Exemptions by alicejenny


Corporate vs. individual tax model
Filing status for individuals
Overview of taxable income
Alternative minimum tax
Payment and filing requirements

Corporate vs. Individual
     Tax Models
    Gross Income              Gross Income
-   Deductions           -   Deductions for AGI
=   Taxable Income       =   AGI
x   Corp Tax Rate (%)    -   Deductions from AGI
=   Gross Tax Due        =   Taxable Income
-   Credits & Payments   x   Individual Tax Rate
=   Tax or Refund Due    =   Gross Tax Due
                         -   Credits & Payments
                         =   Tax or Refund Due
            Filing Status for
            Individuals (1 of 5)
There are 5 filing statuses
  Married, filing jointly
  Surviving spouse (qualifying widow(er))
  Married, filing separately
  Head of household
Filing status affects tax rate brackets,
 standard deduction, and other amounts
       Filing Status for
       Individuals (2 of 5)
  Unmarried   individual
  Residual category (i.e., do not meet any
   of other statuses)
Married, filing jointly (MFJ)
  Marriedas of last day of taxable year, or
  Spouse dies during taxable year
        Filing Status for
        Individuals (3 of 5)
Surviving spouse
  Same   tax rate brackets as married, filing
  File as surviving spouse for 2 years after
   death of spouse if taxpayer maintains a
   home in which a dependent child lives
Married, filing separately
  Married but not filing a return with spouse
   and not abandoned spouse
      Filing Status for
      Individuals (4 of 5)
Head of household (HH)
 Must  be unmarried as of end of year or
  an abandoned spouse
 Must pay > half the cost of maintaining a
  household which is the principal home of
  a dependent relative for more than half of
  tax year

        Filing Status for
        Individuals (5 of 5)
2 Exceptions to the HH requirements
  HH   may be claimed if taxpayer maintains
   a separate home for his or her parents if
   at least one parent qualifies as a
  If the qualifying individual is an unmarried
   child or grandchild, the child or grandchild
   need not be taxpayer’s dependent
     Overview of Taxable
         Income (1 of 2)
Gross Income (§61) (lines 7-22 on 1040; p. 345)
- Exclusions (e.g., muni-bond interest)
- Deductions from gross income (“for” AGI)
= Adjusted Gross Income (lines 23-35 on 1040)
- > of Itemized deductions (Sch A; p.349) or
     std. deduction (“from” AGI deductions)
- Personal & dependency exemptions
= Taxable Income                             9
  Overview of Taxable
      Income (2 of 2)
= Taxable Income
x Tax Rate (%)
= Gross Tax
+ Other taxes
- Credits and Payments
= Tax or Refund Due

    Deductions from Gross
 Income (for AGI Deductions)
Many limitations based on AGI
Deductions for AGI include:
  Payments    to IRAs
  Student loan interest (limited to $2,500)
  Tuition and fees (limited to $3,000)
  Moving expenses
  1/2 of self-employment tax paid
  100% of health ins if self-employed
  Alimony paid
    Standard Deduction
                     (1 of 2)

Depends on filing status. For 2003:
   MFJ  = $9,500 (new)
   MFS = $4,750 (new)
   HOH = $7,000 (new)
   Single = $4,750 (new)

Extra ded if blind or aged (≥ age 65).
   Add   to std ded for each occurrence of
    MJF, MFS = additional $950
    HOH or Single = additional $1,150
      Standard Deduction
                   (2 of 2)

Special limitations on basic std. ded.
 for individuals claimed as dependent
 on another individual’s tax return
  Greater   of
    $750 or
    $250 + earned income (but not exceeding
     the normal basic standard deduction
  Additionalstd. deductions for age and
   blindness still available.              13
       Itemized Deductions
              (Schedule A; 1 of 2)

If itemized deductions are about equal
 to standard deduction each year, bunch
 deductions on alternate years and claim
 standard deduction on other years.
  Example:  Bob gives $5,000 to charity each
   year. He is 77 and single.
    Does he itemize? Suppose he gave $10,000
     to the church every other year?
        Itemized Deductions
             (Schedule A; 2 of 2)

Phase-out of itemized deductions
  IfAGI > $139,500 ($69,750 MFS) in
   2003, itemized deductions are reduced
   by 3% of income > $139,500.
    Itemized deductions cannot be reduced
     more than 80%
  Some   items exempt from phase-out:
    Medical exp., investment interest exp.,
     casualty/theft loss, gambling losses
  See   Appendix 13-A.                        15
           (Personal Exemptions)

One personal exemption for the
 taxpayer (2 for MFJ).
  Ifyou are a dependent on someone
   else’s return, can you still claim yourself?
    Exemption = $3,050 in 2003 for each
     personal or dependency exemption.

