C 237 TAXATION 1 CH 2 section " formula individual income tax"

items arent deductions for adjusted gross income

state and local income taxes.

items are not excluded from income

interest on corporate bonds.

All of the following items are not deductions for​ (not from) adjusted gross income

unreimbursed employee business expenses.

Gross income taxes form Sec. 61(a)

-Compensation for services, including fees, commissions, fringe benefits, and similar items -Gross income derived from business -Gains derived from dealings in property- CH 5 -Interest -Rents -Royalties -Dividends -Alimony and separate maintenance payments -Annuities -Income from life insurance and endowment contracts -Pensions -Income from the discharge of indebtedness -Distributive share of partnership gross income -Income in respect of a decedent -Income from an interest in an estate or trust This rule covers barter transactions which are direct exchanges of property and services. Each party to the transaction is taxed on the value of the property or services received in the exchange. NOTE: -gambling winnings and -illegal income are taxable simply because no specific provisions in the tax law exclude such amounts from taxation. -life insurance proceeds and certain other insurance proceeds are specifically excluded from gross income.

I:2-18 Under what circumstances, if any, can a married person file as a head of household?

A married​ person, if otherwise qualified can claim​ head-of-household status if he or she is married to a nonresident alien or if he or she qualifies as an abandoned spouse. To be an abandoned​ spouse, the person must have lived apart from his or spouse for the last six months of the year and maintain a household for a qualifying child in which they both live.

QI:2-18 (book/static) Question Help Under what​ circumstances, if​ any, can a married person file as a head of​ household?

A married​ person, if otherwise qualified can claim​ head-of-household status if he or she is married to a nonresident alien or if he or she qualifies as an abandoned spouse. To be an abandoned​ spouse, the person must have lived apart from his or spouse for the last six months of the year and maintain a household for a qualifying child in which they both live.

Personal and dependency exemption

A personal exemption generally is allowed for each taxpayer and his or her spouse and an additional dependency exemption is permitted for each dependent. Both personal and dependency exemptions are equal to $4,000 in 2015 and $3,950 in 2014. The amount of an exemption is adjusted annually for increases in the cost of living.

Adjusted gross income (AGI)

AGI is a measure of income that falls between gross income and taxable income. AGI is important because it is used in numerous other tax computations, especially to impose limitations. For example, AGI is used to establish floors for the medical deduction and casualty loss deduction and to establish a ceiling for the charitable contribution deduction.

Taxable income for an individual is defined as

AGI reduced by deductions from AGI and personal and dependency exemptions.

Deductions for Adjusted Gross Income

Allowable deductions include business and investment expenses generally, along with personal expenses that are specifically provided for in the IRC, such as charitable contributions. Most purely personal expenses are not deductible. Deductions fall into two categories for individual taxpayers: 1-deductions for adjusted gross income : expenses connected with a trade or business 2-deductions from adjusted gross income: personal expenses that Congress has chosen to allow particular case: alimony paid, which is not a business expense, is a deduction for adjusted gross income

PI:2-29 (similar to) Question Help The following information relates to two married​ couples: LOADING...​(Click the icon to view the​ information.) Requirement Compute the 20152015 tax due or refund due for each couple. Assume that the itemized deductions have been reduced by the applicable floors. Ignore credits.

Begin by computing taxable income for each couple. ​(Enter "0" for accounts with a zero​ balance.) Johnsons Jones Salary $46,000 $130,000 Interest income 600 9,900 Gross income $46,600 $139,900 Minus: IRA contribution (2,500) 0 Adjusted gross income $44,100 $139,900 Minus: Itemized deductions (18,000) (18,000) Exemptions (8,000) (8,000) Taxable income $18,100 $113,900 Now calculate the 20152015 tax due or refund due for each couple. ​(Do not round intermediary calculations. Only round the amount you input in the cell to the nearest dollar. Use a minus sign or parentheses for a net tax​ refund.) Johnsons Jones Gross tax $1,810 $20,063 Minus: Withholding (1,400) (17,500) Tax due (refund) $410 $2,563

