12. 2010 Cengage Learning Gross income $40,000 Adjusted gross income 37,500 Greater of the standard deduction or itemized deductions ___________ Taxable income ___________ AGI = $40,000 – 2,500
13. 2010 Cengage Learning Gross income $40,000 Adjusted gross income 37,500 Greater of the standard deduction or itemized deductions 5,700 Taxable income ___________ The standard deduction of $5,700 exceeds itemized deductions of $3,000
14. 2010 Cengage Learning Gross income $40,000 Adjusted gross income 37,500 Greater of the standard deduction or itemized deductions 5,700 Taxable income $28,150 Taxable income = $37,500 – 5,700 – 3,650 exemption
34. 2010 Cengage Learning The special rule for standard deduction for dependents is “deduction = greater of $950 or earned income + $300 but only up to basic standard deduction” Example 1: Jaime is 23 and a full time student and her parents claim her as a dependent; she earned $2,000 in 2009. $2,000 earned income ( 2,000 ) standard deduction $0 taxable income Example 2: Tia is 18 and has dividend income of $1,500 (not earned) $1,500 dividend income ( 950 ) standard deduction $ 550 taxable income
38. 2010 Cengage Learning Facts: Noah purchased Sony AAA bonds in 2001 for $47,600. In 2009, he sold the bonds for $51,500, paying commission of $515. What is his: Amount realized ___________ Adjusted basis ___________ Realized gain/loss ___________ Recognized gain/loss ___________ Type of gain/loss ___________
39. 2010 Cengage Learning Amount realized * $50,985 Adjusted basis 47,600 Realized gain/loss 3,385 Recognized gain/loss 3,385 Type of gain/loss Long term capital gain *Amount realized = $51,500 – 515
Selecting the Proper Tax Form . Tax forms in order of complexity are Form 1040EZ, Form 1040A, and Form 1040. a. Form 1040EZ is a form for taxpayers with uncomplicated tax situations. It may be used by a taxpayer who: (1) is not age 65 or over or blind (or if married filing jointly, both spouses are not age 65 or over or blind); (2) has taxable income of less than $50,000; has only wages, salaries, tips, taxable scholarships and fellowships and interest income of $400 or less; ) does not itemize deductions, claim any adjustments to income, claim any dependency exemptions, or claim any tax credits other than the earned income credit; and (5) have a filing status of single or married filing jointly.
Deductions for Adjusted Gross Income . Included are trade or business expenses, reimbursed employee business expenses, one-half of self-employment tax paid, alimony paid, traditional IRA and Keogh contributions, forfeited interest penalty, moving expenses, capital losses, qualified interest on education loans, and other items. Deductions for AGI are deductible whether the taxpayer itemizes or not , while itemized deductions will benefit the taxpayer only if total itemized deductions exceed the standard deduction.
The taxpayer's standard deduction is the sum of the basic standard deduction amount (adjusted for inflation) and the additional standard deduction for the aged and blind. For married individuals filing jointly and surviving spouses, the basic standard deduction is twice the basic standard deduction for single returns. For married individuals filing jointly and surviving spouses, the basic standard deduction is twice the basic standard deduction for single returns.. Thus, the basic standard deduction for married individuals filing jointly and surviving spouses is $11,400 (twice the basic standard deduction of $5,700 for unmarried individuals) for 2009; For heads of household, the basic standard deduction for 2009 is $8,350 For unmarried individuals, the basic standard deduction for 2009 is $5,700 For married individuals filing separate returns, the basic standard deduction for 2009 is $5,700 the standard deduction also includes a real property tax deduction equal to the lesser of the amount of state and local real property taxes the taxpayer would be allowed to deduct if the taxpayer itemized or $500 ($1,000 in the case of a joint return)
Go over penalties Section 6651. Exception for delinquency in filing due to reasonable cause and not due to willful neglect the delinquency was due to the death or serious illness of the taxpayer or a member of the taxpayer's immediate family (for a corporation, estate, trust, etc., the delinquency was due to the death of the individual responsible for filing or a death in the immediate family of such individual); (2) the taxpayer is unable to obtain records; (3) reliance on erroneous advice from the IRS; (4) reliance on a tax adviser; and (5) failure to file resulting from a fire, casualty, natural disaster, or other disturbance.
