Chapter 14 - Chapter 14 Individual Income Tax Formula Total...

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Chapter 14 Individual Income Tax Formula Total income (Everything received) - Exclusions/tax-exempt income = Gross Income - Adjustments = Adjusted Gross income (AGI) - Greater of Standard or Itemized Deductions - Personal and dependency exemptions (3300 in 2006) = Taxable income (TI) * Tax rate (10%-35%) = Tax Liability - Tax Credits - Tax Payments = Tax due or refund ME -Employers must withhold all federal, state, and local taxes out of an employees paycheck and issue them a W-2 at the end of the year that shows the break-downs. -An independent contractor’s payroll does not include the withholdings. The employer must issue a FORM 1099-MISC income, which the contractor must report as business revenue. -Fringe Benefits are tax exempt benefits employers can have in their payroll. Examples include paying for medical, daycare, life insurance. -Self-employed people do not receive this benefit. You cannot pay yourself for health-care. Instead it is considered personal expense. -Stock Options: If employee is offered 2,000 shares at a price of 30 (60,000) and the price is up to 75/share (150,000) he will exercise the option. When this happens he now has a tax bases of 150,000, 60,000 of out-of-pocket and income of 90,000 (negative cash flow) -Incentive Stock Options (ISO): these are qualified for tax-exemptions at the exercise date. The employee will not record income until they are sold. EX: ISO Nonqualified Option Exercise of option: Ordinary income 0 90,000 Tax at 35% 0 31,500 Bases of 2,000 60,000 150,000 Sale of stock: Selling price 225,000 225,000 Basis (60,000) (150,000) Capital gain 165,000 75,000 Tax cost 15% 24,750 11,250
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- Exclusions/Tax Exempt Income - Loans : Someone loans you money, mortgage, your car (not income because there is a presumption that you will pay it back). Loans are taxable; if you default you will have income equal to the excess of the loan. -Gifts: The receiver does not have taxable income on the gift or an inheritance. It doesn’t matter how much it is. Only the giver has taxable income. The giver is allowed to give up to $12,000 without taxes. A person is allowed 2.5 million in gifts before owing gift taxes. (If you give 20,000 then 8,000 is reported as a gift tax and the 12,000 subtracts from the lifetime amount of 2.5 million. Gifts are at current market value. -Inheritance: At the date of death everything is a fair value. A wealthy person has 6 million dollar estate. You subtract out the 2.5 exclusion (never made a gift). 3.5 million is taxable times 50%. Usually set up to go to the spouse. -Scholarships/grants: Scholarships are for school and books only. It does not include housing. Grants are money that comes directly to you for research.
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