1. Individual Income Taxes C3-1 Chapter 3 Tax Determination; Personal and Dependency Exemptions; An Overview of Property Transactions Copyright ©2009 Cengage Learning Individual Income Taxes

2. C3-2 Tax Formula (slide 1 of 2) Income (broadly conceived)$x,xxx Less:Exclusions (x,xxx) Gross Income$x,xxx Less:Deductions for AGI (x,xxx) Adjusted Gross Income (AGI)$x,xxx Less:The greater of- Total itemized deductions or the standard deduction (x,xxx) Personal & dependency exemptions(x,xxx) Taxable Income$x,xxx Income (broadly conceived)$x,xxx Less:Exclusions (x,xxx) Gross Income$x,xxx Less:Deductions for AGI (x,xxx) Adjusted Gross Income (AGI)$x,xxx Less:The greater of- Total itemized deductions or the standard deduction (x,xxx) Personal & dependency exemptions(x,xxx) Taxable Income$x,xxx FIGURE 3–1

3. Individual Income Taxes C3-3 Tax Formula (slide 2 of 2) Tax on taxable income (see Tax Tables or Tax Rate Schedules) $ x,xxx Less: Tax credits (including income taxes withheld and prepaid) (xxx) Tax due (or refund) $ xxx Tax on taxable income (see Tax Tables or Tax Rate Schedules) $ x,xxx Less: Tax credits (including income taxes withheld and prepaid) (xxx) Tax due (or refund) $ xxx FIGURE 3–1

4. Individual Income Taxes C3-4 Income -Broadly Conceived Includes all the taxpayer’s income, both taxable and nontaxable –Essentially equivalent to gross receipts It does not include a return of capital or receipt of borrowed funds Includes all the taxpayer’s income, both taxable and nontaxable –Essentially equivalent to gross receipts It does not include a return of capital or receipt of borrowed funds

5. Individual Income Taxes C3-5 Partial List of Exclusions from Gross Income Accident insurance proceeds Annuities (cost element) Bequests Child support payments Cost-of-living allowance (for military) Damages for personal injury or sickness Gifts received Group term life insurance, premium paid by employer (for coverage up to $50,000) Inheritances Interest from state and local (i.e., municipal) bonds Life insurance paid on death Accident insurance proceeds Annuities (cost element) Bequests Child support payments Cost-of-living allowance (for military) Damages for personal injury or sickness Gifts received Group term life insurance, premium paid by employer (for coverage up to $50,000) Inheritances Interest from state and local (i.e., municipal) bonds Life insurance paid on death Meals and lodging (if furnished for employer’s convenience) Military allowances Minister’s dwelling rental value allowance Railroad retirement benefits (to a limited extent) Scholarship grants (to a limited extent) Social Security benefits (to a limited extent) Veterans’ benefits Welfare payments Workers’ compensation benefits Exhibit 3-1

6. Individual Income Taxes C3-6 Gross Income The Internal Revenue Code defines gross income broadly as ‘‘except as otherwise provided..., all income from whatever source derived’’ Gross income does not include unrealized gains The Internal Revenue Code defines gross income broadly as ‘‘except as otherwise provided..., all income from whatever source derived’’ Gross income does not include unrealized gains

7. Individual Income Taxes C3-7 Partial List of Gross Income Items (slide 1 of 2) Alimony Annuities (income element) Awards Back pay Bargain purchase from employer Bonuses Breach of contract damages Business income Clergy fees Commissions Compensation for services Death benefits Debts forgiven Director’s fees Alimony Annuities (income element) Awards Back pay Bargain purchase from employer Bonuses Breach of contract damages Business income Clergy fees Commissions Compensation for services Death benefits Debts forgiven Director’s fees Hobby income Interest Jury duty fees Living quarters, meals (unless furnished for employer’s convenience) Mileage allowance Military pay (unless combat pay) Notary fees Partnership income Pensions Prizes Professional fees Punitive damages Exhibit 3-2