Deductions for AGI

Deductions for Adjusted Gross Income Listed in Sec. 62: -Trade and business deductions -Reimbursed employee expenses and certain expenses of performing artists -Losses from the sale or exchange of property -Deductions attributable to rents and royalties -Certain deductions of life tenants and income beneficiaries of property -Contributions to retirement plans (Keoghs and IRAs) -Penalties forfeited because of premature -withdrawal of funds from time savings accounts *One-half of self-employment taxes paid *Health insurance costs incurred by a self employed person -Alimony -Moving expenses -Certain required repayments of supplemental unemployment compensation -Jury duty pay remitted to an individual's employer -Certain environmental expenditures (reforestation and clean fuel) -Interest on education loans -Contribution to medical savings account *Though not actually mentioned in Sec. 62, self-employment taxes and health insurance costs of self-employed persons are defined by Secs. 164(f) and 162(l), respectively, as trade or business deductions thereby indirectly enabling taxpayers to deduct these amounts for AGI.

QI:2-2 (book/static) Question Help Explain the distinction between income and gross income.

Explain the distinction between income and gross income. Income includes all income from whatever source derived. Gross income refers only to income from taxable sources.

I:2-1 The tax law refers to gross income, yet the term gross income is not found on Form 1040. Explain. Why is it important to understand the concept of gross income even though the term is not found on Form 1040?

Gross income is income from taxable sources. Form 1040 combines the results of computations made on several separate schedules. For​ example, income from a proprietorship is reported on Schedule C where gross income from the business is reduced by related expenses. Only the net income or loss computed on Schedule C is carried to Form 1040. This is procedurally convenient but means gross income is not shown on Form 1040.

I:2-8 Many homeowners itemize deductions while many renters claim the standard deduction. Explain.

Home mortgage interest and real property taxes are itemized deductions. As a result those expenses alone often exceed the standard deduction enabling a homeowner to itemize. Renters typically do not have these deductions and the standard deduction may be greater than itemized deductions.

incorrect, QI:2-8 (book/static) Question Help Many homeowners itemize deductions while many renters claim the standard deduction. Explain.

Home mortgage interest and real property taxes are itemized deductions. As a result those expenses alone often exceed the standard deduction enabling a homeowner to itemize. Renters typically do not have these deductions and the standard deduction may be greater than itemized deductions.

I:2-2 Explain the distinction between income and gross income.

Income includes all income from whatever source derived. Gross income refers only to income from taxable sources.

I:2-16 What conditions must be met by a married couple before they can file a joint return?

In​ general, a couple must be married on the last day of the tax year in order to file a joint return. In​ addition, the spouses must have the same tax year. If one spouse is a nonresident alien then that spouse must agree to include his or her income on the return.

Exclusions

Not all income is taxable. An exclusion is any item of income that the tax law says is not taxable List of mayor exclusions: -Gifts and inheritances -Life insurance proceeds -Welfare and certain other transfer payments -Certain scholarships and fellowships -Certain payments for injury and sickness - Personal physical injury settlements -Worker's compensation -Medical expense reimbursements -Certain employee fringe benefits -Health plan premiums -Group term life insurance premiums (limited) -Meals and lodging -Employee discounts -Dependent care -Certain foreign-earned income -Interest on state and local government bonds -Certain interest of Series EE bonds -Certain improvements by lessee to lessor's property -Child support payments -Property settlements pursuant to a divorce -Gain from the sale of a personal residence (limited) -Distributions from Roth retirement plans

Tax credits list

Refundable -Withholding from wages and back-up withholding - Estimated tax payments - Overpayment of prior year's tax - Excess Social Security taxes paid - Earned income credit - Regulated investment company credit - Payments made with extension request - Child credit (in some cases) -------------------------------------------------------- Nonrefundable - Adoption expense credit - Credit for the elderly and disabled - Foreign tax credit - Child and dependent care credit - Business energy credit - Research and experimentation credit - Building rehabilitation credit - American opportunity and lifetime learning credits

PI:2-30 (similar to) Question Help The following information for 20152015 relates to FrankFrank​, a single​ taxpayer, age​ 18: Salary $2,300 Interest income 700 Itemized deductions 550 LOADING...​(Click the icon to view the standard deduction and personal and dependency exemption​ amounts.) Requirements a. Compute FrankFrank​'s taxable income assuming he is​ self-supporting. b. Compute FrankFrank​'s taxable income assuming he is a dependent of his parents.