To prove reasonable cause, the taxpayer must show that he exercised ordinary business care and prudence but nevertheless could not file the return when it was due. Crocker v. Commissioner , Dec. 45,675, 92 TC 899. Illness or incapacity of a taxpayer or illness of a member of his immediate family may be reasonable cause for late filing. Williams v. Commissioner , Dec. 18,247, 16 TC 893. However, a taxpayer's selective inability to meet his tax obligations, while performing his regular business duties, does not excuse failure to file on time. 5 Incarceration is not reasonable cause for failure to file. 10 A request for an extension is also not reasonable cause, since a taxpayer cannot presume that the request will be granted. Crocker v. Commissioner
For taxpayers who enter into installment agreements with the IRS, the penalty for failure to timely pay taxes is reduced to one-quarter of 1% of the tax not paid (Code Sec. 6651(h); Reg. §301.6651-1(a)(4)). If a taxpayer files a late return that is subject to both the failure-to-file and failure-to-pay penalties, the former may be reduced by the latter. However, if no return is filed or if a late-filed return understates the amount required to be shown on the return, the failure-to-pay penalty attributable to additional tax demanded by the IRS may not be used to offset any portion of the failure-to-file penalty. If the penalty for failure to file beyond 60 days applies, the penalty may not be reduced by a failure-to-pay penalty that is also imposed below the lesser of $100 or 100% of the tax due (Code Sec. 6651(a), (c) and (d)).11
Reliance on an attorney or accountant to file a return (that clearly is required to be filed) is not reasonable cause that excuses the taxpayer from the failure to file penalty if the return is not timely filed
SURVING SPOUSE For two years after spouse dies • Have been able to file a joint return with the deceased. • Not have remarried • Have a child or stepchild who qualifies as a dependent • Furnish over 1/2 cost of maintaining a home which is the principal residence of the dependent child. A widow or widower can file a joint return for the year his or her spouse dies. 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 for last 6 months of tax year Home was principal residence of taxpayer’s child for > half of year Can claim child as a dependent
Be unmarried on the last day of the year. Maintain as your home for more than 1/2 of the taxable year a household in which any of the following relatives live: your children, adopted children, children's descendants, and stepchildren. **Exception Mom or Dad do not have to live with the taxpayer to qualify. The taxpayer must contribute over 1/2 the cost of maintaining the home. must not be a non-resident alien at any time during the year .
For tax years before 2010, the personal exemption amounts are phased out when the taxpayer's AGI exceeds certain threshold amounts. For tax years before 2006, the total amount of personal exemptions is reduced by the applicable percentage, which is two percentage points for each $2,500 (or fraction thereof) by which AGI exceeds the threshold amount. For married taxpayers filing a separate return, $1,250 is substituted for $2,500. The threshold amounts are annually adjusted for inflation. In 2006 and 2007, the otherwise applicable personal exemption phase-out is reduced by one-third. In 2008 and 2009, the otherwise applicable exemption phase-out is reduced by two-thirds. President Obama will reinstate the phase out of personal exemptions and itemized deductions beginning in 2011, but only for taxpayers in the two highest tax brackets.
Relationship - The child must be the taxpayer's son, daughter, stepson, stepdaughter, brother, sister, stepbrother, stepsister, or a descendant of any such individual. Foster children placed with the taxpayer by authorized placement agencies and legally adopted children (included those lawfully placed with the taxpayer for legal adoption) would satisfy the relationship test. Residence - The child must live with the taxpayer in the same principal place of abode in the United States for MORE THAN half the year . Military personnel on extended active duty outside the United States would be considered to be residing in the United States. The taxpayer and child are considered to live together even if one or both are temporarily absent due to special circumstances such as illness, education, business, vacation, or military service. NOTE: Legally adopted children who are NOT citizens or residents of the United States may be a qualifying child i f the child's principal place of abode is the taxpayer's home and the taxpayer is a U.S. citizen or national . Age for Dependency Exemption, Earned Income Credit, and Head of Household Filing Status - The child must be under age 19 (or under age 24 if a full-time student) on the last day of the tax year, or any age if totally and permanently disabled. Age for Child & Dependent Care Tax Credit - The child must be under age 13 at the time care is provided (or any age if physically or mentally incapable of caring for himself or herself). Age for Child Tax Credit - The child must be under age 17 (whether of not disabled) on the last day of the tax year.
Standard Deduction Not Allowed . The standard deduction may not be claimed by the following: a married individual filing separately if either spouse itemizes; a nonresident alien; or an individual filing a short-period return due to a change in accounting period. Example : Joe and Lynn are married and file separate returns in 2006. Joe claims itemized deductions of $5,600 on his return. Lynn has itemized deductions of $1,500. Lynn must itemize and deduct $1,500, even though the standard deduction for a married person filing separately normally would be $5,150 Standard Deduction Basic amounts for 2006 are: Head of Household - $7,550 MFJ and Qualifying Widow(er)s - $10,300 MFS - $5,150 Single - $5,150 Additional standard deduction for Aged and Blind are: $1,000 for each $1,250 if the individual is unmarried and not a surviving spouse
President Obama is trying to increase the current 15% maximum rate to 20% for filers who are above the 28% tax bracket, effective in 2011