Pope_INDCH02 - Chapter 02I 03/16/2007 9:17 AM Page 2-1 2 C...

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c c c c c c c 2 2-1 LEARNING OBJECTIVES After studying this chapter, you should be able to 1 Use the tax formula to compute an individual’s taxable income 2 Determine the amount allowable for the standard deduction 3 Determine the amount and the correct number of personal and dependency exemptions 4 Determine the amount of child credit 5 Determine the filing status of individuals 6 Explain the tax formula for corporations 7 Explain the basic concepts of property transactions CHAPTER DETERMINATION OF TAX
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2-2 Individuals Chapter 2 Each year, over 130 million individuals and married couples file tax forms on which they compute their federal income tax. The income tax is imposed “on the taxable income of every individual.” 1 The amount of tax actually owed by an individual taxpayer is deter- mined by applying a complex set of rules that together make up the income tax law. To understand the income tax, it is necessary to study the basic formula on which the income tax computation is based. Therefore, this chapter introduces the income tax formula and begins the development of its components. Because the income tax formula constitutes the basis of the income tax, most of the remainder of this book is an expansion of the for- mula. In addition to individual taxpayers, about 5 million corporations and 2 million partnerships file returns each year. These entities are also discussed in this chapter. CHAPTER OUTLINE Formula for Individual Income Tax. ..2-2 Deductions from Adjusted Gross Income. ..2-7 Determining the Amount of Tax. ..2-20 Business Income and Business Entities. ..2-26 Treatment of Capital Gains and Losses. ..2-29 Tax Planning Considerations. ..2-30 Compliance and Procedural Considerations. ..2-33 OBJECTIVE 1 Use the tax formula to compute an individual’s taxable income ADDITIONAL COMMENT “There is one difference between a tax collector and a taxidermist— the taxidermist leaves the hide.” This is a quote from Mortimer Caplan, former Director of the Bureau of Internal Revenue, Time, Feb. 1, 1963. ADDITIONAL COMMENT The IRS estimates that the aver- age taxpayer will spend 3 hours and 59 minutes in preparing just a Form 1040. When the estimated time for recordkeeping, learning about the law, and sending the form is added to the preparation time, the total time estimate jumps to 9 hours and 54 minutes. Each additional form and sched- ule adds even more time. ADDITIONAL COMMENT Comedian Jay Leno’s explanation as to why the IRS calls it Form 1040 was, “For every $50 you earn, you get $10 and they get $40.” 1 Sec. 1. F ORMULA FOR INDIVIDUAL INCOME TAX BASIC FORMULA Most individuals compute their income tax by using the formula illustrated in Table I:2-1. The formula itself appears rather simple. However, the complexity of the income tax results from the intricate rules that must be applied in order to arrive at the amounts that enter into the formula.
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This note was uploaded on 09/13/2010 for the course ACCOUNTING 45089 taught by Professor Kenn during the Spring '10 term at University of Phoenix.

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Pope_INDCH02 - Chapter 02I 03/16/2007 9:17 AM Page 2-1 2 C...

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