Chapter4 - Chapter 4 s Exemptions s Filing Status s...

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1 Chapter Chapter 4 4 Exemptions Filing Status Determination of Tax Filing Requirements Child credit Prepayment and estimated taxes Penalties for failure to file and to pay Statute of Limitations
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2 Tax Formula Adjusted gross income (A.G.I.) $xx,xxx –Deductions from: Greater of: Standard deduction or Itemized deductions : Miscellaneous itemized > 2% AGI +Other itemized Total itemized –2% cutback Remaining itemized deductions (x,xxx) Personal and Dependent Exemptions ( x,xxx) Taxable income $xx,xxx x Rates x xx % Gross tax $ x,xxx –Credits ( Child Credit , etc.) x,xxx) –Prepayments (Estimated Taxes) ( x,xxx) Tax due (or refund) and Penalties $ x,xxx Subjects of Chapter 4
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Why do we have exemptions ?
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Exemption $3,650 Std deduction 5,700 Total $9,350 Family of 4 Exemptions (4) $14,600 Std deduction 11,400 Total $26,000 2009 Amounts
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6 Who Are the Wealthy? Who Are the Wealthy? According to 2002 Statistics of Income Number of individual returns 2002 130,201,415 AGI Percent Below $ 5,392 10% Below $28,654 50% Over $28,654 50% Over $92,663 10% Over $285,424 1%
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7 Who’s Rich According to 2005 Statistics of Income Number of individual returns 2005 134,372,678 http://www.irs.gov/taxstats/article/0,,id=102886,00.html * http://www.irs.gov/pub/irs-soi/05inalcr.pdf (cf. 28th page, Report page 29) $30,881 50% Median $364,657 1% Top $103,912 10% Top $5,700 10% Bottom AGI Percent 2005 (cf. 28th page, Report page 29)
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8 Personal & Dependency Exemptions Personal & Dependency Exemptions Amount $3,650 per exemption in 2009 Indexed annually for inflation 4 x $3,650 = $14,600 So how much are these kids worth?
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Could these celebrities benefit from the deduction for exemptions?
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10 Exemptions Phase-Out Exemptions Phase-Out Exemptions are ALMOST phased-out for high-income earners Phase-out due to expire after 2009
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11 Exemptions Phase-Out Exemptions Phase-Out Phase-out: Total exemption deduction reduced by 2% for each $2,500 (or fraction thereof) by which AGI exceeds these thresholds; for 2008-09 reduce reduction by 1/3: Tentative A.G.I. – THRESHOLD REDUCTION OF $2,500 X 2% = ALL EXEMPTIONS X 1/3 Phase-out Filing Status 2009 Threshold MFJ $250,200 HH 208,500 S 166,800 MFS 125,100 *Phase-out is 100% when income exceeds the threshold by more than $122,500 ($122,501/$2,500 = 50 rounded up x 2% = 98%) but only 1/3
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Problem 4-34(b) X 1/3 Reduction of reduction 195 Final reduction $584 Tentative reduction $14,600 Exemptions (4 x $3,650) (2009) 4% Total tentative percentage reduction x 2% 2% reduction for each increment 2 4,500/2,500 = 1.72 so round up Increments of $2,500 over threshold $ 4,300 Excess (250,200) Threshold given for joint returns $254,500 AGI Exemption deduction is $14,405 ($14,600 - $195)
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