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Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Principles of Taxation Chapter 13 The Individual Tax Formula
Slide 13-2 Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Objectives filing status computing taxable income standard deduction versus itemized deductions exemptions tax rates credits and AMT payment and filing requirements
Slide 13-3 Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Filing Status - Married If married on the LAST 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 dependent child for 2 more years after death of spouse. MFS (married filing separately) rates are less favorable. Typically used by separated spouses.
Slide 13-4 Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Filing Status - Unmarried Single is the default category for unmarried individuals (neither surviving spouse nor head of household). SeeAP1 for filing status examples.
Slide 13-5 Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Taxable Income Computation Calculate total income totalling Line 22 on Calculate Adjusted Gross Income (AGI) on Line 32 of Subtract the greater of: standard deduction or itemized deductions Subtract total exemptions
Slide 13-6 Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Standard Deduction Depends on filing status. For 1999: MFJ = $7200 MFS = $3600 HOH = $6350 Single = $4300 Blind or aged (>=age 65) MJF, MFS = $850 per item HOH or Single = $1050 See AP2 for standard deduction examples.
Slide 13-7 Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 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 72 and single. What is his standard deduction each year? Does he itemize? Suppose he gave $10,000 to the church every other year?
Slide 13-8 Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Exemptions Personal exemption for the taxpayer (2 for MFJ). You cannot claim yourself if someone is claiming you. Exemption = $2750 in 1999 for each personal or dependency exemption.
Slide 13-9 Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Exemptions for dependents Family member OR live in your home for entire year. You provide > 1/2 financial support Dependent’s gross income < exemption amount waived for child < 19 OR student-child<24. 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.
Slide Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Rich People Phase-out of itemized deductions - If AGI greater than $126,600 (MFJ) in 1999, itemized deductions are reduced by 3% of income > $126,600. Can’t reduce itemized deductions below 20% of the total. Phase-out of exemptions - IF AGI greater than $189,950 (MFJ) in 1999, reduce exemption by 2% for each $2500 that AGI is above the threshold. Can reduce to 0.
Slide Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Tax Formula Total Income - Adjustments = AGI - stand ard or itemized deductions - exemp tions = Taxabl e Income Take Tax able Income to the rate schedules at the front of the book.
Slide Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 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?
Slide Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Credits Child Credit = $500 per child in Phases out for rich. Dependent care credit (child < 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.
Slide Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 AMT (again!!) Same purpose - make sure rich people using “loopholes” pay some tax. Taxable income + or - adjustments + preferences = AMTI before exemption - exemption = AMTI x 26% or 28% = TMT
Slide Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Payment and Filing Requirements Taxes on wages are withheld each pay period. Estimated taxes on other income due 4/15, 5/15, 9/15 and 1/15. Pay 90% of current year tax, 100% of prior year (or 105% of prior year if 1998 AGI>$150,000). Tax return due 4/15, but may be extended to 8/15 then 10/15 (LAST DATE).
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