Acct 3315 & 5314:

Principles of Federal
Income Tax

Chapter 2
Determination of Tax
Loretta Dollar

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 Objectives
By the end of this chapter you should be able to:
• Demonstrate the use the tax formula to compute an individual’s taxable income.
• Determine the amount of deductions from adjusted gross income.
• Calculate the income tax for individuals.
• Explain the basic income tax rules relating to business entities.
• Explain the basic income tax rules of capital gains and losses.
• Describe tax planning considerations for various tax matters.
• Describe compliance and procedural matters for filing tax returns.

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Determination of Taxable Income & Tax
Due
Total income
Minus: Exclusions
Gross Income
Minus: Deductions
Taxable Income
Times: Tax Rate
Income Tax Before Credits
Minus: Tax Credits
Total Tax Liability
Minus: Prepayments
Balance Due or Refund

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 Definitions
Total Income
• Any “income from whatever source derived.”
• Includes both taxable and non-taxable income.
• Does NOT include return of capital (basis) of property sold.

• Example: Bob sells a piece of property for $1,000. He has a cost basis of $700. Bob will include
$300, not $1,000, in total income.

举例：鲍勃以1000美元卖掉一块房产。 他的成本基础为700美元。鲍勃将把300美元计入总收入，而不是1000美元。

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Definitions, cont
Exclusions
• Gifts • Tax-exempt interest • Certain divorce payments
• Life insurance • Series EE bond interest for agreements executed
after to 2018
• Welfare • Medical savings account
distributions • Gain from sale of home
• Certain scholarships
• Meritorious achievement • Roth IRA distributions
• Certain payments for injury
awards • Social security benefits
• Certain employee benefits
• 免税利息 EE系列债券利息 • 2018年以后签署的某些离
• Certain foreign income
医疗储蓄账户分配 优异成 婚赔偿金 房屋出售收益 罗
• 礼物 人寿保险 福利 某些奖
就奖 斯IRA分配 社会保障福利
学金 某些伤害赔偿 某些员
工福利 某些外国收入
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Definitions, cont
Gross Income Items

• Wages • Royalties版税 • Pensions

• Business gross • Dividends • COD income
income • Alimony through赡 • Partnership
• Gains from 养 12/31/2018 income
property sales • Annuities • IRD
• Interest • Life insurance • Trust/estate
• Rents proceeds income
“For” vs. “From” AGI

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Deductions “For” AGI

• Trade and business • Penalties from savings • Moving expenses for active-
deductions accounts duty military
• Reimbursed employee • Repayments of
• One-half self-employment
expenses unemployment
taxes
compensation
• Loss from property sales
• Self-employed health • Certain jury duty pay
• Rent/royalty deductions insurance premiums • Interest on student loans
• Retirement plan
• Alimony for agreements • Medical savings account
contributions
executed prior to 2019 contributions
• 贸易与商业扣除 报销员工
• 储蓄账户罚款 一半的自雇 • 现役军人的搬迁费用 失业补
费用 房产出售损失 租金/版
税 自雇健康保险保费 2019 偿的偿还 某些陪审团义务报
税扣除 退休计划缴
年前签署协议的赡养 酬 学生贷款利息 医疗储蓄账
户缴
 Deductions “From” A GI
Taxpayer can deduct greater of:
• Itemized Deductions OR
• Standard Deduction

• 纳税人可以扣除以下部分： 列举扣除或 标准推理 哪个大用哪个

 Itemized Deductions
• Medical Expenses – Can only deduct amounts over 7.5% of AGI.
• Property, State, Local and Real Estate Taxes – Limited to $10,000 ($5,000 MFS).
• Home Mortgage Interest – Limited to $750,000 mortgage incurred 12/16/2017 and later
(limit is $1 million mortgage incurred before 12/16/2017).
• Charitable Contributions – Limited to 60% of AGI.
• 医疗费用——只能扣除超过7.5%的AGI金额。 如果一个人花超额。。。
• 财产税、州税、地方税和房地产税——限额为10,000美元（5,000美元MFS）。
• 住房抵押贷款利息——限额为2017年12月16日及以后产生的75万美元抵押贷款（2017年
12月16日前产生的贷款上限为100万美元）。
• 慈善捐赠——限制为AGI的60%。

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 Standard Deduction
• Single = $15,000
• Head of Household = $22,500
• Married Filing Separately = $15,00
• Married Filing Jointly = $30,000
• Add $1,550 to the Standard Deduction for elderly or blind ($3,100 if both elderly
AND blind) for married taxpayers. Max increase of $6,200 for MFJ.
• Amount increases from $1,550 to $1,950 if unmarried.

