Tax prepayments: - Employees prepay taxes on wages through payroll-tax withholding. - The tax prepayments are subtracted from the income tax liability to determine whether the taxpayer has underpaid and owes additional tax with the return (tax due) or is entitled to a refund of overpaid taxes additional tax with the return (refund due).
Tax credit: A tax credit is a direct reduction in the income tax liability. Tax credit are treated like tax prepayments, a credit is not deducted to arrive at taxable income but is instead subtracted directly from the income tax liability. Individuals allowed tax credit for certain circumstances and activities, and - Buildings and land tax (article 12) - Withholding (article 31- item 5)
Income defined (includes income from all resources) Minus: excluded income (nontaxable income) Minus: excluded income (nontaxable income) Equals: gross income Minus: deduction Minus: deduction Equals: net income Minus :exemptions Equals: taxable income * tax rate (from tax law) * tax rate (from tax law) Equals: income tax Minus: - tax prepayments Minus: - tax prepayments - tax credit - tax credit Equals: tax (refund) due with return
Case (11) : The following are information for a taxpayer taken from his self assessment for the ended year 2008: Revenues: - Salary from job during the year =10,000$ - Sales for his own shop= 48,000$ - Net profit from shares =22,000$ (note: it is not the nature of his trade) - Revenue from farming project= 12,000$ - had a share of the patrimony from relative person =11,000$ Expenses: - Cost of goods sold for his own shop =18,000$ - Purchased a REFRIGERATOR for the shop amounted= 3000$ and the depreciation rate 10% annually. - Rent for the shop= 1200$ - The depreciation for the car =2000$ only 50% accepted by tax officer. - Utilities expenses for business (water, electricity, phone)= 500$ - Rent of his house =5000$ - Medical care expenses for his son (documented) =3000$ - Cost of school premium for his sons. (American school)= 1400$ - Living cost for his family =5000$
Personal information: - Married and has two sons. - The owner for his job deduct 100$ monthly paid to tax office. Required: 1- total income 2- non taxable income 3- taxable income 4- deductions 5- exemptions 6- net taxable income 7- Tax prepayment 8- accrued tax 9- tax value to be paid or refund 10- Not accepted deductions or exemptions (if any) 11-Prepare the adjusting journal entry for the income tax expense at December 31,2008. 12- Assume 20 /01/2009 taxpayer paid income tax. Prepare the payment journal entry.
Answer: income: Salary from job during the year= 10,000$ Sales for his own shop= 48,000$ Net profit from shares= 22,000$ Revenue from farming project= 12,000$ A share of the patrimony= 11,000$ 1- Total income = 103,000 $ non taxable income: Net profit from shares =22,000$ Revenue from farming project =12,000$ A share of the patrimony =11,000$ 2- non taxable income= 45,000 taxable income: Salary from job during the year =10,000$ Sales for his own shop =48,000$ 3- taxable income= 58,000$ Deductions: * Cost of goods sold for his own shop =18000$ * REFRIGERATOR depreciation = 300$ * Rent for the shop= 1200$ * The depreciation for the car 50%*2000= 1000$ * Utilities =500$ 4- deductions = 21,000$
Exemptions: Resident =3000$ Rent of house= 2000$ Medical care =3000$ Wife 500$ Sons 1000$ 5- exemptions = 9500$ 6- net taxable income = (58000-21,000-9500)= 27500$ 7- Tax prepayment = 100$* 12= 1200$ 8- accrued tax =3360 10000* 8%= 800 6000*12% =720 11500*16% = 1840 9- tax value to be paid or refund = 3360-1200 = 2160$ to be paid 10- Not accepted deductions or exemptions = 10400$ 3000$+ 1000$+ 1400$+ 5000$
11- 31/12/2008 Income tax expense …………… 2160 Income tax payable …………………..2160 Income tax payable …………………..2160 (record income tax for 2008) (record income tax for 2008) 12- 20/1/2009 Income Tax payable ………………..2160 Cash …………………………………… 2160 (record paid off tax for 2008) Cash …………………………………… 2160 (record paid off tax for 2008)