Principles of Taxation

1
Principles of Taxation

• Chapter 13
• The Individual Tax Formula

2
Objectives

• Filing status
• Computing taxable income
• Standard deduction versus itemized deductions
• Exemptions
• Tax rates
• Credits and AMT
• Payment and filing requirements

3
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.

4
Filing Status - Unmarried

• Single is the default category for unmarried
  individuals (neither surviving spouse nor head of
  household).
• SeeAP1 for filing status examples.

5
Taxable Income Computation

• Calculate total income totaling Line ___ on
  1040.
• Calculate Adjusted Gross Income (AGI) on Line
  ___ of 1040.
• Subtract the greater of
• __________________ or
• __________________
• Subtract total exemptions.

6
Standard Deduction

• Depends on filing status. For 2001
• MFJ
• MFS
• HOH
• Single
• Blind or aged (gtage _____)
• MJF, MFS extra
• HOH or Single
• See AP2 for standard deduction examples.

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
Exemptions

• Personal exemption for the taxpayer (2 for MFJ).
• If you are a dependent on someone elses return,
  can you still claim yourself?
• Exemption _______ in 2001 for each personal or
  dependency exemption.

9
Exemptions for Dependents

• Family member OR live in your home for entire
  year.
• You provide gt _______ financial support.
• Dependents gross income lt ________________
• waived for child lt ___ OR student-childlt___.
• 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
Rich People

• Phase-out of itemized deductions - If AGI greater
  than 132950 (MFJ) in 2001, itemized deductions
  are reduced by 3 of income gt 132950. Cant
  reduce itemized deductions below 20 of the
  total.
• Phase-out of exemptions - IF AGI greater than
  199450 (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.

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
Credits

• Child Credit ____ per child in 2000. Phases
  out for rich.
• Dependent care credit (child lt 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
AMT (again!!)

• Why do we need AMT?
• Taxable income or - adjustments preferences
  AMTI before exemption- exemption AMTIx
  ______ (or 28 for higher AMTI levels) TMT

14
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?

15
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 AGIgt150,000).
• Tax return due ___/15, but may be extended to
  ___/15 then ____/15 (LAST DATE).