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Individual Income Tax Overview, Dependents, and Filing Status
Individual Income Tax Overview, Dependents, and Filing Status
2020 Edition
Chapter 4
Individual Income Tax
Overview, Dependents,
and Filing Status
©2020 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
Learning Objectives
1. Describe the formula for calculating an
individual taxpayer’s taxes due or refund.
2. Explain the requirements for determining
who qualifies as a taxpayer’s dependent.
3. Determine a taxpayer’s filing status.
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The Individual Income Tax
Formula 1
Gross income.
• Minus: For AGI (above the line) deductions.
• Equals: Adjusted gross income (AGI).
• Minus: From AGI (below the line) deductions:
• Greater of (a) Standard deduction or.
(b) Itemized deductions and.
• Deduction for qualified business income.
• Equals: Taxable income.
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The Individual Income Tax
Formula 2
Taxable income.
• Times: Tax rates.
• Equals: Income tax liability.
• Plus: Other taxes.
• Equals: Total tax.
• Minus: Credits.
• Minus: Prepayments.
• Equals: Taxes due or (refund).
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The Individual Income Tax
Formula 3
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The Individual Income Tax
Formula 4
Deferred income.
• Income included in a subsequent tax year.
• Installment sales.
• Like-kind exchanges.
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The Individual Income Tax
Formula 5
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The Individual Income Tax
Formula 6
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The Individual Income Tax
Formula 7
Capital assets.
• Generally all assets except.
• Accounts receivable.
• Inventory.
• Assets used in trade or business, including supplies.
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The Individual Income Tax
Formula 8
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The Individual Income Tax
Formula 9
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The Individual Income Tax
Formula 10
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The Individual Income Tax
Formula 12
Tax calculation.
• The United States uses a progressive tax rate
schedule.
• Rates range from 10 percent to 37 percent.
• Some items are taxed at preferential rates.
• Long-term capital gains.
• Qualified dividends.
• Tax on these items is calculated separately from income
taxed at ordinary rates.
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The Individual Income Tax
Formula 13
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The Individual Income Tax
Formula 14
Tax prepayments.
• Payments already made toward tax liability
including:
• Income taxes withheld from wages by employer.
• Estimated tax payments made during the year.
• Taxes overpaid in prior year and applied toward current
year’s liability.
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Who Qualifies as Taxpayer’s
Dependent
Determining who qualifies as dependent is
relevant for determining:
• Filing status.
• Eligibility for tax benefits such as the child tax
credit and the American opportunity credit.
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Personal and Dependency
Exemptions 1
Dependency requirements.
• Citizen of United States or resident of United
States, Canada, or Mexico.
• Must not file joint return with spouse.
• Exception—if no tax liability filing jointly or separately.
• Must be qualifying child or qualifying relative
of taxpayer.
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Personal and Dependency
Exemptions 2
Qualifying child.
• Relationship test.
• Age test.
• Residence test.
• Support test.
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Qualifying Child 1
Relationship test.
• Taxpayer’s son, daughter, stepchild, an eligible
foster child, brother, sister, half-brother, half-
sister, stepbrother, stepsister, or a descendant of
any of these relatives.
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Qualifying Child 2
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Qualifying Child 3
Residence test.
• Same residence as taxpayer for more than half
the year.
• Exception for temporary absences such as education.
Support test.
• Child must not provide more than half of his or
her own support.
• Scholarships of actual child (not grandchild, for
example) are excluded from support computation.
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Qualifying Child 4
Tiebreaking rules.
• Parent over nonparent.
• If both parents, based on who child resided with
most.
• If same, parent with higher AGI.
• If nonparents, highest AGI gets exemption.
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Qualifying Child Example 1
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Qualifying Child Example Solution 1
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Qualifying Child Example 2
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Qualifying Child Example Solution 2
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Qualifying Child Example 3
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Qualifying Child Example Solution 3
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Personal and Dependency
Exemptions
Qualifying relative.
• Relationship test.
• Support test.
• Gross income test.
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Qualifying Relative 1
Relationship test.
• A descendant or ancestor of the taxpayer (for
example, child, grandchild, parent, or grandparent),
• A sibling of the taxpayer, including a stepbrother or
stepsister.
• A son or daughter of the taxpayer’s brother or sister
(not cousins).
• A sibling of the taxpayer’s mother or father.
• An in-law (mother-in-law, father-in-law, sister-in-law,
or brother-in-law) of the taxpayer, or.
• An unrelated person who lives in taxpayer’s home
entire year.
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Qualifying Relative 2
Support test.
• Taxpayer must pay more than half of living
expenses (support).
• Scholarships of actual child excluded.
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Dependency Exemption Example
John is a 22-year-old student who has lived
in the dorms for most of the year but spends
the rest of the year living with his parents.
He earned a $5,000 scholarship for the
school year and has worked hard to support
himself through school, earning $6,000 to
pay for his own expenses. His parents have
supported him by paying $7,000 for food,
clothing, and lodging expenses. Are John’s
parents able to claim him as a dependent?
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Dependency Exemption Example
Solution
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Filing Status 1
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Filing Status 2
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Filing Status 3
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Filing Status 4
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Filing Status 5
Head of household.
• Unmarried or considered unmarried at end of
year.
• See discussion of married individuals treated as
unmarried (abandoned spouses) below.
• Not a qualifying widow or widower.
• Pay more than half the costs of keeping up a
home during the year.
• Lived in taxpayer’s home with a “qualifying
person” for more than half of the year.
• Exception for parents (see below).
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Filing Status 6
Qualifying person.
• Qualifying child.
• Qualifying relative who is taxpayer’s mother or
father.
• Parent need not live with taxpayer.
• Taxpayer must pay > ½ cost of maintaining separate
household for taxpayer’s mother or father.
• Parent must qualify as taxpayer’s dependent.
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Filing Status 8
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Filing Status Example 1
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Filing Status Example Solution 1
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Filing Status Example 2
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Filing Status Example Solution 2
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Filing Status Example 3
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End of Presentation
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