8. Individual Income Taxes C3-8 Partial List of Gross Income Items (slide 2 of 2) Dividends Embezzled funds Employee awards (in certain cases) Employee benefits (except certain fringe benefits) Estate and trust income Farm income Fees Gains from illegal activities Gains from sale of property Gambling winnings Group term life insurance, premium paid by employer (for coverage over $50,000) Dividends Embezzled funds Employee awards (in certain cases) Employee benefits (except certain fringe benefits) Estate and trust income Farm income Fees Gains from illegal activities Gains from sale of property Gambling winnings Group term life insurance, premium paid by employer (for coverage over $50,000) Rents Rewards Royalties Salaries Severance pay Strike and lockout benefits Supplemental unemployment benefits Tips and gratuities Travel allowance (in certain cases) Wages Exhibit 3-2

9. Individual Income Taxes C3-9 Deductions - Individual Taxpayers Individual taxpayers have two categories of deductions: –Deductions for adjusted gross income (AGI) –Deductions from adjusted gross income Individual taxpayers have two categories of deductions: –Deductions for adjusted gross income (AGI) –Deductions from adjusted gross income

10. Individual Income Taxes C3-10 Deductions For AGI (slide 1 of 2) Sometimes known as above-the-line deductions –On the tax return, they are taken before the ‘‘line’’ designating AGI Sometimes known as above-the-line deductions –On the tax return, they are taken before the ‘‘line’’ designating AGI

11. Individual Income Taxes C3-11 Deductions For AGI (slide 2 of 2) Deductions for AGI include: –Ordinary and necessary expenses incurred in a trade or business –One-half of self-employment tax paid –Alimony paid –Certain payments to an IRA and Health Savings Accounts –Moving expenses –Fees for college tuition and related expenses –Interest on student loans –The capital loss deduction, and –Others Deductions for AGI include: –Ordinary and necessary expenses incurred in a trade or business –One-half of self-employment tax paid –Alimony paid –Certain payments to an IRA and Health Savings Accounts –Moving expenses –Fees for college tuition and related expenses –Interest on student loans –The capital loss deduction, and –Others

12. Individual Income Taxes C3-12 Adjusted Gross Income (AGI) AGI is an important subtotal –Serves as the basis for computing percentage limitations on certain itemized deductions such as Medical expenses Charitable contributions Certain casualty losses –e.g., Medical expenses are deductible only to the extent they exceed 7.5% of AGI This limitation might be described as a 7.5% “floor” under the medical expense deduction AGI is an important subtotal –Serves as the basis for computing percentage limitations on certain itemized deductions such as Medical expenses Charitable contributions Certain casualty losses –e.g., Medical expenses are deductible only to the extent they exceed 7.5% of AGI This limitation might be described as a 7.5% “floor” under the medical expense deduction

13. Individual Income Taxes C3-13 Deductions From AGI (slide 1 of 3) Deductions from AGI include: –The greater of: Itemized deductions, or The standard deduction –Personal and dependency exemptions Deductions from AGI include: –The greater of: Itemized deductions, or The standard deduction –Personal and dependency exemptions

14. Individual Income Taxes C3-14 Deductions From AGI (slide 2 of 3) A partial list of itemized deductions includes: –Medical expenses (in excess of 7.5% of AGI) –Certain taxes and interest –Charitable contributions –Casualty Losses (in excess of 10% of AGI) –Deductions for expenses related to The production or collection of income, and The management of property held for the production of income –Certain miscellaneous itemized deductions (in excess of 2% of AGI) A partial list of itemized deductions includes: –Medical expenses (in excess of 7.5% of AGI) –Certain taxes and interest –Charitable contributions –Casualty Losses (in excess of 10% of AGI) –Deductions for expenses related to The production or collection of income, and The management of property held for the production of income –Certain miscellaneous itemized deductions (in excess of 2% of AGI)

15. Individual Income Taxes C3-15 Deductions From AGI (slide 3 of 3) The standard deduction is the sum of two components: –Basic standard deduction Amount allowed is based on taxpayer’s filing status –Additional standard deductions Available for taxpayers who are –Age 65 or over, and –Blind Two additional standard deductions are allowed for a taxpayer who is age 65 or over and blind Amount allowed depends on filing status The standard deduction is the sum of two components: –Basic standard deduction Amount allowed is based on taxpayer’s filing status –Additional standard deductions Available for taxpayers who are –Age 65 or over, and –Blind Two additional standard deductions are allowed for a taxpayer who is age 65 or over and blind Amount allowed depends on filing status

