Chapter Individuals As The Taxpayer Taxation of Business Entities © 2016 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part The Big Picture (slide of 2) • Polly maintains a household in which she lives with her – Unemployed husband (Nick), – Stepdaughter (Paige), and – A family friend (Maude) • She provides more > ½ the support of both Paige and Maude – Maude was fatally injured in an automobile accident in February • Polly paid for her hospitalization and funeral expenses – Paige, an accomplished gymnast, graduated from high school last year • Paige has a part-time job but spends most of her time training and looking for an athletic scholarship to the ‘‘right’’ college The Big Picture (slide of 2) • In March, Nick left for parts unknown and has not been seen or heard from since • Based on these facts, what are Polly’s income tax concerns for the current year? – Read the chapter and formulate your response Tax Formula Concept Summary 9.1 Income -Broadly Conceived • Includes all the taxpayer’s income, both taxable and nontaxable – Essentially equivalent to gross receipts • It does not include a return of capital or receipt of borrowed funds Partial List of Exclusions from Gross Income • • • • • • • • • • • Accident insurance proceeds Annuities (cost element) Bequests Child support payments Cost-of-living allowance (for military) Damages for personal injury or sickness Gifts received Group term life insurance, premium paid by employer (for coverage up to $50,000) Inheritances Interest from state and local (i.e., municipal) bonds Life insurance paid on death • • • • • • • • • • Meals and lodging (if furnished for employer’s convenience) Military allowances Minister’s dwelling rental value allowance Railroad retirement benefits (to a limited extent) Scholarship grants (to a limited extent) Social Security benefits (to a limited extent) Unemployment compensation (to a limited extent) Veterans’ benefits Welfare payments Workers’ compensation benefits Gross Income • The Internal Revenue Code defines gross income broadly as ‘‘except as otherwise provided , all income from whatever source derived’’ • Gross income does not include unrealized gains Partial List of Gross Income Items (slide of 2) • • • • • • • • • • • • • • Alimony Annuities (income element) Awards Back pay Bargain purchase from employer Bonuses Breach of contract damages Business income Clergy fees Commissions Compensation for services Death benefits Debts forgiven Director’s fees • • • • • • • • • • • Dividends Embezzled funds Employee awards (in certain cases) Employee benefits (except certain fringe benefits) Estate and trust income Farm income Fees Gains from illegal activities Gains from sale of property Gambling winnings Group term life insurance, premium paid by employer (for coverage over $50,000) Partial List of Gross Income Items (slide of 2) • • • • • • • • • • • • Hobby income Interest Jury duty fees Living quarters, meals (unless furnished for employer’s convenience) Mileage allowance Military pay (unless combat pay) Notary fees Partnership income Pensions Prizes Professional fees Punitive damages • • • • • • • • • • • Rents Rewards Royalties Salaries Severance pay Strike and lockout benefits Supplemental unemployment benefits Tips and gratuities Travel allowance (in certain cases) Treasure trove (found property) Wages Exhibit 3.2 Deductions - Individual Taxpayers • Individual taxpayers have two categories of deductions: – Deductions for adjusted gross income (AGI) – Deductions from adjusted gross income 10 Head of Household (HH) Filing Status • Must be unmarried as of end of year or an abandoned spouse • Must pay > half the cost of maintaining a household which is the principal home of a dependent for more than half of tax year – A dependent must satisfy either the qualifying child or the qualifying relative category • A qualifying relative must also meet the relationship test 53 The Big Picture - Example 30 Head-of-Household Filing Status • Return to the facts of The Big Picture on p 9-1 • Assuming that Polly can be treated as single (i.e., not married), can Maude qualify Polly for head-of-household filing status? – The answer is no – Even though Maude can be claimed as Polly’s dependent, she does not meet the relationship test 54 Exception to the HH Requirements • HH may be claimed if taxpayer maintains a separate home for his or her parents – At least one parent must qualify as a dependent 55 Abandoned Spouse • Allows married taxpayer to file as Head of Household if taxpayer: – Does not file a joint return – Paid > half the cost of maintaining a home – Spouse did not live in home during last months of tax year – Home was principal residence of taxpayer’s child for > half of year – Can claim child as a dependent 56 The Big Picture - Example 31 