August 31, 2015
INCOME TAX OVERVIEW, EXEMPTIONS, AND FILING STATUS
1. THE INDIVIDUAL INCOME TAX FORMULA
- Figure 4.1 textbook: Tax formula
a. Income (broadly conceived) $x,xxx
b. Less:Exclusions (x,xxx)
c. Gross Income $x,xxx
d. Less:Deductions for AGI (x,xxx)
e. Adjusted Gross Income (AGI) $x,xxx
f. Less From AGI deductions:
i. The greater of-
1. Total itemized deductions
2. or the standard deduction (x,xxx)
ii. Personal & dependency exemptions (x,xxx)
g. Taxable Income $x,xxx
h. Times tax rates on taxable income
i. Tax before credits $x,xxx
i. (see Tax Tables orTax Rate Schedules)
j. Less: Tax credits (x,xxx)
k. Less: Prepayments (income (x,xxx)
i. Taxes withheld,
ii. Estimated tax
iii. Prepaid taxes)
l. Tax due (or refund) $ x,xxx
3. Section 3.1 Tax Formula
a. TAX RETURN 1: Fred (age 37) and Susan (age 35) Anderson are married and file a joint income tax return. They have two children, Andy (13) and Shawn (15) who live with them and whom they support. Fred is an accountant at Watkins and Latham, CPA's. Susan is a part-time nursery school teacher. What is the amount of their tax due or tax refund? They have the following income and deductions for 2014.
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Salaries
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Fred
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81,000
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Susan
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19,970
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100,970
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Contributions to Traditional Individual Retirement Accounts (IRA'S)
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Fred
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1,500
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Susan
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500
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2,000
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Home mortgage interest expense paid to B of A (Received 1098)
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6,500
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Property taxes on home
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1,500
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Purchase of medical insurance
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10,500
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Theft of Susan's car on 3/1/2014
Cost $5000
FMV $3000
Susan was uninsured.
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Interest income from NY City Bonds
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4,000
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Social security tax paid
Fred 81,000 x 7.65%
Susan 19,970 x 7.65%
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6,196
1,527
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7,723
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California state income tax withheld in 2014
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Fred
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2,800
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Susan
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400
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3,200
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Unreimbursed travel expenses for work
Fred
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2,800
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Tax return preparation fee
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500
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500
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Investment expense- (management fee charged by Merrill Lynch)
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700
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Charitable contribution to First Church in cash
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500
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Federal tax withholding
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Fred
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6,800
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Susan
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2,300
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9,100
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Child tax credit
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2,000
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Gifts from Susan's grandmother
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25,200
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Money found on street by Fred
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30
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Sold 100 shares Intel stock on 12/1/2014 for $7000 they purchased on 1/1/2000 for $6000
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Solution:
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Salaries
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100,970
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Other Income
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30
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Long-term capital gain
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1000
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Gross Income
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102,000
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Deductions for AGI:
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(2000)
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IRA contribution
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AGI
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100,000
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LESS: Larger of Itemized or Standard Deduction
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Itemized Deductions:
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Medical Expenses:
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10,500
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Less 10 percent of AGI
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10,000
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Deductible medical expenses
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500
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Interest:Home Mortgage Interest
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6,500
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Taxes:
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California State Income Tax Paid
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3,200
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Property taxes on personal residence
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1,500
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4,700
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Charitable contributions
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500
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Casualty Losses
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Less $100 per casualty
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3,000
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Less 10% of AGI
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(100)
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0
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(10000)
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Miscellaneous Itemized Deductions:
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Unreimbursed employee expenses
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2800
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Tax return preparation fee
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500
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Investment Expenses
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700
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4000
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Less 2% of AGI
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2,000
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Total itemized deductions
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14,200
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(14,200)
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Vs Standard Deduction
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Greater of itemized or standard deduction
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Less Exemptions:
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Personal exemptions 2 x 3950
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7900
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Dependency exemptions 2 x $3950
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7900
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(15,800)
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Taxable Income
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70,000
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Total federal tax for 2014
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Ordinary Income
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69000
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9443
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LTCG
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1000
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* 0
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0
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Total Tax
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70000
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9443
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Less Tax Credits
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(2000)
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Child Tax Credit
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7,443
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Less federal tax payments
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(9100)
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Tax refund
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1657
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a. QUESTION 1: Figure out the tax due from the tax rate schedules.