16. Individual Income Taxes C3-16 Standard Deduction (slide 1 of 2) The basic standard deduction (BSD) amount depends on filing status of taxpayer Filing status 2007 2008. Single $5,350 $5,450 MFJ, SS 10,700 10,900 HH 7,850 8,000 MFS 5,350 5,450 TABLE 3–1

17. Individual Income Taxes C3-17 Standard Deduction (slide 2 of 2) Additional standard deduction (ASD) –For taxpayers age 65 or older and/or legally blind Additional standard deduction (ASD) –For taxpayers age 65 or older and/or legally blind Filing Status 2007 2008. Single $1,300 $1,350 MFJ, SS 1,050 1,050 HH 1,300 1,350 MFS 1,050 1,050 TABLE 3–2

18. Individual Income Taxes C3-18 Determining Standard Deduction Examples (2008 tax year): –Taxpayer is single, blind, and age 65 or older SD = $5,450 (BSD) + $1,350 (ASD) + $1,350 (ASD) = $8,150 –Taxpayers are married, filing jointly, one blind, and both age 65 or older SD = $10,900 (BSD) + $1,050 (ASD) + $1,050 (ASD) + $1,050 (ASD) = $14,050 Examples (2008 tax year): –Taxpayer is single, blind, and age 65 or older SD = $5,450 (BSD) + $1,350 (ASD) + $1,350 (ASD) = $8,150 –Taxpayers are married, filing jointly, one blind, and both age 65 or older SD = $10,900 (BSD) + $1,050 (ASD) + $1,050 (ASD) + $1,050 (ASD) = $14,050

19. Individual Income Taxes C3-19 Personal and Dependency Exemption Amounts Amounts –2007: $3,400 per exemption –2008: $3,500 per exemption Personal and dependency exemptions –One per taxpayer (two personal exemptions when married, filing jointly) and for each dependent Exception: Individual claimed as dependent by another taxpayer does not receive a personal exemption Amounts –2007: $3,400 per exemption –2008: $3,500 per exemption Personal and dependency exemptions –One per taxpayer (two personal exemptions when married, filing jointly) and for each dependent Exception: Individual claimed as dependent by another taxpayer does not receive a personal exemption

20. Individual Income Taxes C3-20 Taxpayers Ineligible For Standard Deduction Certain taxpayers cannot use the SD: –Married, filing separately, when either spouse itemizes deductions –Nonresident aliens –Individual filing return for tax year of less than 12 months because of change in annual accounting period Certain taxpayers cannot use the SD: –Married, filing separately, when either spouse itemizes deductions –Nonresident aliens –Individual filing return for tax year of less than 12 months because of change in annual accounting period

21. Individual Income Taxes C3-21 SD Limit For Person Claimed as Dependent Individual claimed as dependent has a BSD limited to the greater of: – $900 or – $300 plus earned income (but not exceeding normal BSD) ASD amount(s) still available Individual claimed as dependent has a BSD limited to the greater of: – $900 or – $300 plus earned income (but not exceeding normal BSD) ASD amount(s) still available

22. Individual Income Taxes C3-22 Examples of SD Limit (slide 1 of 2) Dependent’s SD (2008 tax year): –A blind child who earns $200 and is claimed by parents as a dependency exemption SD = $900 (BSD) + $1,350 (ASD) = $2,250 –A child who earns $1,500 and is claimed by parents as a dependency exemption SD = $1,800 [BSD equal to greater of $900 or ($300 + $1,500 earned income)] Dependent’s SD (2008 tax year): –A blind child who earns $200 and is claimed by parents as a dependency exemption SD = $900 (BSD) + $1,350 (ASD) = $2,250 –A child who earns $1,500 and is claimed by parents as a dependency exemption SD = $1,800 [BSD equal to greater of $900 or ($300 + $1,500 earned income)]

23. Individual Income Taxes C3-23 Examples of SD Limit (slide 2 of 2) Examples of dependent’s SD (2008 tax year) –A child who earns $5,500 and is claimed by parents as a dependency exemption SD = $5,450 [BSD limited to normal amount] Examples of dependent’s SD (2008 tax year) –A child who earns $5,500 and is claimed by parents as a dependency exemption SD = $5,450 [BSD limited to normal amount]

