chapter 4 notes

# chapter 4 notes - CHAPTER FOUR PERSONAL AND DEPENDENCY...

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C HAPTER F OUR PERSONAL AND DEPENDENCY EXEMPTIONS; FILING STATUS; DETERMINATION OF TAX FOR AN INDIVIDUAL; FILING REQUIREMENTS LECTURE OUTLINE I. INTRODUCTION A. Each of the areas covered in this chapter is important to every individual taxpayer. The tax computation process is summarized as follows: 1. Calculate A.G.I, by determining gross income and the deductions for A.G.I. 2. Subtract any personal and dependency exemptions and the larger of the standard deduction or total itemized deductions; and 3. Calculate the tax, based on the individual's filing status. This chapter deals with the personal and dependency exemption deduction and determination of filing status. It also covers the tax computation and the regulations as to who is and who is not required to file an individual income tax return. II. PERSONAL AND DEPENDENCY EXEMPTION A. Each personal and dependency exemption entitles the taxpayer to a deduction equal to the exemption amount. 1. For 2010 the exemption amount is \$3,650. Beginning in 1990, the \$2,000 basic deduction has been indexed to reflect increases in the consumer price index (CPI). 2. This deduction is allowable regardless of whether a taxpayer itemizes his or her other deductions. Note: This \$3,650 deduction is small relative to the cost of supporting an individual for a year. Nevertheless, it is the government's way of recognizing family size within the tax system. Note: This is an excellent place to emphasize the importance of indexing. One can compare the 1989 exemption of \$2,000 to the 2010 exemption amount of \$3,650. Without indexation, the amount of income one pays tax on in real terms increases. B. Personal exemptions. A taxpayer is allowed a personal exemption. A joint return by husband and wife is a return by two taxpayers, so two personal exemptions are allowable on that return. 1. A married person filing separately generally is not entitled to an exemption for a spouse. The exemption is allowed, however, if the spouse has no gross income and is not claimed as a dependent by any other taxpayer.

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C. Dependency exemptions. A dependency exemption may be claimed by a taxpayer for any qualifying dependent. Note: It might be useful to point out that the special rules involving the "uniform definition of a child" as part of the Working Families Tax Act of 2004 were intended to provide simplification—i.e., the same concepts apply in defining a child for purposes of the exemption deduction, the child tax credit, head of household status, and others. The student can be the judge as to whether it is, in fact, simplification after he or she studies all of these provisions. 1. To be a qualifying child, one must meet the requirements under the uniform definition of a child. a.
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chapter 4 notes - CHAPTER FOUR PERSONAL AND DEPENDENCY...

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