1. 2-1 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

2. 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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

3. 2-3 DETERMINATION OF TAX (2 of 2)  Tax planning considerations  Compliance and procedural considerations ©2011 Pearson Education, Inc. Publishing as Prentice Hall

4. 2-4 Formula for Individual Income Tax (1 of 2) Income from whatever source derived - Exclusions (see Table 2) = Gross Income - Deductions for AGI (see Table 4) = Adjusted Gross Income (AGI)  Tax rate schedules, std. deduction, personal exemptions, & other amounts are adjusted for inflation. ©2011 Pearson Education, Inc. Publishing as Prentice Hall

5. 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 (see Table 5) = Net tax payable or refund due ©2011 Pearson Education, Inc. Publishing as Prentice Hall

6. 2-6 Deductions from Adjusted Gross Income  Itemized deductions  Standard deduction  Personal exemptions  Dependency exemptions  Child credit ©2011 Pearson Education, Inc. Publishing as Prentice Hall

7. 2-7 Itemized Deductions (1 of 2)  See Table 6 for partial list  Medical expenses  Taxes  Investment and residential interest  Charitable contributions  Personal casualty and theft losses  Miscellaneous deductions ©2011 Pearson Education, Inc. Publishing as Prentice Hall

8. 2-8 Itemized Deductions (2 of 2)  Only claim itemized deductions if greater than standard deduction  Some items limited by varying percentages of adjusted gross income  Prior to 2010, a temporary rule required higher income taxpayers to reduce certain itemized deductions ©2011 Pearson Education, Inc. Publishing as Prentice Hall

9. 2-9 Standard Deduction  Varies based on:  Filing status, age, and vision  $5,700 - $11,400 in 2010  Only minor change from 2009  Used when std. ded. > itemized deductions  Limited std. ded. in certain situations ©2011 Pearson Education, Inc. Publishing as Prentice Hall

10. 2-10 Personal Exemptions  Generally, each taxpayer allowed one  Unless claimed as dependent on another return  $3,650 in 2009 and 2010  Additional allowed for spouse on joint return ©2011 Pearson Education, Inc. Publishing as Prentice Hall

11. 2-11 Dependency Exemptions Requirements for All Dependents  Have a qualifying identification number  Meet a citizenship test  Meet a separate return test  Not themselves claim another person as a dependent ©2011 Pearson Education, Inc. Publishing as Prentice Hall

12. 2-12 Dependency Exemptions Additional Requirements for Qualifying Children  Relationship test  Age test  Abode test  Support Test ©2011 Pearson Education, Inc. Publishing as Prentice Hall

13. 2-13 Dependency Exemptions Requirements for Other Relatives  Relationship test  Gross income test  Support test  Prior to 2010 a temporary provision phased out personal and dependency exemptions for high income taxpayers ©2011 Pearson Education, Inc. Publishing as Prentice Hall

14. 2-14 Child Credit  $1,000 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 $3,000 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

15. 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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

16. 2-16 Filing Status (1 of 3)  Married filing jointly  The Federal Defense of Marriage Act of 1996 defines marriage as between a woman. Same sex couples cannot file a joint Federal return  May file jointly state return in certain states ©2011 Pearson Education, Inc. Publishing as Prentice Hall

17. 2-17 Filing Status (2 of 3)  Surviving spouse  Head of household  Single  Married filing separately ©2011 Pearson Education, Inc. Publishing as Prentice Hall

18. 2-18 Filing Status (3 of 3)  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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

19. 2-19 Dependents with Unearned Income Personal Exemption & Standard Deduction  No personal exemption on own return  Standard deduction reduced to greater of  Earned income OR  $950 OR  Dependent’s earned income plus $300 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

20. 2-20 Dependents with Unearned Income Kiddie Tax (1 of 2)  All kids < 18 yrs old  Tax rate on child’s net unearned income in excess of $1,900 same as parents’ rate if higher than child’s rate  Certain kids age 18-23  If 18, applies if earned income $950  If 19-23, same rules as for age 18 ONLY if also a full-time student ©2011 Pearson Education, Inc. Publishing as Prentice Hall

21. 2-21 Dependents with Unearned Income Kiddie Tax (2 of 2)  Parents of child subject to kiddie tax may elect to include child’s dividend &interest income on their own return  If child’s total gross income ≤ $9,500 &  All child’s income from div. & interest ©2011 Pearson Education, Inc. Publishing as Prentice Hall

22. 2-22 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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

23. 2-23 Business Income & Bus Entities C Corporation Tax Rates First $50K15 % of Taxable Inc > $50K But Not > $75K$7,500 + 25% of Taxable Inc > $75K But Not > $100K13,750 + 34% of Taxable Inc > $75K > $100K But Not > $335K $22,250 + 39% 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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

24. 2-24 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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

25. 2-25 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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

26. 2-26 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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

27. 2-27 Capital Gains & Losses Tax Rates on Net Capital Gains  Net long-term gain  Taxed at maximum of 15%  Increases to 20% in 2011  0% if in the 10% or 15% tax  Net short-term gain  Taxed at the same rate as other income ©2011 Pearson Education, Inc. Publishing as Prentice Hall

28. 2-28 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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

29. 2-29 Tax Planning Considerations  Shifting income between family members  Splitting income  Maximizing itemized deductions  Filing joint or separate returns  Innocent spouse provision ©2011 Pearson Education, Inc. Publishing as Prentice Hall

30. 2-30 Compliance and Procedural Considerations  Who must file  See Chart on page 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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

31. Comments or questions about PowerPoint Slides? Contact Dr. Richard Newmark at University of Northern Colorado’s Kenneth W. Monfort College of Business richard.newmark@PhDuh.com 2-31 ©2011 Pearson Education, Inc. Publishing as Prentice Hall