a. Answer:
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Tax on Ordinary Income
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9443
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Tax on LTCG
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0
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Total
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9443
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b. QUESTION 2: What is the marginal tax bracket of the Andersons? 1570
c. QUESTION 3:
a. True or False: The Andersons pay 15% of their taxable income in federal tax?
b. What is the average tax rate of the Andersons?
i. Definition: Total tax liability ÷ taxable income= 7443/70,000=10.67
d. QUESTION 4: What is the effective tax rate of the Andersons? 7443/(70,000+4000)
a. Definition: Total tax liability ÷ Total Income 7440/106,000
i. Total Income = Taxable income + Excludible income = 10200+4000
b. Answer:Economic income = 70,000+ 4,000 (tax-exempt interest)
QUESTION 5: If instead of $500, the Andersons contributed $3500 to their Church, how much federal income tax would they save by the increased $3000 contribution?
3000*15%=450 (Deduction X marginal)
QUESTION 7:If the home mortgage interest expense were $2,500 instead of $6,500 would the Andersons itemize their deductions or take the standard deduction.
TAX RETURN 1: William (age 42) and Claire (age 53) Wilson are married and file a joint income tax return. They have three children, Sharon (15) and Kim (12) Peter (3) who live with them and whom they support. William is a manager at Subway, Inc. Claire is a part-time cashier at Costco. They live at 1310 Walnut Lane, Salinas, Ca. 94113. They both wish to contribute $3 to the Presidential Election Campaign. What is the amount of their tax due or tax refund? They have the following income and deductions for 2014. (You can make up social security numbers).
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Salaries
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William
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63,150
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Claire
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35,200
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98,350
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Contributions to Traditional Individual Retirement Accounts (IRA'S)
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William
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3,300
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Claire
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1,150
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4450
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Home mortgage interest expense paid to B of A (Received 1098)
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5800
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Property taxes on home
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3,900
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Purchase of medical insurance
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10,300
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Theft of Claire's car on 3/1/2014
Cost $30,000
FMV $13,350
Claire was uninsured.
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Interest income from Houston City Bonds
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7,000
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Social security tax paid
William 63,150 x 7.65%
Claire 35,200 x 7.65%
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4831
2693
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7524
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California state income tax withheld in 2014
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William
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2920
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Claire
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530
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3450
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Unreimbursed travel expenses for work
William
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1700
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Tax return preparation fee
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450
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450
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Investment expense- (management fee charged by Merrill Lynch)
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980
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Charitable contribution to First Church in cash
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740
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Federal tax withholding
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William
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2,729
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Claire
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1,015
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3744
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Child tax credit
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Gifts from Claire's grandmother
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4,310
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Money found on street by William
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880
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Sold 280 shares XYZstock on 3/11/2014 for $16,500 they purchased on 11/13/2004 for $14,200
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Answer:
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Salaries
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98350
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Other Income
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880
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Long-term capital gain
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2300
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Gross Income
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101530
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Deductions for AGI:
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(16,650)
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IRA contribution
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AGI
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84880
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LESS: Larger of Itemized or Standard Deduction
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Itemized Deductions:
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Medical Expenses:
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10,300
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Less 10 percent of AGI
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8488
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Deductible medical expenses
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?
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Interest:Home Mortgage Interest
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5800
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Taxes:
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California State Income Tax Paid
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3450
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Property taxes on personal residence
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3,900
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7350
|
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Charitable contributions
|
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740
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|
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Casualty Losses
|
?
|
|
|
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Less $100 per casualty
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(100)
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Less 10% of AGI
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(8488)
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0
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Miscellaneous Itemized Deductions:
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Unreimbursed employee expenses
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1700
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Tax return preparation fee
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450
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Investment Expenses
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980
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3130
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Less 2% of AGI
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1698
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Total itemized deductions
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Vs Standard Deduction
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Greater of itemized or standard deduction
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Less Exemptions:
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Personal exemptions 2 x 3950
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Dependency exemptions 2 x $3950
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Taxable Income
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Total federal tax for 2014
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Ordinary Income
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LTCG
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1
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Total Tax
|
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Less Tax Credits
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Child Tax Credit
|
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|
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Less federal tax payments
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Tax refund
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