Federal Taxation ch2

7/24/2019 Federal Taxation ch2

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Chapter 2: Determination

of TaxPrentice Hall’s Federal Taxation 2016:Individals

Cop!ri"ht # 2016 Pearson$dcation% Inc&



'asic Formla for Calclatin"Income Tax

TotalIncome

(ess:$xclsions

$)als:*ross

Income

(ess:Dedctions

for +*I

$)als: +*I

(ess:Itemi,ed

Dedctionsor -tandard

Ded&

(ess:Personal

$xemptions

Taxa.leIncome

Tax (ia.ilit!CalclatedPer Ta.le

/ins:Credits andPrepa!ment

s

$)als: et Tax Pa!a.le

or efnd

Cop!ri"ht # 2016 Pearson$dcation% Inc& 22









Total Income

+n! 5income from hatever sorcederived&7

Incldes .oth taxa.le and non

taxa.le income&Does 8T inclde retrn of capital

9.asis of propert! sold&

$xample: 'o. sells a piece ofpropert! for ;1%000& He has a cost.asis of ;<00& 'o. ill inclde;300% not ;1%000% in total income&

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$xclsions

*ifts(ife

Insrance>elfare

Certain-cholarship

s

Certain

Pmts forIn?r!

Certain

$mplo!ee'ene@ts

Certain

Forei"nIncome

Tax$xemptInterest

-eries $$'ond

Interest

(easeholdImproveme

nts

/eritorios+chieveme

nt +ards

CertainDivorce

Pa!ments

*ain from-ale ofHome

oth I+Distri.tion

sC8D -- 'ene@ts




*ross Income Items per A61

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5For7 vs& 5From7 +*I


AGI = “THE LINE”

2B



Dedctions 5For7 +*I A62




Dedctions 5From7 +*I

Taxpa!er can dedct "reater of:Itemi,ed Dedctions 8 -tandardDedction&

Can also dedct personal anddependenc! exemptions&

$xemptions ;4%000 per person

for 201=&




Itemi,ed vs& -tandard Dedction9201= +monts


-in"le ;6%300Head of Hosehold ;%2=0/arried Filin" -eparatel! ;6%300/arried Filin" Eointl! ;12%600

Increases to -D if elderl! or.lind&

/edical $xpenses Taxes G Propert!% eal $state%-(Charita.le Contri.tionsCasalt! (osses

/ort"a"e Interest/iscellaneos Dedction 211



Itemi,ed Dedctions G ot-.?ect to Thresholds

/ort"a"e Interest&

Charita.le Contri.tions

9limited&Propert!% -tate(ocal% and eal

$state Taxes&

Investment Interest 9limited&




Itemi,ed Dedctions G ot-.?ect to Thresholds 9cont’d

/iscellaneos Dedctions 8Ts.?ect to 2 +*I:

◦ $state taxes for ID&

◦ *am.lin" losses to the extent of"am.lin" income&

◦

+morti,ation of .ond premim&◦ +monts restored nder claim of

ri"ht&




Itemi,ed Dedctions G -.?ect toFloors

/edical $xpenses G can onl!dedct amonts over threshold:

◦ 'elo a"e 6=% threshold 10 +*I&

◦ 8ver a"e 6=% threshold <&= +*I&/iscellaneos Itemi,ed

Dedctions G 2 +*I&

Casalt! (osses G 10 +*I&8verall Floor on ID total G applies

to ealth! taxpa!ers&




-tandard Dedctions

-in"le ;6%300&Head of Hosehold ;%2=0&

/arried Filin" -eparatel! ;6%300&

/arried Filin" Eointl! ;12%600&If elderl! or .lind% add ;1%2=0 to the

-tandard Dedction 9;2%=00 if .othelderl! +D .lind&

/arried coples can increase theirstandard dedction a maximm of;=%000&




Disalloance of -tandardDedction




Personal $xemptions95P$7P$ ;4%000 per taxpa!er&/arried @lin" ?ointl! claims to

exemptions 9one for each

spose&/a! also claim P$ for each

dependent&

If taxpa!er is .ein" claimed as adependent of another% heshecannot claim himherself on on

tax retrn& Cop!ri"ht # 2016 Pearson$dcation% Inc& 21<



Dependenc! $xemptions G Jali@cation


TI$ 1 $JKI$/$T- TI$ 2 $JKI$/$T-

/K-T /$$T +(( 4CIT$I+:

