1. Income Tax Fundamentals 2017 Student Slides
CHAPTER 1
The Individual Income Tax Return
© 2019 Cengage. All rights reserved.

2. History of Taxation
Since 1913, when 16th amendment was passed, the constitutionality of income tax has never been questioned by federal courts
Income taxes serve a multitude of purposes

3. Objectives of Tax Law (1 of 2)
Raise revenue
Tool for social and economic policies
Social policy encourages desirable activities and discourages undesirable activities
Deductions for charitable contributions
Credits for higher education expenses
Credits for taxpayers in disaster areas

4. Objectives of Tax Law (2 of 2)
Economic policy as manifested by fiscal policy
Encourage investment in capital assets through depreciation
Credits for investment in solar and wind energy
Both economic and social
Exclude gain on sale of personal residence up to $250,000 ($500,000 if married)

5. Primary Entities/Forms
Individual
Taxable income includes wages, salary, self-employment earnings, rent, interest and dividends
An individual may file simplest tax form qualified for
1040EZ
1040A
1040
If error made on one of the three above forms, can amend with a 1040X

6. Tax Formula for Individuals
This formula follows Form 1040 Gross Income less: Deductions for Adjusted Gross Income (AGI) AGI less: Greater of Itemized or Standard Deduction less: Exemption(s) Taxable Income (TI) times: Tax Rate (using tax tables or rate schedules) Gross Tax Liability less: Tax Credits and Prepayments Tax Due or Refund

7. Who Must File Based on filing status and gross income
Generally, if exemptions
plus
greater of standard or itemized deductions exceed income, then filing is not necessary
If taxpayer is claimed as a dependent on another taxpayer’s return, dependent’s standard deduction is:
Greater of $1,050 or
Earned income + $350
But never more than standard deduction

8. Standard Deduction & Exemptions
2016 standard deduction Single $ 6,300 Married Filing Joint (MFJ) 12,600 Qualifying Widow(er) 12,600 also known as Surviving Spouse Head of Household (HOH) 9,300 Married Filing Separate (MFS) 6,300 *Plus additional amounts for blindness or over 65: $1,250 if MFJ, MFS or qualifying widow(er) and $1,550 if HOH or Single Exemption = $4,050/person

9. Filing Status (1 of 4) Single Married Filing Jointly (MFJ)
Unmarried or legally separated as of 12/31
And not qualified as married filing separately, head of household or qualifying widow(er)
Married Filing Jointly (MFJ)
If married on 12/31 – even if didn’t live together entire year
If spouse dies during year, you can file MFJ in current year

10. Filing Status (2 of 4) Married Filing Separately (MFS)
Each file separate returns
Must compute taxes the same way - both itemize or both use standard
If living in community property state, must follow state law

11. Filing Status (3 of 4) Head of Household (HOH)
Tables have lower rates than single or MFS
Taxpayer can file as HOH if:
Unmarried or abandoned as of 12/31
Paid > 50% of cost of keeping up home that was principal residence of dependent child or other qualifying dependent relative

12. Filing Status (4 of 4)
There is one exception to principal residence requirement. If dependent is taxpayer’s parent, he/she doesn’t have to live with taxpayer.
Note: A divorced parent who meets above rules and has signed IRS/legal document, may still claim HOH even if dependency exemption shifted to ex-spouse

13. Tax Computation Seven brackets
10%, 15%, 25%, 28%, 33%, 35%, 39.6%
Tax rate schedules for different filing types
Qualifying dividends and net long-term capital gains may be taxed at lower rates
Rates based on ordinary tax bracket

14. Special Rules for High-Income Taxpayers (1 of 2)
Two laws effected tax increases for high-income taxpayers in 2013
The Affordable Care Act (“Obamacare”)
The American Taxpayer Relief Act (“Fiscal cliff” legislation)
Additional 3.8% Medicare tax on net investment income
If modified AGI > $250,000 (MFJ), $200,000 (S) or $125,000 (MFS)
Additional .9% Medicare tax on earned income
Same income thresholds as above (details in Chapter 9)
Reported on Form 8959

15. Special Rules for High-Income Taxpayers (2 of 2)
Top capital gains tax rate increased to 20%
If taxpayer is in 39.6% top marginal rate, then qualified dividends and long-term capital gains are taxed at 20%
Itemized deduction and exemption phase-outs reinstated

16. Tax and The Internet Volumes of tax information available on internet
contains forms and publications and a search engine to aid the user in obtaining useful information
The IRS has also launched a YouTube video site and an iTunes podcast site; these feature topics like how to obtain refund or file an extension
Also, there are feeds on Twitter a Facebook page, a mobile phone app (IRS2GO), and other social media modalities
A good income tax preparation site is