Requirement a. Compute FrankFrank​'s taxable income assuming he is​ self-supporting. ​(For amounts of zero or​ less, enter​ "0" in the appropriate​ cell.) Salary $2,300 Interest income 700 Adjusted gross income $3,000 Minus: Standard deduction (6,300) Exemption (4,000) Taxable income $0 Requirement b. Compute FrankFrank​'s taxable income assuming he is a dependent of his parents. ​(For amounts of zero or​ less, enter​ "0" in the appropriate​ cell.) Salary $2,300 Interest income 700 Adjusted gross income $3,000 Minus: Standard deduction (2,650) Exemption 0 Taxable income $350

PI:2-41 (book/static) Question Help Juan and​ Maria, who have two young​ children, are in the process of obtaining a divorce. Juan expects to have​ $200,000 of income each year while Maria expects to have​ $60,000 of income each year. Assume the children will live with Maria after the divorce and that Juan will pay child support. Requirements a. What advice can you provide them regarding the dependency exemptions for the​ children? b. What advice can you provide them regarding the child​ credit? c. What advice can you provide regarding tax rate​ schedules?

Requirement a. What advice can you provide them regarding the dependency exemptions for the​ children? The information provided suggests that Juan will be in a higher tax bracket than Maria. As a​ result, personal exemptions are worth more to Juan than to Maria. b.The child credit is phased out for single taxpayers with AGI above​ $75,000. Juan will not be entitled to the child credit because of his high income. The credit is only available to taxpayers who claim dependency exemptions for​ children, so it would be beneficial to allow Maria to take the child credit and dependency exemption. The tax savings received by Maria should be considered when the amount of child support that Juan must pay is being determined. c.As the custodial​ parent, Maria is entitled to file as a​ head-of-household. This is true even if she does not claim the dependency exemption or child credit. Juan will file as a single taxpayer.

PI:2-58 (similar to) Question Help Assume KristenKristen is a wealthy widow whose husband died last year. Her dependent daughter lives with her for the entire year. KristenKristen has interest income totaling $ 330 comma 000$330,000 and she pays property taxes and home mortgage interest totaling $ 17 comma 000$17,000. Requirements a. What filing status applies to KristenKristen​? b. Compute her taxable income and gross tax. c. Assume that KristenKristen does not have a daughter. What is Kristen'sKristen's filing​ status?

Requirement a. What filing status applies to KristenKristen​? KristenKristen meets the requirements of a surviving spouse.​ Thus, she will use the married filing joint/surviving spouse rate schedule. Requirement b. Compute her taxable income and gross tax. ​(Round phaseout multiples up to the nearest whole number. Do not round other intermediary calculations. Only round the amount you input in the cell to the nearest whole​ dollar.) Begin by computing KristenKristen​'s taxable income. Interest income $330,000 Adjusted gross income $330,000 Minus: Itemized deductions (16,397) Exemption (6,560) Taxable income $307,043 ​Now, compute KristenKristen​'s gross tax. ​(Do not round intermediary calculations. Only round the amount you input in the cell to the nearest whole​ dollar.) Income tax on taxable income 76,853 Additional tax on investment income 3,040 Gross tax $79,893 Requirement c. Assume that KristenKristen does not have a daughter. What is KristenKristen​'s filing​ status? KristenKristen must file as a single taxpayer because she does not have a dependent child.

PI:2-56 (similar to) Question Help MeganMegan is a single taxpayer. Her salary is $ 52 comma 000$52,000. MeganMegan realized a​ short-term capital loss of $ 2 comma 500$2,500. Her itemized deductions total $ 3 comma 500$3,500. ​(The tax year is 20152015​.) LOADING...​(Click the icon to view the standard deduction and personal and dependency exemption​ amounts.) LOADING...​(Click the icon to view the tax rate​ schedule.) Requirements a. Compute Megan'sMegan's adjusted gross income. b. Compute her taxable income. c. Compute her tax liability.