Abandoned Spouse Filing Status • Return to the facts of The Big Picture on p 9-1 • Can Polly qualify as an abandoned spouse? – Yes, if she can claim Paige as a dependent—either as a qualifying child or as a qualifying relative – If so, Polly can use head-of-household filing status – If not, her filing status is married person filing separately 57 Taxes Rates • Tax liability is computed using either the Tax Table method or the Tax Rate Schedule method – Most taxpayers must use the Tax Tables – Certain taxpayers may not use the Tax Table method including: • An individual who files a short period return • Individuals whose taxable income exceeds the maximum (ceiling) amount in the Tax Table – The 2012 Tax Table applies to taxable income below $100,000 • An estate or trust • For 2014 the tax rates are 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% 58 Kiddie Tax (slide of 4) • Net unearned income (NUI) of child is taxed at parents’ rate – Child must be under age 19 at end of year (or under age 24 if a full-time student) – NUI generally equals unearned income less $2,000 (2014 tax year) • The kiddie tax does not apply if – The child has earned income that exceeds half of his or her support, – If the child is married and files a joint return, or – If both parents are deceased 59 Kiddie Tax (slide of 4) • Unearned income includes: – – – – – – – Taxable interest Dividends Capital gains Rents Royalties Pension and annuity income, and Unearned income from trusts 60 Kiddie Tax (slide of 4) • Computing NUI for Kiddie Tax for 2015: – Unearned income – Less: $1,050 – Less: The greater of: i) $1,050, or ii) Allowable itemized deductions connected with production of unearned income – Equals: net unearned income 61 Kiddie Tax (slide of 4) • Net unearned income taxed at parents’ rate – Remainder of taxable income taxed at child’s rate • Two options for computing the tax – A separate return may be filed for the child • The tax on net unearned income (referred to as the allocable parental tax) is computed as though the income had been included on the parents’ return – Form 8615 is used to compute the tax – The parents may elect to report child’s income on their own return • Certain requirements must be met 62 Refocus On The Big Picture (slide of 4) • Polly’s major concern is her filing status – If she qualifies as an abandoned spouse, she is entitled to file as head of household • If not, she is considered to be a married person filing separately – In order to be an abandoned spouse, Polly must be able to claim Paige as a dependent 63 Refocus On The Big Picture (slide of 4) • To be a dependent, Paige must meet the requirements of a qualifying child or a qualifying relative – For qualifying child purposes, Paige must meet either • The age test (i.e., under age 19), or • The full-time student (under age 24) test – Paige is not a full-time student - is she under age 19? – If so, she is a qualifying child – If Paige is not a qualifying child, is she a qualifying relative? – Here, the answer depends on meeting the gross income test – How much did Paige earn from her part-time job? » If her earnings are under $4,000, she satisfies the gross income test 64 Refocus On The Big Picture (slide of 4) • If Paige can be claimed as a dependent, Polly is an abandoned spouse entitled to head-of-household filing status – If not, she is a married person filing separately • Maude can be claimed as Polly’s dependent because she is a member of the household – It does not matter that she died in February • The dependency exemption amount need not be apportioned and is allowed in full – Because Maude is her dependent, Polly can claim the medical expenses she paid on Maude’s behalf • The funeral expenses, however, are not deductible 65 Refocus On The Big Picture (slide of 4) • Does Maude qualify Polly for head-ofhousehold filing status? – No—although she is a dependent, Maude does not meet the relationship test 66 If you have any comments or suggestions concerning this PowerPoint Presentation for South-Western Federal Taxation, please contact: Dr Donald R Trippeer, CPA trippedr@oneonta.edu SUNY Oneonta © 2016 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 67 ... Casualty Losses in excess of 10% of AGI Deductions for expenses related to • The production or collection of income, and • The management of property held for the production of income – Certain miscellaneous... dependency exemptions 14 Deductions From AGI (slide of 3) • A partial list of itemized deductions includes: – Medical expenses in excess of 10% of AGI • 7.5% if at least age 65 – – – – Certain taxes... – Certain miscellaneous itemized deductions in excess of 2% of AGI 15 Deductions From AGI (slide of 3) • The standard deduction is the sum of two components: – Basic standard deduction • Amount