Chapter 2
Determination of Tax
Learning Objectives
? Use the tax formula to compute an
individual’s taxable income
? Determine the amount allowable for the
standard deduction
? Determine the amount and the correct
number of personal and dependency
deductions
Learning Objectives
? Determine the amount of child credit
? Determine the filing status of individuals
? Explain the tax formula for corporations
? Explain the basic concepts of property
transactions
Formula For Individual
Income Tax
? INCOME FROM WHATEVER SOURCE DERIVED
minus EXCLUSIONS= GROSS INCOME minus
DEDUCTIONS FOR ADJUSTED GROSS INCOME=
ADJUSTED GROSS INCOME - deduct GREATER
OF ITEMIZED OR STANDARD DEDUCTION and
PERSONAL AND DEPENDENCY EXEMPTIONS=
TAXABLE INCOME,TAXABLE INCOME times TAX
RATE (tax table or schedule) = GROSS TAX minus
CREDITS AND PREPAYMENTS= NET TAX
PAYABLE OR REFUND DUE
Formula For Individual
Income Tax
Income from whatever source derived
Minus,Exclusions
Gross Income
Minus,Deductions for Adjusted Gross Income
Adjusted Gross Income(AGI)
Minus,Deductions from adjusted gross income,
Greater of itemized deductions or the standard deduction
Personal and dependency exemptions
Taxable Income
Times,Tax rate or rates (from tax table or schedule)
Gross tax
Minus,Credits and prepayments
Net tax payable or refund due
$ xxx,xxx
(xxx)
$ xx,xxx
(xxx)
$ x,xxx
(xx)
(xx)
$ x,xxx
.xx
$ xx
(x)
$ xx
Definitions
? Income
? Exclusion
? Gross income
? Deductions for adjusted gross
income (AGI)
? Adjusted gross income (AGI)
? Deductions from AGI
Definitions
? Itemized or standard deductions
? Personal and dependency
exemptions
? Taxable income
? Tax rates and gross tax
? Credits and prepayments
Itemized Deductions
? Qualifying medical expenses,taxes,investment
and residential interest,charitable contributions,
personal casualty and theft losses,&
miscellaneous if greater than standard deduction
? Some items limited by varying percentages of
adjusted gross income
? Maximum reduction in such itemized deductions
is 80% of total itemized deductions
Standard Deduction
? Varies based on,
– Filing status
– Age
– Vision
? Used when greater than
Itemized
? Loss of the Standard Deduction
Personal Exemptions
? Unless claimed as
dependent on another
return,each allowed
one
? Additional allowed for
spouse on joint return
or separate return if
no gross income/not
dependent of another
Dependency
Exemptions
? Dependency exemption allowed if,
– Provides over 50% support
– Dependents gross income < exemption amount
– No joint return filed by married dependent (except
if sole purpose is refund)
– Related to or resided with taxpayer for the entire
tax year (no cousins) and
– Dependent is U.S,Citizen,U.S,Resident,or they
must resides in Canada or Mexico
Determine The Amount Of
Child Credit
? $500 per qualifying
child
– Must be US citizen,
national,or resident
under the age of 17
? Credit is reduced if
MAGI exceeds
threshold
– 110,000 for MFJ
– 75,000 for Single
– 55,000 for MFS
Determining The Amount Of
Tax
? Filing status
– Joint
– Surviving spouse
– Head of household
– Single
– Married filing separately
Relative Tax By Filing
Status
? Joint return
? Surviving spouse
? Head of household
? Abandoned spouse
? Single
? Married - filing
separately
LOWEST
HIGHEST
Dependents With Unearned
Income
? Dependent does not receive a personal
exemption on their own return,
? A dependent’s standard deduction is reduced
to the greater of earned income or $750 or the
dependent’s earned income plus $250,
? The tax on the net unearned income of a child
under age 14 is figured by reference to the
parents’ tax rate if it is higher than the child’s
(known as the,kiddie tax”),
Corporate Tax Formula &
Rates
?,C” Corporations - Table I 2-7
?,S” Corporations - no formula/based on
ordinary income (Flow-through Entity)
Tax Formula for C Corporations
Income from whatever source derived
Minus,Exclusions
Gross Income
Minus,Deductions
Taxable Income
Times,Tax rates
Gross Tax
Minus,Credits and prepayments
Net tax payable or refund due
$xxx
(xxx)
$xxx
(xxx)
$xxx
.xx
$xxx
(xxx)
$xxx
Treatment Of Capital Gains
And Losses
? Capital gains and losses
have been accorded
favored tax treatment
since 1922
Treatment Of Capital Gains
And Losses
? Definition of capital assets
– Assets other than inventory,trade
receivables,certain properties
created by efforts of taxpayer,
depreciable business property,
business land,and certain
government publications
Tax Treatment Of 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
Tax Treatment Of Gains And
Losses
? Net long-term gain is taxed at
20% tax (10% if in the 15% tax
bracket)
? Net short-term gain is taxed at the
same rate as other income
Tax Treatment Of Gains And
Losses
? Individuals who suffer net
capital losses can deduct only
up to $3,000 of the losses from
other income,
? Losses over $3,000 are carried
over and offset against future
gains,
Tax Planning
Considerations
? Shifting income between family
members
? Splitting income
? Maximizing itemized deductions
? Filing joint or separate returns
? Innocent spouse provision
Compliance And Procedural
Considerations
? Who must file
– See Chart on page 2-29
? Due dates for filing return
? Use of forms 1040,1040EZ,and 1040A
? System for reporting income
– See chart on page 2-30