EXEMPTIONS PHASE-OUT TOTAL EXEMPTION AMOUNT ON RETURN IS PHASED OUT STARTING WHEN AGI EXCEEDS A THRESHOLD AMOUNT

39. EXEMPTIONS PHASE-OUT - THRESHOLD AMOUNT 2000 1999 –SINGLE 128,950/126,600 –H of H 161,150/158,300 –JOINT 193,400/189,950 –SEP RET 96,700/ 94,975

40. EXEMPTIONS PHASE-OUT LOSE 2% OF TOTAL EXEMPTION AMOUNT FOR EACH $2,500 (OR PART OF) ($1,250 if married filing separately) BY WHICH AGI EXCEEDS THE APPLICABLE THRESHOLD AMOUNT

41. EXEMPTIONS PHASE-OUT ALLOWED EXEMPTION = (1-.02(AGI-THRESHOLD)/2,500)*TOTAL EXEMPTION AMT NOTE: (AGI-threshold)/2,500 rounded up!

42. CHILD TAX CREDIT For each child of the taxpayer younger than 17 claimed as a dependent on a return: –A $500 (2000&1999) credit can be claimed –Phased out at $50/1,000 of AGI > limit –AGI Limit = 110,000 – MJ, 75,000 S or HH, 55,000 MS Nonrefundable

43. ADDITIONAL CHILD TAX CREDIT IF 3 OR MORE CHILD TAX CREDITS ARE CLAIMED, THE TAXPAYER(S) ARE ELIGIBLE FOR THE ADDITIONAL CHILD TAX CREDIT

44. Applies only to low income taxpayers, works off the child tax credit, and is fairly complex We will not study it

45. TAX COMPUTATIONS DETERMINE FILING STATUS AND USE APPROPRIATE TABLES OR RATES MUST USE TABLES IF THEY APPLY (IF TI < $100,000) 1999 TABLES pp A-3 - A-14

46. TAX COMPUTATIONS BOOK ONLY HAS 1999 TABLES USE 2000 RATES TO APPROXIMATE TABLES (This is what solution manual does) ALWAYS NOTE WHEN YOU SHOULD BE USING TABLES

47. TAX COMPUTATIONS KIDDIE TAX NET UNEARNED INCOME (NUI) OF CHILD < 14 IS TAXED AT PARENT’S RATES (NOT ON PARENT’S RETURN)

48. TAX COMPUTATIONS KIDDIE TAX - NUI: ALL UNEARNED INCOME - 700 - (GREATER OF 700 OR ITEMIZED DEDUCTIONS TRACEABLE TO EARNING UNEARNED INCOME) 700 IS INFLATION ADJUSTED

49. TAX COMPUTATIONS KIDDIE TAX NOT APPLICABLE IF BOTH PARENTS ARE DEAD USE HIGHEST MARGINAL RATE PARENT, IF STILL MARRIED CUSTODIAL PARENT, IF DIVORCED WITH/WITHOUT COMPUTATION

50. TAX COMPUTATIONS KIDDIE TAX COMPUTATIONS ARE FAIRLY COMPLEX - SEE BOOK WILL GO OVER PROBLEMS CAREFULLY

51. TAX COMPUTATIONS KIDDIE TAX IGNORE THE ELECTION TO REPORT KID’s INCOME ON PARENT’S RETURN. AT BEST – BREAKEVEN, BUT CAN COST FAMILY EXTRA TAX LIMITED AVAILABILITY (GI < $7,000)

52. FILING REQUIREMENTS GENERALLY MUST FILE IF GI > PERSONAL EXEMPTION(S) + STANDARD DEDUCTION (NOT INCLUDING ADJUSTMENT FOR BLINDNESS) SEE PAGE 2-22

53. FILING REQUIREMENTS EXAMPLE(2000): MARRIED JOINT, ONE SIGHTED AND 70, OTHER BLIND AND 60 MUST FILE IF GI > 7,350 + 850 (AGE) + 2*2,800 = 13,800 (BLIND DOESN’T COUNT HERE)

54. FILING REQUIREMENTS SPECIAL CASES: –SEPARATE RETURNS - 2,800 –SELF EMPLOYMENT INCOME > 400 –DEPENDENTS - UGH!!!!!

55. FILING REQUIREMENTS DEPENDENTS - UGH!!!!! PRACTICAL RULE – FILE IF TI IS POSITIVE (GI > STD DEDUCTION OF THAT PARTICULAR TAXPAYER)

56. FILING REQUIREMENTS REGARDLESS OF REQUIREMENTS, MOST PEOPLE NEED TO FILE TO GET REFUND.

57. PROPERTY TRANSACTIONS THIS SHOULDN’T BE HERE, BUT FYI: NLTCG TAXED AT LOWER RATES CAPITAL LOSSES – DEDUCT IN FULL AGAINST CAPITAL GAINS. NET LOSSES UP TO $3,000 REDUCE ORD INCOME. REST CARRIED FORWARD

58. CHAPTER 2 Would you believe it? WE ARE DONE (FOR TODAY)!!!!!