Income Gross Deductions from Gross Income (Generally these are business expenses) = A.G.I. A.G.I. Standard Deductions Itemized Deductions (Generally Personal Expenses) Personal and Dependency Exemptions = Taxable Income Taxable Income is the amount that you will pay tax on. Taxable Income Compute Tax + Additional Taxes Tax Credits = Net Tax (compare to) Tax Prepayments Estimated Tax 1. The law requires that a taxpayer pay at least 90% of the current year tax due, on an equal quarterly basis, by the due date of the return. 2. If the taxpayer pays less than 90% they will be penalized for the under-estimation. 3. Safe Harbor if the taxpayer pays 100% of previous year's tax-no penalty. 4. Safe Harbor Exception if the taxpayer's A.G.I. exceeds $150,000 they must pay 110% of the previous year's tax (every quarter) 5. If your tax is higher than your tax prepayments at the end of the year you will have a balance due. 6. If your tax prepayments exceed your net tax at the end of the year you will get a refund. Who Must File a Return to determine who has to file you must know the following 1. Generally filing requirement is based on the amount of Gross Income 2. A taxpayer must file if their gross income equals or exceeds the total of: Personal exemption plus Standard deduction including the Additional Standard Deduction Personal Exemption 3,400 anyone who can be claimed as a dependent on another person's return is not entitled to a personal exemption when they file their return. Standard Deduction taxpayers are entitled to deduct a fixed amount (standard deduction) based upon their filing status. 1. Single 5,350 2. M/J 10,700 3. H/H 7,850 4. Blind or Age 65 or older M/J or S/S 1,050 Single or H/H 1,300 M/S if one spouse itemizes both must itemize. Therefore each must file if their gross income equals or exceeds $3,400 If the taxpayer's net self employment income is $400 or more they must file, regardless of the amount of their gross income. Married Generally if you are married, on the last day of the tax year you must file either M/J or M/S. Head of Household unmarried taxpayer who maintains a household (pays > 50% of costs) in which a qualified child or qualified relative lives with them for more than 6 months. Exceptions
1. Unmarried qualified child of taxpayer who lives with taxpayer doesn't have to qualify as dependent. 2. Parent of taxpayer, who is a dependent doesn't have to live with the taxpayer, so long as taxpayer pays more than 50% of cost of where parent lives. Surviving Spouse 1. Must be eligible to file jointly in year of spouses death 2. Cannot be remarried 3. Must maintain a household in which a dependent child lives with him/her. Head of Household as Abandoned Spouse NOT a filing status 1. If you qualify you are deemed to be unmarried for Federal income tax purposes and automatically qualify for head of household. 2. To qualify for an abandoned spouse Cannot file a joint return with spouse Must live separate and apart from for spouse the last 6 months of the tax year Must maintain household in which a dependent child lives with you Qualified Relative 1. Gross Income Test Dependent can't have G.I. of $3,400 or more. Social Security is not included in G.I. 2. Relationship Test Grandparents, Parents, Aunt, Uncle, Brother, Sister, Niece, Nephew, Child, Grandchild, (In-laws 6 Mother, Father, Sister, Brother, Son and Daughter) 1st cousin is no good. 3. Support Test must provide more than 50% of their support, life insurance and cemetery plots are not included but EVERYTHING else is. 4. Joint Return Test You cannot claim someone as your dependent that is filing a necessary joint return with their spouse. 5. Citizenship/Dependency Test must be a citizen of the U.S. or a resident of the U.S., Canada, or Mexico Qualified Child 1. Relationship Test son, daughter, stepson, stepdaughter, foster child or the descendent of such child, brother, sister, stepbrother, stepsister, or a descendent of such person 2. Age Test under 19 or under 24 and a full time student 3. Citizen/Residency Test 4. Principal Residence Test must have same principal residence as the taxpayer for more than 6 months during the tax year. 5. Support Test Tie Breaker Rules Parent over non parent Both parents one who child lives with. If that doesn't work higher AGI. Non-parents Higher AGI
Phase-Out of Exemptions AGI Threshold = Excess / 2,500 = fraction (round up) * 2 = Phase Out % Normal Exemption (3,400 * __) * Phase out % = Exemption Phase Out Exemption Phase Out / 3 * 2 = phase out amount Normal exemption phase out amount = deduction allowed Thresholds 1. Single 156,400 2. M/J and S/S 234,600 3. M/S 117,300 4. H/H 195,500 Marginal tax rate the tax at which the next dollar of income is taxed at (income + 1) Effective tax rate the average rate of tax that is paid on each dollar of taxable income Kiddie Tax child under 18 by year end, has unearned income in excess of a fixed amount, the excess will be taxed to the child at the max tax rate of the child or parent, whichever is greater Unearned Income - 850 - Greater of 850 or Itemized Deduction attributed to unearned income (investment expense) - = Net unearned Income - * Parents Marginal Tax Rate - = Kiddie Tax
A.G.I. - Std Deduction (Greater of 850 or Earned Income + 300) = Excess Personal Exemption (0) = Excess Net Unearned Income = Taxable Income
Normal Tax (Taxable Income * 10%) + Kiddie Tax = Total Tax Taxpayers who are legally separated are unmarried for Federal Income Tax purposes When determining the value of dependency exemptions remember the exemption may be reduced by phase out rules
Interest income is payment received for the use of money. Generally, all interest income is included in gross income. Exception Municipal Bond Interest Income a municipality is a state or local government or an agency (Tax Free) Gain on the sale of a municipal bond is fully taxable. Dividend Income Distribution of corporate earnings to shareholders