1& Jalif!in" ID L

2& /eet citi,en test

3& /eet separate retrntest

4& Individal does notclaim someone else asa dependent&

Isindividal a)alif!in" childM

/K-T /$$T +(( 4CIT$I+:1& elationship test2& +"e test

3& +.ode test4& -pport test

/K-T /$$T +(( 3CIT$I+:

1& elationship test2& *ross income

test3& -pport test

AND

OR

ote: Individal mst meet .oth Tier 1 and Tier 2criteria to )alif! as the taxpa!er’s dependent&

21B



Tier 1 Criteria for Dependenc!$xemption

ID L each dependent mst havea --&

Citi,enship G mst .e K- citi,en%

K- national% or le"al resident&-eparate retrn test:

◦ *enerall!% dependent cannot @le

?oint retrn ith spose&◦ $xception: dependent @les ?oint

retrn onl! to o.tain refnd of taxithheld&




Tier 2 Criteria G Dependent is aJalif!in" Child

elationship Test G $li"i.leindividals:

◦ Taxpa!er’s natral% adopted% foster%

and stepchildren&◦ Taxpa!er’s si.lin"s% halfsi.lin"s% and

stepsi.lin"s&

◦ +n! descendants of the a.ove&

◦ +doption le"al adoptions or child.ein" le"all! placed in home foradoption&




Tier 2 Criteria G Dependent is aJalif!in" Child 9cont’d

+"e Test G mst fall ithin atleast one cate"or!:

◦ Knder a"e 1N 8

◦ Permanentl! and totall! disa.led9an! a"eN 8

◦ Flltime stdent nder a"e 24& Considered flltime stdent if dependent

is enrolled at )alif!in" instittion for atleast = months and carries a fll corseload&




Tier 2 Criteria G Dependent is aJalif!in" Child 9cont’d

+.ode Test G mst have sameprincipal a.ode as the taxpa!erfor O12 the !ear&

◦ oncstodial parent meets +.odetest if cstodial parent a"rees inritin"&

-pport Test G dependent can’tprovide more than of hisherspport&




Tier 2 Criteria G 8ther Jalif!in"Individals

elationship Test G mst fall ithin at leastone cate"or!:

◦ Related to the taxpayer & Does not have to live ith taxpa!er&

Can .e a )alif!in" child% parents 9incldin" parents’ancestors and si.lin"s% stepparents% or certain inlas&

Taxpa!er’s cosins do not )alif! nder this cate"or!&

◦ Resides in taxpayer’s home the entire year &

◦ Dependent needs onl! to .e related to onespose in a ?oint retrn& elationship is notterminated .! death or divorce once

esta.lished&




Tier 2 Criteria G 8ther Jalif!in"Individals 9cont’d

*ross Income Test G dependent’s taxa.le"ross income mst .e Q exemptionamont for the !ear 9;4%000 in 201=&

-pport Test G taxpa!er mst provide

more than of dependent’s @nancialspport&

◦ Inclde nontaxa.le amonts spent exceptscholarships&

◦ Inclde F/R of items in spport calclationincldin" impted rent&

◦ Do not inclde F/R of personal servicesrendered .! taxpa!er to dependent&




Tie'reaSer les forDependenc! $xemption

If more than one taxpa!er canpotentiall! claim an individal as adependent% then the possi.le

claimants are prioriti,ed in order of"reatest claim to least:

1& TP ho can claim nder )alif!in" childrles vs& other relatives&

2& Parents have "reater claim over nonparents&

3& If 1& and 2& don’t appl!% then exemption"oes to TP ith hi"hest +*I&




/ltiple -pport+"reementsIf "rop provides O =0 spport .t no

one person provides O =0% then theeli"i.le mem.ers can desi"nate oneperson&

$li"i.le mem.ers mst a"ree in ritin"&Claimant mst complete a /ltiple

-pport Declaration 9Form 2120&

/-D trmps tie.reaSer rles& TP ho can claim nder )alif!in" child

rles can’t transfer to another TP hocan claim nder the dependent’s rles&







Parental elease

*enerall!% exemption is aardedto cstodial parent&

$xception G non cstodial parent

can claim exemption if otherparent si"ns Form B332&

Cop!ri"ht # 2016 Pearson$dcation% Inc& 22B



efnda.le Tax Credits




onrefnda.le Credits




Child Credits G A 24

Can claim ;1%000 credit for each)alif!in" child& Partiall! refnda.le&

Jalif!in" child same de@nition as fordependenc! exemption except Q 1<!ears&

Credit is redced ;=0 for ever! ;1%0009or part thereof over the folloin"