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 Disallowance of Standard Deduction
• Return < 12 months due to change in accounting period.
• Married filing separately where spouse itemizes.
• Nonresident Alien.
• 由于会计期间变更，12个月后<返回。 Eg 死亡。
• 已婚分开报税，配偶进行逐项申报。
• 非居民外国人。

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Dependency Exemptions – Qualification

Note: Individual must meet both Tier 1 and Tier 2 criteria to qualify as the
taxpayer’s dependent.
 Tier 1 Criteria
for Dependency Exemption
• ID # – Each dependent must have a SSN.
• Citizenship – Must be US citizen, US national, or legal resident.
• Separate return test:
• Generally, dependent cannot file joint return with spouse.
• Exception: Dependent files joint return only to obtain refund of tax
withheld.

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 Tier 2 Criteria
Qualifying Child
• Relationship Test – Eligible individuals:
• Taxpayer’s natural, adopted, foster, and step-children.
• Taxpayer’s siblings, half-siblings, and step-siblings.
• Any descendants of the above.
• Adoption = Legal adoptions or child being legally placed in home for
adoption.

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 Tier 2 Criteria
Qualifying Child, cont
• Age Test – Must fall within at least one category:
• Under age 19; OR
• Permanently and totally disabled (any age); OR
• Full-time student under age 24.
• Considered full-time student if dependent is enrolled at qualifying
institution for at least 5 months and carries a full course load.

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 Tier 2 Criteria
Qualifying Child, cont
• Abode Test – Must have same principal abode as the taxpayer for > ½ the
year.
• Non-custodial parent meets Abode Test if custodial parent agrees in
writing.
• Support Test – Dependent can’t provide more than ½ of his/her support.

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 Tier 2 Criteria
Qualifying Relative
• Relationship Test – Must fall within at least one category:
1. Related to the taxpayer.
• Does not have to live with taxpayer.
• Can be a qualifying child, parents (including parents’ ancestors and
siblings), step-parents, or certain in-laws.
2. Resides in taxpayer’s home the entire year.
• Dependent needs only to be related to one spouse in a joint return.
Relationship is not terminated by death or divorce once established.

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 Tier 2 Criteria
Qualifying Relative, cont
• Gross Income Test – Dependent’s taxable gross income must be < $5,050.
• Support Test – Taxpayer must provide more than ½ of dependent’s financial
support.
• Include non-taxable amounts spent except scholarships.
• Include FMV of items in support calculation including imputed rent.
• Do not include FMV of personal services rendered by taxpayer to
dependent.

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 Tie-Breaker Rules
for Dependency Exemption
• If more than one taxpayer can potentially claim an individual as a
dependent, then the possible claimants are prioritized in order of
greatest claim to least:
1. Taxpayer who can claim under qualifying child rules vs. other
relatives.
2. Parents have greater claim over non-parents.
3. If 1. and 2. don’t apply, then exemption goes to taxpayer with
highest AGI.

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 Multiple Support Agreement
• If group provides > 50% support but no one person provides > 50%, then the
eligible members can designate one person.
• Eligible members must agree in writing.
• Claimant must complete a Multiple Support Declaration (Form 2120).
• MSD trumps tie-breaker rules.
• Taxpayer who can claim under qualifying child rules can’t transfer to another
taxpayer who can claim under the dependent’s rules.

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 Parental Release
• Generally, dependency is awarded to custodial parent.
• Exception – Noncustodial parent can claim dependency if other parent signs
Form 8332.

