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Final Study Guide - Exam 4 Study Guide 16 17 Chapter 14 The...

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1 Exam 4 Study Guide (Chapters 14, 15, 16, 17) Chapter 14 – The Individual Tax Formula The five filing statuses are: Married filing jointly – Must be married on the last day of the taxable year Surviving spouse – File as a surviving spouse in the two years following the death of spouse if maintaining a home for a dependent child and not remarried . Head of household – Unmarried (not a surviving spouse) and maintains a home for a dependent child or other dependent relative (for over half the year) Single – Unmarried individual who does not qualify as surviving spouse or head of household Married filing separately – Married individuals may choose to file separate returns. Four steps to calculate an individual’s taxable income: 1. Calculate Total Income – includes taxable business income, salaries, investment income, etc. 2. Calculate Adjusted Gross Income (AGI) – Certain deductions for AGI can be subtracted from total income to arrive at adjusted gross income (AGI) . 3. Subtract the Standard Deduction or Itemized Deductions – Deduct the greater of itemized deductions or the std deduction. The std deduction varies with filing status, age, and vision. It is limited for those who are claimed as a dependent on another taxpayer’s return to the greater of: the dependent’s earned income + $300; or $850. Itemized deductions include real estate taxes, medical expenses, charitable contributions, state & local taxes, casualty and theft losses, employee expenses, etc. Total itemized deductions may be reduced for high-income taxpayers. 4. Subtract the Exemption Amount – Deduct an exemption amount . A personal exemption is an amount ($3,400 in 2007) a person can deduct for himself and for his spouse. A dependency exemption of the same amount can be deducted for each dependent . A person who is claimed as a dependent on another person’s return cannot claim a personal exemption on his own return. Personal and dependency exemptions are phased out for high-income taxpayers. Dependents must be a qualifying child or a qualifying relative . For a qualifying child : Relationship test – must be the taxpayer’s children or siblings or descendants Age test – must be under age 19, a full-time student under 24 (during at least 5 months of the year), or a permanent and totally disabled child Abode test – have the same primary abode as the taxpayer for more than ½ of the year Support test – child may not provide more than ½ of his own support during the year To be considered a qualifying relative , the following requirements must be met: Relationship test – must be related or reside in the person’s household for the entire yr Gross income test – dependent’s gross income must be less than the exemption amount Support test – taxpayer provides more than ½ the financial support for the year Individuals can reduce their tax liability by the amount of any credits for which they are eligible. A tax credit is a dollar-for-dollar reduction in the tax liability.
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