thresholds:◦ /F- ;==%000

◦ -in"le ;<=%000

◦ /FE ;110%000




Istaxpa!ermarried asof last da!of the tax!earM

Didtaxpa!er’sspose diedrin" tax

!earM

Is taxpa!erana.andonedsposeM

8

>ill taxpa!erclaimsomeone elseas a

dependentM

$-

/arried

@lin"separatel!

/arried@lin" ?ointl!

OR

8

$-

$-

8 -I*($

Istaxpa!era K-citi,enM

$-

-I*($

8

$

-

Pa!s over cost ofhoseholdM

8

Head ofHosehold

$-

8

Next

Determinin" Filin" -tats




Didtaxpa!er’s

spose diedrin" tax!earM $

-

Did taxpa!erremarr! .!

end of tax!earM

Can @le /FE 2

tax !earsafterspose’sdeath& U

8

/arried@lin"separatel!

/arried@lin" ?ointl!

OR

* Additional requirements apply in

Year 2. Cop!ri"ht # 2016 Pearson$dcation% Inc& 233



-rvivin" -pose Criteria




Children ith KnearnedIncomeChildren ith earned or nearned

income are re)ired to @le ontax retrn if otherise over @lin"

threshold&Dependents do not claim a

personal exemption&

-tandard dedction is limited to"reater of:

◦ ;1%0=0N 8

◦

Dependent’s earned income V ;3=0&Cop!ri"ht # 2016 Pearson$dcation% Inc& 23=



Children ith Knearned Income95KI7

5Widdie Tax7 G if child is nder 1B 924 insome cases% child’s nearned income istaxed at parent’s mar"inal rate&

Q 1B% 5Siddie tax7 applies to KI O ;2%100&

1 X child’s a"e X 23% 5Siddie tax7 if:

1& Flltime stdentN +D

2& $arned income X12 spportN +D

3& KI O ;2%100&

Y1B% 5Siddie tax7 if:

1& $arned income X12 spportN +D

2& KI O ;2%100&




Treatment of Capital*ains(osses

Capital "ains 95C*7 and capitallosses 95C(7 derive from sale orexchan"e of capital assets&

et lon"term capital "ains aretaxed at a loer rate than8rdinar! Income 958I7&

et shortterm capital "ains aretaxed as 8I&




Treatment of Capital *( 9cont’d

Capital assets are "eneral trade%.siness% or investment propert!that are not inventor!&

et C( are dedcti.le onl! p to;3%000& $xcess C( can .ecarried forard&

Cop!ri"ht # 2016 Pearson$dcation% Inc& 23B



/aximm et Capital *ain ates

Taxpa!er 'racSet /ax C* ates10% 1= 0

2=3= 1=

3&6 20U

U3&B srtax applies to hi"hincome taxpa!er on investmentincome% net C*% interest&


l i



Tax Plannin"Considerations




>ho /st FileM

For taxpa!ers nder 6=% mst @le if"ross income exceeds folloin" levelseven if no tax de 9201= thresholds:

-in"le ;10%300/FE ;20%600

-rvivin" -pose ;16%600

/F- ; 4%000

/arried livin" separatel! ; 4%000

Head of Hosehold ;13%2=0




>ho /st FileM 9cont’d

Taxpa!er mst still @le even if "rossincome .elo threshold if:

1& Taxpa!er rec’d advance

pa!ments of $IC&2& Taxpa!er has -$ income O ;400&

3& Taxpa!er ho is claimed as a

dependent .! another +Dnearned income O ;1%0=0 or *IO -td& dedction&




De Dates

Individals G +pril 1=Corporations and - Corporations

G 1=th da! of the 3rd month after

close of tax !ear&If de date falls on eeSend or

national holida!% de date is

moved to the @rst .siness da!folloin"&

$xtensions G 6 months for

Individals and CorporationsN =Cop!ri"ht # 2016 Pearson$dcation% Inc& 243






eports Filed ith I-

Federal Taxation ch2

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