1. Taxable Income Formula for Individuals
Gross Income $XX
Less Adjustments (deductions ‘for’ AGI) ($XX)
Equals Adjusted Gross Income (AGI) $XX
Less Greater of Itemized or Standard Deductions ($XX)
Less Personal and Dependency Exemptions ($XX)
Equals Taxable Income $XX

2. Filing Status
Married filing jointly - legally married at year end, and widows and widowers for year of death
Widows/widowers with dependents qualify as surviving spouse for 2 years following year of death of spouse, and continue to use MFJ rates and standard deduction amount
Married filing separately - married individuals choosing to file separate returns
Head-of-household - Single individual maintaining household for a dependent relative, not qualifying as a surviving spouse
Single - everyone else

3. Standard Deduction Indexed for inflation
Depends on filing status – 2003 amounts
Single - $4,750
Married filing jointly and surviving spouse - $7,950
Married filing separately - $3,975
Head of household - $7,000
Additional Standard deduction if over 65 or blind
$1,150 for single and head of household
$950 for all others

4. Personal & Dependency Exemptions
Artificial deductions, representing an amount of income not taxed that varies with the number of persons supported by that income
2003 exemption - $3,050 per person
exemption allowed for taxpayer, spouse (on a joint return) and supported dependents

5. Personal & Dependency Exemptions continued
‘Support’ requires:
50% of financial support provided by taxpayer
Gross income less than exemption
Waived for child who is a minor or full-time student under 24
Family member or resident in taxpayer’s home
Phase-out for high income taxpayers
MFJ threshold AGI of $209,350 (2003)
H-of-H threshold $174,400
Single threshold $139,500
MFS threshold $104,625

6. Other Issues Phase-out of itemized deductions
Higher income taxpayers are limited in their ability to use itemized deductions
Total deductions reduced by 3% of AGI in excess of threshold amount ($139,500 in 2003)
Medical, investment interest, gambling and personal casualty loss deductions not subject to reduction
Reduction cannot exceed 80% of total remaining itemized deductions
Motivation for phase-out?
Impact of phase-out on marginal tax rate?

7. Other Issues continued
Why does it matter if a deduction is ‘for’ or ‘from’ AGI?
AGI used to calculate limits such as medical expense and miscellaneous itemized deductions
If taxpayer claims the standard deduction, any benefit of a ‘for’ deduction inadvertently treated as a ‘from’ deduction is lost

8. Other Issues continued
Marriage penalty
Federal income tax system is not marriage neutral
Why does a marriage penalty occur?
MFJ standard deduction amount is not 2 times Single amount
MFJ rate brackets are not 2 times Single brackets
Do all married taxpayers experience a marriage penalty? Which taxpayers would receive a marriage benefit?

9. Computation of Tax Liability
Regular tax liability on ordinary income, calculated using rate schedules based on filing status
Special tax rates on capital gains
Individual tax credits:
Child credit - $600 per child, phased out for higher-income taxpayers
Dependent care credit
Earned income credit
Excess payroll tax withholding

10. Individual Alternative Minimum Tax
Basic approach similar to corporate AMT
standard deduction and exemptions are AMT adjustments
Individual AMT exemption amounts:
MFJ - $49,000 (phased out if AMTI > $150,000)
MFS - $24,500 (phased out if AMTI > $75,000)
Single - $35,750 (phased out if AMTI > $112,500)
Individual AMT rates:
26% on AMTI up to $175,000
28% on excess

11. Payment and Filing Requirements
Most individuals meet payment requirements via payroll withholding
Estimated payments may be required for taxpayers with substantial non-payroll income
Safe harbor payment requirements:
Form 1040 required by 15th day of 4th month following close of taxable year
Automatic 4-month extension possible; can request additional 2-month extension