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Chapter 4 - Individual income tax overview, exemptions, and filing status. Upon completion of this lesson, the successful participant will be able to: Describe the formula for calculating an individual’s tax liability and generally explain each formula component, explain the requirements for determining a taxpayer’s personal and dependency exemptions, determine a taxpayer’s filing status,. | Chapter 4 Individual Income Tax Overview, Exemptions, and Filing Status Learning Objectives Describe the formula for calculating an individual’s tax liability and generally explain each formula component. Explain the requirements for determining a taxpayer’s personal and dependency exemptions. Determine a taxpayer’s filing status. Individual Income Tax Formula Gross income Minus: For AGI deductions Equals Adjusted gross income Minus: From AGI deductions: Greater of (a) Standard deduction or (b) Itemized deductions and Personal and dependency exemption Equals Taxable income Individual Income Tax Formula Taxable income Times: Tax rates Equals: Income tax liability Add: Other taxes Equals: Total tax Minus: Credits Minus: Prepayments Equals: Taxes due or (refund) Please insert exhibit 4-1 on this slide where indicated Individual Income Tax Formula Individuals report taxable income to the IRS Reported on Form 1040 U.S. tax laws use all-inclusive gross income concept Realized income | Chapter 4 Individual Income Tax Overview, Exemptions, and Filing Status Learning Objectives Describe the formula for calculating an individual’s tax liability and generally explain each formula component. Explain the requirements for determining a taxpayer’s personal and dependency exemptions. Determine a taxpayer’s filing status. Individual Income Tax Formula Gross income Minus: For AGI deductions Equals Adjusted gross income Minus: From AGI deductions: Greater of (a) Standard deduction or (b) Itemized deductions and Personal and dependency exemption Equals Taxable income Individual Income Tax Formula Taxable income Times: Tax rates Equals: Income tax liability Add: Other taxes Equals: Total tax Minus: Credits Minus: Prepayments Equals: Taxes due or (refund) Please insert exhibit 4-1 on this slide where indicated Individual Income Tax Formula Individuals report taxable income to the IRS Reported on Form 1040 U.S. tax laws use all-inclusive gross income concept Realized income measurable change in property rights All realized income included in gross income unless specifically excluded or deferred Recognized income Reported on tax return Individual Income Tax Formula Excluded and Deferred income not included in gross income Excluded income Income never included in taxable income Municipal bond interest Gain on sale of personal residence Deferred income Income included in a subsequent tax year Installment sales Like-kind exchanges Individual Income Tax Formula Character of income or loss Determines rates applicable to income or loss in current year Tax exempt – no tax Tax deferred – no tax in current year (current year tax rate is zero) Ordinary – ordinary rates from tax rate schedule Qualified dividends taxed at 0, 15%, or 20% depending on taxpayer’s income level Capital gain or loss – depends on whether short-term or long-term From selling capital asset If held capital asset more than a year gain or loss is long-term, otherwise it is short-term Net .