24. Individual Income Taxes C3-24 Personal and Dependency Exemptions In Year Of Death Personal exemption allowed on joint return for spouse who dies during the year –Example: Tom and Betty were married in 1990. Tom dies on February 1, 2008. A personal exemption may be claimed for Tom on the taxpayers’ 2008 joint return. Personal exemption allowed on joint return for spouse who dies during the year –Example: Tom and Betty were married in 1990. Tom dies on February 1, 2008. A personal exemption may be claimed for Tom on the taxpayers’ 2008 joint return.

25. Individual Income Taxes C3-25 Dependency Exemptions (slide 1 of 2) A dependency exemption is available for one who is either a qualifying child or a qualifying relative –A qualifying child must meet the following tests: Relationship Abode Age, and Support A dependency exemption is available for one who is either a qualifying child or a qualifying relative –A qualifying child must meet the following tests: Relationship Abode Age, and Support

26. Individual Income Taxes C3-26 Dependency Exemptions (slide 2 of 2) One objective of the Working Families Tax Relief Act of 2004 (WFTRA of 2004) –Establish a uniform definition of qualifying child for purposes of the: Dependency exemption Head-of-household filing status Earned income tax credit Child tax credit Credit for child and dependent care expenses One objective of the Working Families Tax Relief Act of 2004 (WFTRA of 2004) –Establish a uniform definition of qualifying child for purposes of the: Dependency exemption Head-of-household filing status Earned income tax credit Child tax credit Credit for child and dependent care expenses

27. Individual Income Taxes C3-27 Relationship Test The child must be the taxpayer’s: –Son or daughter –Stepson or stepdaughter –Brother or sister –Stepbrother or stepsister –Half brother or half sister, or –A descendant of such individual (e.g., grandchildren, nephews, nieces) A child who has been adopted, or whose adoption is pending, qualifies A foster child may also qualify The child must be the taxpayer’s: –Son or daughter –Stepson or stepdaughter –Brother or sister –Stepbrother or stepsister –Half brother or half sister, or –A descendant of such individual (e.g., grandchildren, nephews, nieces) A child who has been adopted, or whose adoption is pending, qualifies A foster child may also qualify

28. Individual Income Taxes C3-28 Abode Test A qualifying child must live with the taxpayer for more than half of the year –Temporary absences from the household due to special circumstances (e.g., illness, education) are not considered A qualifying child must live with the taxpayer for more than half of the year –Temporary absences from the household due to special circumstances (e.g., illness, education) are not considered

29. Individual Income Taxes C3-29 Age Test The child must be under age 19 or under age 24 in the case of a student –A student is a child who, during any part of five months of the year, is enrolled full time at a school or government-sponsored on-farm training course –Individuals who are disabled are not subject to the age test The child must be under age 19 or under age 24 in the case of a student –A student is a child who, during any part of five months of the year, is enrolled full time at a school or government-sponsored on-farm training course –Individuals who are disabled are not subject to the age test

30. Individual Income Taxes C3-30 Support To be a qualifying child, the individual must not be self-supporting –Cannot provide more than one-half of his or her own support –In the case of a full-time student, scholarships are not considered to be support To be a qualifying child, the individual must not be self-supporting –Cannot provide more than one-half of his or her own support –In the case of a full-time student, scholarships are not considered to be support

31. Individual Income Taxes C3-31 Tiebreaker Rules In situations where a child may be a qualifying child for more than one person –Tiebreaker rules specify which person has priority in claiming the dependency exemption In situations where a child may be a qualifying child for more than one person –Tiebreaker rules specify which person has priority in claiming the dependency exemption

32. Individual Income Taxes C3-32 Qualifying Relative In order to claim a dependency exemption for a qualifying relative, the following tests must be met: –Relationship –Gross income –Support In order to claim a dependency exemption for a qualifying relative, the following tests must be met: –Relationship –Gross income –Support