Requirements a. and b. Compute Megan'sMegan's adjusted gross income and her taxable income. Start by computing Megan'sMegan's adjusted gross income and then her taxable income. ​(Use parentheses or a minus sign to enter a​ loss.) Salary $52,000 Capital loss allowable (2,500) Adjusted gross income $49,500 Minus: Standard deduction (6,300) Exemption (4,000) Taxable income $39,200 Requirement c. Compute her tax liability. ​(Do not round any intermediary calculations. Round your final tax liability to the nearest whole​ dollar.) Megan's tax liability is $ 5,594 .

incorrect, PI:2-49 (similar to) Question Help JohnJohn and EmilyEmily are a married couple with two dependent sons. Their salaries total $ 105 comma 000$105,000. They have a capital loss of $ 5 comma 500$5,500 and​ tax-exempt interest income of $ 1 comma 300$1,300. They paid home mortgage interest of $ 9 comma 000$9,000​, state income taxes of $ 3 comma 000$3,000​, and medical expenses of $ 4 comma 000$4,000​, and they made charitable contributions of $ 8 comma 000$8,000. ​(The tax year is 20152015​.)

Requirements​ a, b,​ c, and d. Begin by computing adjusted gross income. Then compute itemized deductions and determine the amount of their personal exemptions.​ Finally, compute taxable income. ​(Assume JohnJohn and EmilyEmily are both under age 65. Enter a​ "0" for amounts with a zero balance. Use parentheses or a minus sign to enter a loss. Leave any unused cells​ blank.) Salaries 105,000 Allowable capital loss (3,000) Adjusted gross income 102,000 Itemized deductions Medical expenses $0 Home mortgage interest (9,000) State income taxes (3,000) Charitable contributions (8,000) Total itemized deductions (20,000) Personal exemptions (16,000) Taxable income $66,000

Credits and prepayments

Tax credits, which include prepayments, are amounts that can be subtracted from the gross tax to arrive at the net tax due or refund due. Credits may be classified : 1-Refundable tax credits are allowed to reduce a taxpayer's tax liability to zero and, if some credit still remains, are refundable (paid) by the government to the taxpayer. 1.1-Prepayments of tax, which are amounts paid to the government during the year through means such as withholding from wages, and selected other items are classified as refundable tax credits. 2-Nonrefundable tax credits are allowances that have been created by Congress for various social, economic, and political reasons such as the child and dependent care credits. Nonrefundable tax credits can be subtracted from the tax and may reduce the tax liability to zero. However, if the nonrefundable credits exceed the tax liability, none of the excess will be paid to the taxpayer.

Tax rates

Tax rates are the percentage rates, set by Congress, at which income is taxed. There are seven tax rates ranging from 10% to 39.6%. 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% Taxpayers compute their tax by applying the percentage rates found in the tax rate schedules to taxable income. However, most taxpayers simply look in a tax table to find their gross tax.

QI:2-20 (book/static) Question Help Income earned by C corporations is taxed​ twice, once when the income is earned and again when it is distributed. If​ so, how is it possible that operating a business as a C corporation can reduce taxes

Up to​ $50,000 of income earned by a C corporation is taxed at​ 15% whereas a​ proprietorship's income is taxed at the​ owner's marginal tax​ rate, which will be higher than​ 15%.

I:2-45 Filing Status. For the following independent situations, determine the optimum filing status for the years in question. Wayne and Celia had been married for 24 years before Wayne died in an accident in 2013. Celia and her son, Wally, age 21 in 2013, continued to live at home in 2013, 2014, 2015, and 2016. Wally worked part-time (earning $5,000 in each of the four years) and attended the university on a part-time basis. Celia provided more than 50% of Wally's support for all four years. What is Celia's filing status for 2013, 2014, 2015, and 2016? Juanita is a single parent who maintained a household for her unmarried son Josh, age 19. Josh worked full-time and earned $16,000. Juanita provided approximately 40% of Josh's support but provided all the expenses of maintaining the household. What is Juanita's filing status? Gomer and Gertrude are married and have one dependent son. In April, Gomer left Gertrude a note informing her that he needed his freedom and he was leaving her. As of December, Gertrude had not seen nor heard a word from Gomer since April. Gertrude fully supported her son and completely maintained the household. What is Gertrude's filing status assuming she was still legally married?

