Chapter 4 Tax Notes
Chapter 4 Tax Notes ACCT 404
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This 5 page Class Notes was uploaded by Victoria Andreski on Wednesday February 10, 2016. The Class Notes belongs to ACCT 404 at Clemson University taught by Sarah Martin in Spring 2016. Since its upload, it has received 12 views. For similar materials see Individual Taxation in Accounting at Clemson University.
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Date Created: 02/10/16
CHAPTER 4 —Individual Income Tax Overview, Exemptions, & Filing Status From AGI Deductions: Individual Income Tax Formula Greater of: Gross Income -For AGI Deductions = Adjusted Gross Income a) Standard deduction OR b) Itemized deductions & Adjusted Gross Income - From AGI Deductions = Taxable Income personal and dependency deduction Taxable Income X Tax Rates = Income Tax Liability Income Tax Liability + Other Taxes = Total Tax Total Tax – Credits– Prepayments = Taxes Due or (refund) • Individuals report taxable income to the IRS (report on Form 1040) • US tax laws use all-inclusive gross income concept o Realized income—measurable change in property rights § Include all realized income in gross income unless specifically excluded/deferred o Recognized income—reported on tax return • Excluded & Deferred income NOT included in gross income o Excluded income—never included in taxable income § Municipal bond interest § Gain on sale of personal residence o Deferred income—included in a subsequent tax year § Installment sales § Like-kind exchanges • Character of income or loss o Determines rates applicable to income or loss in current year o Tax exempt—no tax o Tax deferred—no tax in current year (current year tax rate=0) o Ordinary—ordinary rates from tax rate schedule o Qualified dividends tax at 0, 15%, or 20% depending on taxpayer’s income level o Capital gain/loss—depends on short or long-term § From selling capital asset § If held capital asset for longer than 1 year= long-term § Less than 1 year= short-term § Net long-term gains taxed at preferential rates • Capital Assets o All assets except: § Accounts receivable § Inventory § Assets used in trade/business (including supplies) • Capital Gains/Losses o Net long-term capital gains in excess of net short-term capital losses generally taxed at 0%, 15%, or 20% depending on taxpayer’s taxable income o Short-term capital gains taxed at ordinary rates o Net capital losses (losses in excess of gains for year) § $3,000 deductible against ordinary income for year § Losses in excess of $3,000 carried forward • Deductions for AGI o Deductions “above the line” o Deducted in determining adjusted gross income o Always reduce taxable income dollar for dollar • Deductions from AGI o Deductions “below the line” o Deducted from adjusted gross income to determine taxable income o Greater of standard deduction or itemized deductions o Personal & dependency exemptions • 2015 Standard Deduction Amounts o $12,600 Married filed jointly o $12,600 Qualifying widow/widower o $6,300 Married filing separately o $9,250 Head of household o $6,300 Single o Additional standard deduction for age & eyesight • Tax Calculation o US uses a progressive tax rate schedule o Some items taxed at preferential rates § Long-term capital gains § Qualified dividends § Tax on these items calculated separately from income taxed at ordinary rates • Other taxes o Alternative minimum tax o Self-employment taxes o 3.8% net investment income tax § aka Medicare Contribution tax on net-investment income o .9% Additional Medicare tax • Tax Credits o Reduce tax liability dollar for dollar • Tax Prepayments o Payments already made towards tax liability including: § Income taxes withheld from wages by employer § Estimated tax payments made during the year § Taxes overpaid in prior year & applied toward current year’s liability o If prepayments exceed tax liability after credits, taxpayer receives a refund Personal & Dependency Exemptions • Personal exemptions—for taxpayer & spouse if married filed jointly • Dependency exemptions—for those who qualify as the taxpayers’ dependents • Exemption amount for 2015 = $4,000 • Dependency requirements o Citizen of US or resident of US, Canada, or Mexico o Must NOT file joint return w/ spouse § Exception—if no tax liability filing jointly or separately o Must be qualifying child or qualifying relative of taxpayer • Qualifying Child o Relationship test § Taxpayer’s son, daughter, stepchild, eligible foster child (must