33. Individual Income Taxes C3-33 Relationship Test The relationship test for a qualifying relative is more expansive than for a qualifying child. Also included are the following relatives: –Lineal ascendants (e.g., parents, grandparents) –Collateral ascendants (e.g., uncles, aunts) –Certain in-laws (e.g., son-, daughter-, father-, mother-, brother-, and sister-in-law) The relationship test also includes unrelated parties who live with the taxpayer The relationship test for a qualifying relative is more expansive than for a qualifying child. Also included are the following relatives: –Lineal ascendants (e.g., parents, grandparents) –Collateral ascendants (e.g., uncles, aunts) –Certain in-laws (e.g., son-, daughter-, father-, mother-, brother-, and sister-in-law) The relationship test also includes unrelated parties who live with the taxpayer

34. Individual Income Taxes C3-34 Gross Income Test Dependent’s gross income must be less than the exemption amount ($3,500 for 2008)

35. Individual Income Taxes C3-35 Support Test Taxpayer must provide more than 50% of the qualifying relative’s support –Only amounts expended are considered in the support test –Scholarships are not considered in the support test Two exceptions to the support test: –Multiple support agreements –Children of divorced parents Taxpayer must provide more than 50% of the qualifying relative’s support –Only amounts expended are considered in the support test –Scholarships are not considered in the support test Two exceptions to the support test: –Multiple support agreements –Children of divorced parents

36. Individual Income Taxes C3-36 Multiple Support Agreements Allows one member of a group providing > 50% of support to claim individual even though no one person provides > 50% support –Eligible parties must provide > 10% of support –Each eligible party must meet all other dependency requirements Example - Allows children of elderly parent to claim exemption for parent when none individually meets the 50% support test Allows one member of a group providing > 50% of support to claim individual even though no one person provides > 50% support –Eligible parties must provide > 10% of support –Each eligible party must meet all other dependency requirements Example - Allows children of elderly parent to claim exemption for parent when none individually meets the 50% support test

37. Individual Income Taxes C3-37 Children of Divorced Parents Special rules apply if the parents meet the following conditions: –They would have been entitled to the dependency exemption had they been married and filed a joint return –They have custody (either jointly or singly) of the child for more than half of the year Under the general rule, the parent having custody of the child for the greater part of the year (i.e., the custodial parent) is entitled to the dependency exemption –General rule does not apply if A multiple support agreement is in effect Custodial parent issues a waiver in favor of the noncustodial parent Special rules apply if the parents meet the following conditions: –They would have been entitled to the dependency exemption had they been married and filed a joint return –They have custody (either jointly or singly) of the child for more than half of the year Under the general rule, the parent having custody of the child for the greater part of the year (i.e., the custodial parent) is entitled to the dependency exemption –General rule does not apply if A multiple support agreement is in effect Custodial parent issues a waiver in favor of the noncustodial parent

38. Individual Income Taxes C3-38 Other Rules for Dependency Exemptions In addition to fitting into either the qualifying child or the qualifying relative category, a dependent must also meet: –The joint return, and –The citizenship or residency tests In addition to fitting into either the qualifying child or the qualifying relative category, a dependent must also meet: –The joint return, and –The citizenship or residency tests

39. Individual Income Taxes C3-39 Joint Return Test Dependent cannot file a joint return with spouse unless: –Filing solely for refund of tax withheld –No tax liability exists for either spouse –Neither spouse required to file return Dependent cannot file a joint return with spouse unless: –Filing solely for refund of tax withheld –No tax liability exists for either spouse –Neither spouse required to file return

40. Individual Income Taxes C3-40 Citizenship or Residency Test Dependent must be a U.S. citizen or a resident of U.S., Canada, or Mexico for some part of the calendar year in which the taxpayer’s tax year begins –An exception provides that an adopted child need not be a citizen or resident of the U.S. (or a contiguous country) as long as his or her principal abode is with a U.S. citizen Dependent must be a U.S. citizen or a resident of U.S., Canada, or Mexico for some part of the calendar year in which the taxpayer’s tax year begins –An exception provides that an adopted child need not be a citizen or resident of the U.S. (or a contiguous country) as long as his or her principal abode is with a U.S. citizen