          (Exemptions for Dependents; 1 of 2)

 Must meet ALL five requirements:
  1.   Family member OR live in your home for
       entire year.
        What about full-time college student away at
         school most of the year?
  2.   You provide > 1/2 financial support.
  3.   Dependent’s gross income < exemption
       amount ($3,050):
        Waived for child < 19 OR student-child<24 17
         (Exemptions for Dependents; 2 of 2)

 Must meet ALL five requirements:
  4.   Dependent must not generally file a joint
       return (with a spouse).
  5.   Dependent must be a U.S. citizen OR a
       resident of US, Mexico, or Canada.

           (Phase-out of Exemptions)

 Phase-out of exemptions
    IF AGI greater than $209,250 (MFJ) in
     2003, reduce exemption by 2% for each
     $2,500 that AGI is above the threshold.
    Exemptions can be reduced to $0.
    See Appendix 13-B.

  Computing Tax Liability
                  (1 of 2)

Use schedule applicable to taxpayer.
  Which  rates are most favorable? Least
Marriage penalty
  What  is it? Who benefits? Who is
  How does it affect the std. deduction?
  How does it affect tax brackets?         20
       Computing Tax Liability
                       (2 of 2)

 Computation of capital gains (1 + 2)
  1.   Compute tax liability on taxable income
       EXCLUDING capital net LTCG.
  2.   Compute tax on net LTCG.
        15% (or 5% if marginal tax rate ≤ 15%).
 Additional individual taxes
      Self-employment taxes
        Both employer and employee portions of
         payroll taxes on income from Sole
         proprietors, partnerships, LLCs and LLPs21
     Individual Tax Credits

Non-refundable credits
  Child Credit
  Child and dependent care credit

Refundable credits
  Earned income credit
  Excess FICA withholding
    Refunded through a tax return claim.
           Child Tax Credit

$1,000 per dependent child under 17.
  Can be a refundable credit if taxpayer has
   earned income.
Phased out by $50 (or fraction thereof)
 per $1,000 above AGI threshold
  $110K MFJ
  $75K single
  $55K MFS                                23
   Child and Dependent Care
Only for employment related care costs
 for certain dependents
  Child< 13 years old or
  Handicapped dependent or spouse.
Credit amount
  Eligible   care costs x credit % (20%-30%)
    20% if AGI > $28,000.
    Lesser of actual qualified costs or $2,400 (1
     child) or $4,800 (2 or more children).
    Also limited to spouses’ lowest earned income.24
     Earned Income Credit

Earned income credit
  Transfer payment to working poor
   because credit is refundable.
  Increases progressivity of tax rates.
  Credit phases out as income increases.

  Must have earned income (wages or SE)
  Must have qualifying child (exceptions) 25
Alternative Minimum Tax
  Taxable income
± adjustments
+ preferences
= AMTI before exemption
- exemption (less 25% of excess AMTI)
x 26% (or 28% for higher AMTI levels)
       AMT Adjustments

Examples of AMT adjustments:
 +  Standard deduction
 + Personal & dependency exemptions
 + 2% misc itemized deductions
 + Deduction for state, local, foreign taxes
 - Itemized deductions phased out

         AMT Exemption

AMT exemption amounts:
 HOH and single: $40,250
 MFS: $29,000

AMT phaseout threshholds:
 HOH and single: $112,500
 MFS: $75,000
   Payment and Filing
   Requirements (1 of 3)
 Taxes   withheld from wages each period
   Wages deemed to be w/h equally
    throughout year.
 Estimated   taxes for income not subject
   to withholding
   Due on 4/15, 6/15, 9/15, and 1/15.

    Payment and Filing
    Requirements (2 of 3)
Avoid underpayment penalty
 Pay90% of current year tax or
 100% of prior year
   110% of prior year if 2002 AGI>$150K.
 ES payments or withholding must be
   made throughout the year.
   Withholding deemed to be made evenly
    throughout year.
   Limits deferral opportunities w/in a year. 30
    Payment and Filing
    Requirements (3 of 3)
Tax return due 4/15
  Get automatic extension to 8/15.
  Need permission to extend to 10/15.
  Extension only extends time to file, NOT
   extension to pay tax.


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