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A qualifying child must satisfy 4 tests
- Relationship: child (adopted, step, foster), sister (half, step), or descendant of these (grandson, niece) (EXCLUDED: ancestors of these (uncles) and in-laws
- Abode: lived with TP > 6 mths
- Age: under 19 or under 24 in school (5mths of year); or disabled; Not older than TP
- Support: not more than 50% of their own support; not including scholarships
What is the formula for Individual Income taxes?
- Less: exclusions
- Gross Income
- Less: Deductions for AGI
- Less: SD or Itemized deductions
- Taxable income
- Tax on Taxable income
- Less: Tax Credits
- Tax Due (Refund)
What is not included in Income?
- return of capital
- a receipt of borrowed funds
What are the exclusions to Gross Income?
- Accident insurance proceeds
- Child support payments
- Life insurance paid on death of insured
- Welfare payments
- Unemployment compensation (to a
- limited extent)
What type of deductions are deductible whether the taxpayer itemizes or not?
Deductions for AGI which are also called “above-the-line” deductions.
Give 3 examples of a floor to AGI.
- Casualty losses are deductible only to the extent they exceed 10% of AGI.
- Medical expenses are deductible only to the extent they exceed 7.5% of AGI.
- Miscellaneous itemized deductions are deductible only if they exceed 2% of AGI
Give an example of a ceiling of AGI.
Charitable contributions may not exceed 50% of AGI.
What is the ASD?
Additional Standard Dedcuction is an additional amount allowed for taxpayers who are age 65 or older and/or blind.
- For 2010
- $1,100 MFJ, QW, MFS
- $1,400 S, HH
Property Tax Deduction and Auto Sales Taxes Standard Deductions
Temp. additional SD (2008-2009, maybe 2010).
Property tax: The amount allowed is the lesserof what was paid or $500 ($1,000 on a joint return).
- The new provision will benefit many older taxpayers (where the residential mortgage is paid or largely paid) and the interest element is zero (or small) and low
- income taxpayers whose itemized deductions do not (or barely) exceed the basic standard deduction.
- Auto Sales Tax: The sales tax paid on the purchase
- can be claimed as a special standard deduction.
- The deduction cannot exceed the part of the tax
- attributable to the first $49,500 of the purchase price.
- A phase-out of the deduction takes place when the
- taxpayer’s AGI exceeds $125,000 ($250,000 on a joint return).
- The purchased vehicle cannot exceed a gross weight of
- 8,500 pounds and the original use commences with the taxpayer.
Who may not claim the SD?
- a married individual filing separately if either spouse itemizes
- a nonresident alien
- an individual filing a short-period return due to a change in accounting period.
Standard Deduction of a Dependent.
The dependent taxpayer is limited to the greater of $950 or the individual’s EI + $300 (but not to exceed the amount of the basic standard deduction for the taxpayer’s filing status).
A dependent may not take his personal exemption if her parents have taken it on their return.
$3,650 in 2010 ($3,650 in 2009)
- TP and Spouse (MFJ) except
- If a separate return is filed, an exemption is allowed for a spouse only if the spouse had no gross income and was not claimed as a dependent by another taxpayer.
What are the filing requirements?
The gross income level at which a taxpayer is required to file a return is generally equal to the sum of the taxpayer’s exemption amount plus the applicable standard deduction
Exceptions to general rule: The general rule described above does not apply to a taxpayer claimed as a dependent, a married individual filing separately, or a self-employed taxpayer.
- (1) A taxpayer claimed as a dependent must file:
- if he has earned income only and the gross income
- exceeds his total standard deduction;
- if he has unearned income only and gross income
- of more than $950 plus any additional standard deduction allowed; or
- if he has both earned and unearned income and
- gross income is more than the larger of earned income + $300 (but limited to the applicable standard deduction) or $950 plus any additional standard deduction allowed.
(2) A married individual filing separately must file a return if gross income is equal to or greater than the exemption amount ($3,650 in 2009 and 2010).
- (3) A self-employed individual with $400 or more of net
- earnings from a business or profession must file a return, regardless of theamount of gross income.
Abandoned Spouse Rules
a. The taxpayer cannot file a joint return with his/her spouse.
b. The taxpayer must pay more than half of the cost of maintaining a household.
c. The taxpayer's spouse did not live in the taxpayer's home during the last 6 months of the tax year.
d. The taxpayer’s home was the principal residence of the taxpayer’s (natural, step, or adopted) child for more than half the year.
e. The taxpayer can claim the child as a dependent.
The marginal rate is the highest rate applied in computing the tax. Knowledge of a taxpayer’s marginal tax rate is useful in tax planning situations. Knowing the marginal rate enables the tax planner to quantify the tax impact of an additional dollar of income or an additional dollar of deductions.
The effective rate
The effective rate is the rate paid on total (taxable and tax-exempt) income.
The average rate
The average rate is the rate paid on taxable income.
The following taxpayers are ineligible to use the Tax Table:
- · an individual who files a short-period return.
- · an individual with taxable income of $100,000 or more.
- · an estate or trust.
What is the marital status of:
1. Widower's wife died Jan 3, 2010
2. Divorce effective Dec 31, 2010
- 1. MFJ - married
- 2. unmarried
What are the Tiebreaker rules?
- One person is the parent - parent wins
- Both are parent - one with longer residence
- Both are parents same time period - parent with higher AGI
- None are parent - person with higher AGI
What is a Qualifying Relative?
- Relationship: any QC relationship, lineal ascendants (parents) collateral ascendants (aunts), certain in-laws (son, father,brother); anyone who lives all year
- Gross Income: must be less than exemption amount
- Support: - TP must provide > 50% of support (excludes multiple support aggreements, children of divorced parents)
What is a Multiple Support Agreement?
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 supportEach 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
All persons in the agreement, except person claiming the exemption, must file a Form 2120 (Multiple Support Declaration).
What are the 2 additional requirements to be a dependent in addition to the QC/QR requirements?
- The joint return (Filing solely for refund of tax withheld No tax liability exists for either spouse Neither spouse required to file return)
- The citizenship or residency tests (US citizen, or resident of US, Canada, Mexico)
What are military extentions?
- If out of US and Puerto Rico not in combat zone: June 15 plus interest
- in combat zone: 180 days after last day of combat service with no interest
What is the Kiddie Tax?
- Certain Minor Children Taxed at Parents’ Rate (Kiddie Tax). Unearned income of children under age 19 or a student under age 24 is taxed at the parents’ rate. However, a total of $1,900 ($950 base amount
- + $950 standard deduction of the dependent) is exempted from taxation at the
- parents’ rate in 2010.
- a. The amount of net unearned income taxed at the parents’ rate is computed as follows:
- Unearned income
- – $950
- – The greater of $950 or allowable itemized deductions directly
- connected with the production of unearned income
- = Net unearned income
- b. The child’s
- rate applies to the child’s taxable income less the amount of net unearned
- income taxed at the parents’ rate.