41. Individual Income Taxes C3-41 Phase-out of Exemptions (slide 1 of 2) Applies when taxpayer’s AGI in 2008 exceeds: $239,950 for married, filing jointly, or surviving spouse $199,950 for head of household $159,950 for single $119,975 for married, filing separately The phase-out of exemptions is being repealed in two stages and will not be complete until 2010 –The exemption phaseout remains at two-thirds for 2006 and 2007 and at one-third for 2008 and 2009 Applies when taxpayer’s AGI in 2008 exceeds: $239,950 for married, filing jointly, or surviving spouse $199,950 for head of household $159,950 for single $119,975 for married, filing separately The phase-out of exemptions is being repealed in two stages and will not be complete until 2010 –The exemption phaseout remains at two-thirds for 2006 and 2007 and at one-third for 2008 and 2009

42. Individual Income Taxes C3-42 Phase-out of Exemptions (slide 2 of 2) Exemptions deduction is reduced by 2% for every $2,500 ($1,250 for MFS), or part thereof, that AGI exceeds threshold amounts –The amount of the phased-out exemptions is then multiplied by 1/3 (the reduction-of- phaseout fraction) for tax years 2008 and 2009 Exemptions deduction is reduced by 2% for every $2,500 ($1,250 for MFS), or part thereof, that AGI exceeds threshold amounts –The amount of the phased-out exemptions is then multiplied by 1/3 (the reduction-of- phaseout fraction) for tax years 2008 and 2009

43. Individual Income Taxes C3-43 Child Tax Credit $1,000 tax credit is allowed for each dependent child under the age of 17 –Qualifying child includes stepchildren and eligible foster children $1,000 tax credit is allowed for each dependent child under the age of 17 –Qualifying child includes stepchildren and eligible foster children

44. Individual Income Taxes C3-44 Taxes Rates Tax liability is computed using either the Tax Table method or the Tax Rate Schedule method –Most taxpayers must use the Tax Tables –Certain taxpayers may not use the Tax Table method including: An individual who files a short period return Individuals whose taxable income exceeds the maximum (ceiling) amount in the Tax Table –The 2007 Tax Table applies to taxable income below $100,000 An estate or trust For 2008 the tax rates are 10%, 15%, 25%, 28%, 33%, and 35% Tax liability is computed using either the Tax Table method or the Tax Rate Schedule method –Most taxpayers must use the Tax Tables –Certain taxpayers may not use the Tax Table method including: An individual who files a short period return Individuals whose taxable income exceeds the maximum (ceiling) amount in the Tax Table –The 2007 Tax Table applies to taxable income below $100,000 An estate or trust For 2008 the tax rates are 10%, 15%, 25%, 28%, 33%, and 35%

45. Individual Income Taxes C3-45 Kiddie Tax (slide 1 of 4) Net unearned income (NUI) of child is taxed at parents’ rate –Child must be under age 19 at end of year –NUI generally equals unearned income less $1,800 (2008 tax year) Net unearned income (NUI) of child is taxed at parents’ rate –Child must be under age 19 at end of year –NUI generally equals unearned income less $1,800 (2008 tax year)

46. Individual Income Taxes C3-46 Kiddie Tax (slide 2 of 4) Unearned income includes: –Taxable interest –Dividends –Capital gains –Rents –Royalties –Pension and annuity income, and –Unearned income from trusts Unearned income includes: –Taxable interest –Dividends –Capital gains –Rents –Royalties –Pension and annuity income, and –Unearned income from trusts

47. Individual Income Taxes C3-47 Kiddie Tax (slide 3 of 4) Computing NUI for Kiddie Tax: Unearned income Less: $900 Less: The greater of: i) $900, or ii) Allowable itemized deductions connected with production of unearned income Equals: net unearned income Computing NUI for Kiddie Tax: Unearned income Less: $900 Less: The greater of: i) $900, or ii) Allowable itemized deductions connected with production of unearned income Equals: net unearned income

48. Individual Income Taxes C3-48 Kiddie Tax (slide 4 of 4) Net unearned income taxed at parents’ rate –Remainder of taxable income taxed at child’s rate Two options for computing the tax –A separate return may be filed for the child The tax on net unearned income (referred to as the allocable parental tax) is computed as though the income had been included on the parents’ return – Form 8615 is used to compute the tax –The parents may elect to report child’s income on their own return Certain requirements must be met Net unearned income taxed at parents’ rate –Remainder of taxable income taxed at child’s rate Two options for computing the tax –A separate return may be filed for the child The tax on net unearned income (referred to as the allocable parental tax) is computed as though the income had been included on the parents’ return – Form 8615 is used to compute the tax –The parents may elect to report child’s income on their own return Certain requirements must be met