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Refundable Tax Credits

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Nonrefundable Credits

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 Child Tax Credit
• Can claim $2,000 credit for each qualifying child or $500 each for other
dependent. Partially refundable.
• Same definition as for qualifying child except < 17 years.
• Credit is reduced $50 for every $1,000 (or part thereof) over $200,000
($400,000 MFJ).
• Partially refundable. Refund is limited to the lesser of: (1) 15% of the
taxpayer’s earned income in excess of $2,500 or (2) $1,700 (if the taxpayer
has one or two qualifying children < 17 years).

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Determining Filing Status

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Determining Filing Status, cont

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 Surviving Spouse Criteria
Year 1
• If not remarried, can claim MFJ.
• Can use MFJ tax schedule and MFJ standard deduction.
Year 2
• Cannot be remarried by end of Year 2.
• Must be a US citizen or resident.
• Must have a dependent living at home with taxpayer paying over ½ expenses
of home.

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 Children with Unearned Income
• Children with earned or unearned income are required to file own tax return if
otherwise over filing threshold.
• Standard deduction is limited to greater of:
• $1,300; OR
• Dependent’s earned income + $450 (not to exceed $15,000).
• “Kiddie Tax” – If child is under 18 (24 in some cases), some of child’s
unearned income is taxed at parent’s marginal rate.

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 Children with Unearned Income, cont
• If less than age 18, “kiddie tax” applies to unearned income > $2,700.
• If age 18, “kiddie tax” if:
1. Earned income ≤ 1/2 support; AND
2. Unearned income > $2,700.
• If age 19 but less than 24, “kiddie tax” if:
1. Full-time student; AND
2. Earned income ≤ 1/2 support; AND
3. Unearned income > $2,700.

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 Treatment of Capital Gains/Losses
• Capital gains and capital losses derive from sale or exchange of capital
assets.
• Net long-term capital gains are taxed at a lower rate than ordinary
income.
• Net short-term capital gains are taxed as ordinary income.
• Capital assets are general trade, business, or investment property that
are not inventory.
• Net capital losses are deductible only up to $3,000. Excess capital
losses can be carried forward.

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 Maximum Net Capital Gain Rates
Capital gains are taxed at the following maximum rates depending on the
taxpayer’s AGI:
• 0% for AGI < $48,350 (< $96,700 for MFJ).
• 15% for AGI between $48,350 and $533,400 (between $96,700 and $600,050
for MFJ).
• 20% for AGI > $533,400 (> $600,050 for MFJ).

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Tax Planning Considerations

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 Who MUST File
Taxpayers under 65 must file if gross income exceeds following levels even if
no tax due:
• Single: $15,000
• MFJ: $30,000
• Surviving Spouse: $30,000
• MFS: $5
• Head of Household: $22,500

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 Who MUST File, cont
Taxpayer must still file even if gross income below threshold if:
1. Taxpayer who is claimed as a dependent by another AND unearned income
> $1,300 or gross income
> standard deduction.
2. Taxpayer owes 0.9% Additional Medicare tax or 3.8% Net Investment
Income Tax.
3. Taxpayer has self-employment income > $400.

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 Due Dates
• Individuals – April 15
• C Corporations – 15th day of the 4th month after close of tax year.
• Partnership and S Corporations – 15th day of the 3rd month after close of tax
year.
• If due date falls on weekend or national holiday, due date is moved to the first
business day following.
• Extensions – 6 months for Individuals, Partnership, and S Corporations; 6 or 7
months for Corporations.

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 Form 1040 Schedules
• Schedule 1: Sources of income not reported on Form 1040
• Schedule 2: Additional taxes and tax prepayments
• Schedule 3: Nonrefundable tax credits

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Reports Filed with IRS

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 Conclusion
You should now be able to:
• Demonstrate the use the tax formula to compute an individual’s taxable income.
• Determine the amount of deductions from adjusted gross income.
• Calculate the income tax for individuals.
• Explain the basic income tax rules relating to business entities.
• Explain the basic income tax rules of capital gains and losses.
• Describe tax planning considerations for various tax matters.
• Describe compliance and procedural matters for filing tax returns.

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