Wayne and Celia had been married for 24 years before Wayne died in an accident in 20132013. Celia and her​ son, Wally, age 21 in 20132013​, continued to live at home in 20132013​, 20142014​, 20152015​, and 20162016. Wally worked​ part-time (earning​ $5,000 in each of the four​ years) and attended the university on a​ part-time basis. Celia provided more than​ 50% of​ Wally's support for all four years. What is​ Celia's filing status for 20132013​, 20142014​, 20152015​, and 20162016​? Year Optimum Filing Status 2013 Married filing jointly 2014 Single 2015 Single 2016 Single b. Juanita is a single parent who maintained a household for her unmarried son​ Josh, age 19. Josh worked​ full-time and earned​ $16,000. Juanita provided approximately​ 40% of​ Josh's support but provided all the expenses of maintaining the household. What is​ Juanita's filing​ status? Optimum Filing Status Single c. Gomer and Gertrude are married and have one dependent son. In​ April, Gomer left Gertrude a note informing her that he needed his freedom and he was leaving her. As of​ December, Gertrude had not seen nor heard a word from Gomer since April. Gertrude fully supported her son and completely maintained the household. What is​ Gertrude's filing status assuming she was still legally​ married? Optimum Filing Status Head of household

I:2-3 a-Explain the distinction between a deduction and a credit. b-Which is worth more, a $10 deduction or a $10 credit? c-Explain the difference between refundable and nonrefundable credits.

a. Explain the distinction between a deduction and a credit. A deduction is an amount that is subtracted from income ​, while a credit is an amount that is subtracted from the tax itself. b. Which is worth​ more, a​ $10 deduction or a​ $10 credit? In​ general, a​ $10 credit is worth more than a​ $10 deduction because the credit results in a direct dollar for dollar tax savings. The savings from a deduction depends on the tax bracket that applies to the taxpayer. c. Explain the difference between refundable and nonrefundable credits. If a refundable credit exceeds the​ taxpayer's tax liability the taxpayer will receive a refund equal to the excess. If a nonrefundable credit exceeds the​ taxpayer's tax liability the taxpayer will not receive a refund, but may be entitled to a carryover or carryback.

I:2-41 Dependency Exemptions, Child Credits, Tax Rate Schedules, and Divorce. Juan and Maria, who have two young children, are in the process of obtaining a divorce. Juan expects to have $200,000 of income each year while Maria expects to have $60,000 of income each year. Assume the children will live with Maria after the divorce and that Juan will pay child support. What advice can you provide them regarding the dependency exemptions for the children? What advice can you provide them regarding the child credit? What advice can you provide regarding tax rate schedules?

a. What advice can you provide them regarding the dependency exemptions for the​ children? The information provided suggests that Juan will be in a higher tax bracket than Maria. As a​ result, personal exemptions are worth more to Juan than to Maria. b. The child credit is phased out for single taxpayers with AGI above​ $75,000. Juan will not be entitled to the child credit because of his high income. The credit is only available to taxpayers who claim dependency exemptions for​ children, so it would be beneficial to allow Maria to take the child credit and dependency exemption. The tax savings received by Maria should be considered when the amount of child support that Juan must pay is being determined. c.As the custodial​ parent, Maria is entitled to file as a​ head-of-household. This is true even if she does not claim the dependency exemption or child credit. Juan will file as a single taxpayer.