49. Individual Income Taxes C3-49 Filing Requirements (slide 1 of 2) General Rule: Tax return must be filed if gross income is ≥ the sum of the standard deduction and exemption amount ASD for blind does not apply for this determination –Special rules apply for dependents and self- employed taxpayers General Rule: Tax return must be filed if gross income is ≥ the sum of the standard deduction and exemption amount ASD for blind does not apply for this determination –Special rules apply for dependents and self- employed taxpayers

50. Individual Income Taxes C3-50 Filing Requirements (slide 2 of 2) Tax return of an individual is due on or before the 15th day of the 4th month after taxpayer’s year end –Most individuals are calendar year taxpayers, thus, due date is April 15 May obtain a 6 month extension of time to file –Excuses a taxpayer from penalty for failure to file, not from penalty for failure to pay If more tax is owed, extension request (Form 4868) should be accompanied by check for balance of tax due Tax return of an individual is due on or before the 15th day of the 4th month after taxpayer’s year end –Most individuals are calendar year taxpayers, thus, due date is April 15 May obtain a 6 month extension of time to file –Excuses a taxpayer from penalty for failure to file, not from penalty for failure to pay If more tax is owed, extension request (Form 4868) should be accompanied by check for balance of tax due

51. Individual Income Taxes C3-51 Filing Status There are 5 filing statuses –Single –Married, filing jointly –Surviving spouse (qualifying widow or widower) –Head of household –Married, filing separately Filing status affects tax rate brackets, standard deduction, and other amounts There are 5 filing statuses –Single –Married, filing jointly –Surviving spouse (qualifying widow or widower) –Head of household –Married, filing separately Filing status affects tax rate brackets, standard deduction, and other amounts

52. Individual Income Taxes C3-52 Single Filing Status Includes a taxpayer who is unmarried or separated from spouse by a divorce decree or separate maintenance agreement and does not qualify for another filing status –Marital status is determined as of the last day of the tax year When a spouse dies during the year, marital status is determined as of the date of death Includes a taxpayer who is unmarried or separated from spouse by a divorce decree or separate maintenance agreement and does not qualify for another filing status –Marital status is determined as of the last day of the tax year When a spouse dies during the year, marital status is determined as of the date of death

53. Individual Income Taxes C3-53 Married Filing Jointly (MFJ) Filing Status Married as of last day of taxable year, or Spouse dies during taxable year Married as of last day of taxable year, or Spouse dies during taxable year

54. Individual Income Taxes C3-54 Surviving Spouse Filing Status Same tax rate brackets as married, filing jointly File as surviving spouse for 2 years after death of spouse if taxpayer maintains a home in which a dependent child lives Same tax rate brackets as married, filing jointly File as surviving spouse for 2 years after death of spouse if taxpayer maintains a home in which a dependent child lives

55. Individual Income Taxes C3-55 Married Filing Separately Filing Status Married but not filing a return with spouse and not abandoned spouse

56. Individual Income Taxes C3-56 Head of Household (HH) Filing Status 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 for more than half of tax year –A dependent must satisfy either the qualifying child or the qualifying relative category A qualifying relative must also meet the relationship test 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 for more than half of tax year –A dependent must satisfy either the qualifying child or the qualifying relative category A qualifying relative must also meet the relationship test

57. Individual Income Taxes C3-57 Exception to the HH Requirements HH may be claimed if taxpayer maintains a separate home for his or her parents –At least one parent must qualify as a dependent HH may be claimed if taxpayer maintains a separate home for his or her parents –At least one parent must qualify as a dependent

58. Individual Income Taxes C3-58 Abandoned Spouse Allows married taxpayer to file as Head of Household if taxpayer: –Does not file a joint return –Paid > half the cost of maintaining a home –Spouse did not live in home during last 6 months of tax year –Home was principal residence of taxpayer’s child for > half of year –Can claim child as a dependent Allows married taxpayer to file as Head of Household if taxpayer: –Does not file a joint return –Paid > half the cost of maintaining a home –Spouse did not live in home during last 6 months of tax year –Home was principal residence of taxpayer’s child for > half of year –Can claim child as a dependent

