ACC 375

Lecture Outline for Class 2

The individual tax model:

Gross Income5

Less Deductions FOR AGI1

=AGI

Less the greater of the Standard Deduction2 or Total Itemized Deductions3

Less Personal and Dependency Exemptions4

=Taxable income (loss)

Calculate tax though Tax Tables or Tax Rate Schedules

+ additions to tax

Less Tax Credits

=Tax Due or Tax Refund

  1. Deductions FOR AGI (p.404)
  1. Standard Deduction

TP takes the standard deduction if it is more than total itemized deductions. The standard deduction is composed of the basic standard deduction and an additional standard deduction for certain taxpayers.

Standard Deduction

$10,000 married filing a joint return

$5,000 married filing separately

$7,300 head of household

$5,000 single individual

Additional standard deduction if taxpayer is elderly (age 65 or older) or blind

$1,250 if single or head of household

$1,000 if married

Some taxpayers have limitations on their standard deduction:

  1. Itemized Deductions (starting on p. 417)

Will be covered in Class 3 in more detail

  1. Personal and Dependency Exemptions

TP gets a personal exemption for him and for spouse. Someone who is claimed as a dependent on another TPs return does not get a personal exemption (but does get a standard deduction). The standard deduction amount is indexed for inflation each year. For 2005, the amount is $3200. In addition, a taxpayer can take a dependency exemption of $3200 for each qualifying exemption.

An exception to the more-than-50% test involves the multiple support agreement. When a group of TPs support another taxpayer where no one single person provides >50% but as a group they provide >50%, then any person persons meeting the relationship test and provides more-than-10%, may be designated to take the dependency exemption. This is very useful for children who support a parent.

An exception to the support test applies as to children of divorced or separated

parents.

(1) Pre-2005 rules awarded the exemption(s) to the custodial parent unless he

or she issued a waiver (Form 8332) in favor of the noncustodial parent.

(2) Under the Working Families Tax Relief Act, the noncustodial parent is

awarded the exemption(s) if the divorce decree (or separation agreement)

so specifies or the custodial parent issues a waiver (Form 8332) in favor of

such noncustodial parent.

(3) Under the new rules, therefore, a conclusive presumption no longer favors

the custodial ex-spouse. If the noncustodial spouse cannot meet the

conditions specified (e.g., the divorce decree is silent, no waiver is issued),

the exemption(s) will be awarded in accordance with the usual tests

applicable to either the qualifying child or qualifying relative category

(whichever is applicable).

  1. Gross Income

When is income recognized?

Exceptions for the accrual basis TP

Exceptions for the cash basis TP

Who recognizes the income?

Assignment of Income

Community Property Laws

Sources of Income:

Interest

OID

Below market rate loans

Dividend income

Stock dividends

Annuity income

Prizes and awards

Welfare

Unemployment

Social Security

Legal Settlements

Alimony

Child Support

Tax Benefit

Gifts and Inheritances

Life Insurance

Accident and Health Insurance

Scholarships