be placed in foster parent’s home by agency), brother, sister, half brother/sister, stepbrother, stepsister, or descendant of any of these relatives (niece, nephew, grandchild) o Age test § Child must be younger than the individual claiming the child as a qualifying child or either: • Under age 19 at end of year • Under age 24 at end of year & a full-time student o Must be full-time student, enrolled for 5 months out of the tax year • Permanently & totally disabled o If person can’t complete the 7 daily functions o No age limit o Residence test § Same residence as taxpayer for more than half the year • Exception for temporary absences as education (or military service) o Support test § Child must not provide more than half of his/her own support (rent, utilities, car, clothes, haircuts, food, gas, etc.) • Scholarships of actual child (NOT grandchild) are excluded from support computation o Tie-Breaking Rules § Parents first § Days living w/ each parent if parents living apart § AGI—higher AGI gets exemption (adjusted gross income) • Qualifying Relative o Relationship test § A descendant or ancestor of taxpayer (child, grandchild, parent, or grandparent) § Sibling of taxpayer (including stepbrother/stepsister) § Son or daughter of taxpayer’s brother or sister (aka niece/nephew)à NOT cousins § Sibling of taxpayer’s mother or father (aka aunt/uncle) § In-law (mother-in-law, father-in-law, sister-in-law, brother-in-law) of taxpayerà even if marriage ends § Unrelated person who lives in taxpayer’s home ENTIRE year o Support test § Taxpayer must pay MORE THAN ½ of living expenses (support) • Scholarships of actual child included o Gross Income test § Gross income LESS THAN personal exemption amount ($4,000 in 2015) § Hardest to meet o Multiple-Support Agreement § More than 1 person is supporting the individual § Total of the group must be more than 50% § Any person who gives more than 10% can claim individual as dependent § Individual must give over 10% Filing Status • 5 different filing statuses o 1) Married Filing Jointly § Must be married on the last day of the year • If one spouse dies, the surviving spouse is considered to be married to descendent spouse at end of year o Exception: surviving spouse remarries before year end § Joint and several liability for tax—both are equally liableà IRS can go to either one for liability § File 1 return § Put both incomes on return o 2) Married Filing Separately § Taxpayers are married but file separate returns • Typically NOT beneficial from tax perspective o Tax rates & other tax benefits • May be beneficial for non-tax reasons o No joint & several liability § Tax rates are higher § Less deductions § If one itemizes, they both have to o 3) Qualifying Widow/Widower (Surviving Spouse) § Available for the 2 years following the year of spouse’s death § Surviving spouse does NOT qualify if remarries during 2-year period § Surviving spouse must maintain household for dependent child § Can’t remarry & must have a child (foster kids don’t count) o 4) Single § Unmarried unless qualify for head of household § If you don’t qualify for anything else o 5) Head of Household § Unmarried or considered unmarried at end of year (abandoned spouse) • Is married at end of year (or is NOT legally separated from the other spouse) • Does NOT file a joint tax return w/ other spouse • Pays MORE THAN ½ the cost of maintaining a household that serves as principal abode for qualifying child for MORE THAN ½ the year • Lived apart from other spouse for the last 6 months of the year (other than temporary absences) • Does NOT qualify if spouse is on work/military assignment or is in jail § Not a qualifying widow/widower § Pay MORE THAN half the costs of keeping up a home during the year § Lived in taxpayer’s home w/ a “qualifying person” for MORE THAN half the year • Exception for parents • Qualifying person o Qualifying child o Qualifying relative who is taxpayer’s mother or father § Parent doesn’t need to live w/ taxpayer § Taxpayer must pay MORE THAN ½ the cost of maintain separate household for taxpayer’s mother/father § Parent must qualify as taxpayer’s dependent o Qualifying relative who is NOT the taxpayer’s parent § Person must have lived w/ taxpayer for MORE THAN half the year § Must qualify as taxpayer’s dependent § Must be related to taxpayer through qualified family relationship • If related only because lived w/ taxpayer for entire year, NOT a qualified person
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