Deductions from AGI

any allowable deduction not listed in Sec. 62 is a deduction from AGI. The two categories of deductions from adjusted gross income are (1) itemized deductions or the standard deduction (2) personal and dependency exemptions Partial List of Itemized Deductions from AGI: -Medical expenses (over 10% of adjusted gross income for most taxpayers) -Certain taxes: *State, local, and foreign income and real property taxes *State and local personal property taxes -Residential interest and investment interest (limited) -Charitable contributions (limited) -Casualty and theft losses (over 10% of adjusted gross income) -Miscellaneous deductions (over 2% of adjusted gross income) -Other misc exoenses: -Employee expenses (e.g., professional and union dues, professional publications, travel, transportation, education, job hunting, office-in-home, special clothing, and 50% of entertainment expenses) -Expenses for producing investment income (e.g., accounting and legal fees, safe deposit rental, fees paid to an IRA custodian) -Tax advice and tax return preparation and related costs -Other miscellaneous deductions: *Federal estate tax attributable to income in respect of a decedent *Gambling losses to the extent of winnings *Amortization of bond premium *Amounts restored under claim of right

Which of the following credits is considered a refundable​ credit?

earned income credit

Income

income includes both taxable and nontaxable income - includes income from any source. -it does not include a "return of capital." Thus, in the case of the sale of property, only the gain, not the entire sales proceeds, is viewed as income. This view extends to the sale of inventory, where gross profit is viewed as income, as opposed to the sale price.

All of the following items are generally excluded from income

life insurance proceeds paid by reason of death. interest on state and local government bonds. child support payments.

All of the following items are deductions for​ (not from) adjusted gross income

qualifying contributions to individual retirement accounts. moving expenses. ​one-half of​ self-employment taxes paid.

All of the following items are included in gross income

rent income. alimony received. interest earned on a bank account.

A single taxpayer provided the following information for​ 2015: Salary ​$80,000 Interest on local government bonds ​(qualifies as a tax​ exclusion) ​4,000 Allowable itemized deductions ​13,000 What is taxable​ income?

​$63,000

Inclusions

-Compensation for services -gross income derived from business -gains derived from dealings in property -interest -rents -royalties -dividends -alimony and separate maintenance payments -annuities -Income from life insurance and endowment contracts -pension -income from discharge of indebtness -distributive share of partnership gross income -income in respect of a decedent -income from and interest in a estate or trust -barter -property insurance settlements -gambling winnings -illegal income -jury duty -unemployment compensation

Define each component of the individual income tax formula.

1- income 2- exclusions 3-Gross income 4-Deductions for adjusted Gross income 5- Adjusted Gross income 6- Deduction from adjusted gross income 7- Itemized deductions and the standard 8- Personal and dependency exemptions 9-Taxable income 10-Tax rates and gross tax 11-Credits and prepayments

Gross income

Gross income is income reduced by exclusions. Sec. 61(a) states that unless otherwise provided, "gross income means all income from whatever source derived, including (but not limited to)" the listed items of income. Thus, even though an item is omitted from the list does not necessarily mean that the item is excluded. For example, illegal income, although omitted from the list, is taxable

I:2-6 Under what circumstances must a taxpayer use a rate schedule instead of a tax table?

If taxable income exceeds the maximum in the tax table or if the taxpayer is using a special tax computation method.

income tax formula

Income from whatever source derived Minus: Exclusions --------------------------------------------- =Gross income Minus: Deductions for adjusted gross income ------------------------------------------------------- =Adjusted gross income Minus: Deductions from adjusted gross income: -Greater of itemized deductions or the standard deduction -Personal and dependency exemptions -------------------------------------------------------- =Taxable income Times: Tax rate or rates (from tax table or schedule) ----------------------------------------------------- =Gross tax Minus: Credits and prepayments -------------------------------------------------- Net tax payable or refund due

Taxable income

Taxable income is adjusted gross income reduced by deductions from AGI. It is the amount of income that is taxed.

I:2-17 Explain what is meant by the phrase maintain a household.

The phrase​ "maintain a​ household" means to pay over​ one-half of the costs of the household. These costs include property​ taxes, mortgage​ interest, rent, utility​ charges, upkeep and​ repairs, property insurance and food consumed on the premises.

QI:2-17 (book/static) Question Help Explain what is meant by the phrase maintain a household.

The phrase​ "maintain a​ household" means to pay over​ one-half of the costs of the household. These costs include property​ taxes, mortgage​ interest, rent, utility​ charges, upkeep and​ repairs, property insurance and food consumed on the premises.

All of the following items are deductions for adjusted gross income

alimony paid. trade or business expenses. rent and royalty expenses.

items not included in gross income

child support payments received.