59. Individual Income Taxes C3-59 Gains and Losses from Property Transactions (slide 1 of 3) In order for gains (losses) to be recognized (included in gross income), they must be realized: –Realized gain (loss) = amount realized - adjusted basis Amount realized = selling price - costs of disposition Adjusted basis = cost + capital additions - cost recovery In order for gains (losses) to be recognized (included in gross income), they must be realized: –Realized gain (loss) = amount realized - adjusted basis Amount realized = selling price - costs of disposition Adjusted basis = cost + capital additions - cost recovery

60. Individual Income Taxes C3-60 Gains and Losses from Property Transactions (slide 2 of 3) All realized gains are recognized unless a specific tax provision provides otherwise (e.g., nontaxable exchanges) Realized losses may or may not be recognized depending on the circumstances –Generally, losses on the sale or disposition of personal use property are not recognized All realized gains are recognized unless a specific tax provision provides otherwise (e.g., nontaxable exchanges) Realized losses may or may not be recognized depending on the circumstances –Generally, losses on the sale or disposition of personal use property are not recognized

61. Individual Income Taxes C3-61 Gains and Losses from Property Transactions (slide 3 of 3) Once recognized gains or losses have been determined, they must be classified as ordinary or capital –Ordinary gains are fully taxable –Ordinary losses are fully deductible Capital gains and losses are subject to special tax treatment Once recognized gains or losses have been determined, they must be classified as ordinary or capital –Ordinary gains are fully taxable –Ordinary losses are fully deductible Capital gains and losses are subject to special tax treatment

62. Individual Income Taxes C3-62 Gains and Losses from Capital Asset Transactions (slide 1 of 2) Capital assets are defined as any property other than: –Inventory, –Accounts Receivable, and –Depreciable property or real property used in a business Most personal use assets owned by individuals are capital assets –Losses on these assets are not deductible Capital assets are defined as any property other than: –Inventory, –Accounts Receivable, and –Depreciable property or real property used in a business Most personal use assets owned by individuals are capital assets –Losses on these assets are not deductible

63. Individual Income Taxes C3-63 Gains and Losses from Capital Asset Transactions (slide 2 of 2) Gains and losses from capital asset transactions must be netted –Net gains and losses by holding period –If excess losses result, they are shifted to the category carrying the highest tax rate Gains and losses from capital asset transactions must be netted –Net gains and losses by holding period –If excess losses result, they are shifted to the category carrying the highest tax rate

64. Individual Income Taxes C3-64 Max Tax Rates for Net Capital Gains of Individuals Classification Maximum Rate Short-term gains (held ≤ one year) 35% Long-term gains (held > one year) Collectibles 28% Certain depreciable property used in a trade or business (unrecaptured § 1250 gain) 25% All other long-term capital gains 15%, 5%, or 0% Classification Maximum Rate Short-term gains (held ≤ one year) 35% Long-term gains (held > one year) Collectibles 28% Certain depreciable property used in a trade or business (unrecaptured § 1250 gain) 25% All other long-term capital gains 15%, 5%, or 0%

65. Individual Income Taxes C3-65 Treatment of Capital Losses Net capital losses of individuals are deductible FOR AGI up to $3,000 yearly –Excess capital losses are carried over to the next tax year –When carried over, capital losses retain their classification as short- or long-term Net capital losses of individuals are deductible FOR AGI up to $3,000 yearly –Excess capital losses are carried over to the next tax year –When carried over, capital losses retain their classification as short- or long-term

66. Individual Income Taxes C3-66 If you have any comments or suggestions concerning this PowerPoint Presentation for South-Western Federal Taxation, please contact: Dr. Donald R. Trippeer, CPA trippedr@oneonta.edu SUNY Oneonta If you have any comments or suggestions concerning this PowerPoint Presentation for South-Western Federal Taxation, please contact: Dr. Donald R. Trippeer, CPA trippedr@oneonta.edu SUNY Oneonta