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DETERMINATION OF TAXDETERMINATION OF TAX(1 of 2)(1 of 2)

Formula for individual income taxDeductions from adjusted gross

incomeDetermining the amount of taxBusiness income and business

entitiesTreatment of capital gains and losses

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DETERMINATION OF TAXDETERMINATION OF TAX(2 of 2)(2 of 2)

Tax planning considerationsCompliance and procedural

considerations

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Formula for IndividualFormula for IndividualIncome TaxIncome Tax (1 of 2)(1 of 2)

Income from whatever source derived- Exclusions= Gross Income- Deductions for Adjusted Gross Income

= Adjusted Gross Income (AGI)

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Formula for IndividualFormula for IndividualIncome TaxIncome Tax (2 of 2)(2 of 2)

= Adjusted Gross Income (AGI)- Deductions from AGI: Greater of itemized deductions or std deduction Personal and dependency exemptions= Taxable IncomeX Tax rate or rates (tax table or schedule)= Gross tax- Credits and prepayments= Net tax payable or refund due

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Deductions from Deductions from Adjusted Gross IncomeAdjusted Gross Income

Itemized deductionsStandard deductionPersonal exemptionsDependency exemptionsChild credit

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Itemized Deductions(1 of 2)

See Table I2-5 for partial list Medical expensesTaxesInvestment and residential interestCharitable contributionsPersonal casualty and theft lossesMiscellaneous deductions

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Itemized Deductions(2 of 2)

Only claim itemized deductions if greater than standard deduction

Some items limited by varying percentages of AGI

Itemized deductions reduced if AGI exceeds certain amountMax reduction in itemized deductions

is 80% of total itemized deductions

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Standard Deduction

Varies based on:Filing statusAgeVision

Used when > itemized deductionsLoss of or limited standard

deduction in certain situations

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Personal Exemptions

Generally, each taxpayer allowed oneUnless claimed as dependent on

another return$3,500 in 2008

Additional allowed for spouse on joint return

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Dependency ExemptionsRequirements for All Dependents

Have a qualifying identification number

Meet a citizenship testMeet a separate return testCannot themselves claim

another person as a dependent

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Dependency Exemptions Additional Requirements for Qualifying

Children

Relationship testAge testAbode testSupport Test

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Dependency Exemptions Requirements for Other Relatives

Relationship testGross income testSupport testPersonal and dependency

exemptions phased out for high income taxpayersPhaseout eliminated for 2010 & beyond

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Child Credit

$1000 per qualifying child Under 17 and a “qualifying” child

Credit reduced if MAGI exceeds threshold

Child credit refundable to extent of 15% of taxpayer's earned income in excess of 12,050

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Determining the Determining the Amount of TaxAmount of Tax

Filing statusJoint returnSurviving spouseHead of householdSingle taxpayerMarried filing a separate returnAbandoned spouseDependents with unearned income

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Filing Status(1 of 2)

Married filing jointlySurviving spouseHead of householdSingleMarried filing separately

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Filing Status(2 of 2)

Relative tax liability by filing status from lowest to highestMarried filing jointlySurviving spouseHead of household

Includes abandoned spouseSingleMarried filing separately

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Dependents with Unearned Income

Personal Exemption & Standard Deduction

No personal exemption on own return

Standard deduction reduced to greater ofEarned income OR $900 OR Dependent’s earned income plus

$300

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Dependents with Unearned IncomeKiddie Tax

All kids < 18 yrs oldTax rate on child’s net unearned income in

excess of $900 same as parents’ rate if higher than child’s rate

Certain kids age 18-23If 18, applies if earned income < ½

support AND unearned income > $900If 19-23, same rules as for age 18 ONLY if

also a full-time student

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Business Income & Bus Business Income & Bus Entities Entities

C Corporation FormulaC Corporation Formula

Income from whatever source derived- Exclusions= Gross Income- Deductions= Taxable IncomeX Tax rates= Gross Tax - Credits and prepayments= Net tax payable or refund due

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Business Income & Bus Business Income & Bus Entities Entities

C Corporation Tax RatesC Corporation Tax Rates

First $50K 15 % of Taxable Inc

> $50K But Not > $75K $7,500 + 25% of Taxable Inc

> $75K But Not > $100K 13,750 + 34% of Taxable Inc > $75K

> $100K But Not > $335K $22,250 + 39% of Taxable Inc > $100K

> $335K 34% of Taxable Inc

> $10M But Not > $15M 3.4M + 35% of Taxable Inc > $10M

> $15M But Not > $18,333,333 $5.150M + 38% > $15M

> $18,333,333 35% of Taxable Inc

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Business Income & Bus Business Income & Bus Entities Entities

Flow-through vs. Non Flow-throughFlow-through vs. Non Flow-through

Flow-through entities do not pay tax at the entity level

C corporations pay tax at the entity level and the owners pay tax on corporate earnings (dividends) when received

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Capital Gains & LossesCapital Gains & LossesCapital Asset DefinitionCapital Asset Definition

Capital asset defined in §1221Assets other than inventory, trade receivables, certain self-created works, depreciable business property, business land, and certain government publications

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Capital Gains & LossesCapital Gains & LossesClassification of Capital Gains and LossesClassification of Capital Gains and Losses

Capital gains and losses are divided into 2 categoriesLong-term is held for over 12

monthsShort-term is held less than 12

months

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Capital Gains & LossesCapital Gains & LossesTax Rates on Net Capital GainsTax Rates on Net Capital Gains

Net long-term gainTaxed at maximum of 15% 5% if in the 10% and 15% tax

bracketNet short-term gain

Taxed at the same rate as other income

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Capital Gains & LossesCapital Gains & LossesTax Treatment of Net Capital LossesTax Treatment of Net Capital Losses

Individuals can deduct only up to $3,000 of net capital losses from their other income

Unused losses are carried over indefinitely to offset gains in future years

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Tax Planning Tax Planning ConsiderationsConsiderations

Shifting income between family members

Splitting incomeMaximizing itemized deductionsFiling joint or separate returns

Innocent spouse provision

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Compliance and Compliance and Procedural Procedural

ConsiderationsConsiderations

Who must fileSee Chart on page 2-33

Due dates for filing returnIndividuals and Partnerships

15th day of 4th month after year endForms 1040, 1040EZ, and 1040A

Corporations15th day of 3rd month after year end

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Comments or questions about PowerPoint Slides?Contact Dr. Richard Newmark at University of Northern Colorado’s

Kenneth W. Monfort College of Businessrichard.newmark@PhDuh.com

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