2014 Cengage Learning
Income Tax Fundamentals 2014
Student Slides
Gerald E. Whittenburg
Martha Altus-Buller
Steven Gill
1

 Since 1913, when 16 th amendment was passed, the constitutionality of income tax has never been questioned by federal courts
 Income taxes serve a multitude of purposes
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 Raise revenue
 Tool for social and economic policies o o o
Social policy encourages desirable activities and discourages undesirable activities
 Deductions for charitable contributions
 Credits for higher education expenses
Economic policy as manifested by fiscal policy
 Encourage investment in capital assets through depreciation
 Credits for investment in solar and wind energy
Both economic and social
 Exclude gain on sale of personal residence up to $250,000 ($500,000 if married)
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 Individual o
Taxable income includes wages, salary, selfemployment earnings, rent, interest and dividends o
An individual may file simplest tax form qualified for
 1040EZ
 1040A
 1040 o
If error made on one of the three above forms, can amend with a 1040X
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This formula follows Form 1040
Gross Income less: Deductions for Adjusted Gross Income (AGI)
AGI less: Greater of Itemized or Standard Deduction less: Exemption(s)
Taxable Income times: Tax Rate (using tax tables or rate schedules)
Gross Tax Liability less: Tax Credits and Prepayments
Tax Due or Refund
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2013 standard deduction
Single
Married Filing Joint (MFJ)
Qualifying Widow(er) also known as Surviving Spouse
Head of Household (HOH)
Married Filing Separate (MFS)
$ 6,100
12,200
12,200
8,950
6,100
*Plus additional amounts for blindness or over 65: $1,200 if MFJ,
MFS or qualifying widow(er) and $1,500 if HOH or Single
Exemption = $3,900/person
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 Based on filing status and gross income
◦ Generally, if exemptions plus greater of standard or itemized deductions exceed income, then filing is not necessary
◦
•
•
If taxpayer is claimed as a dependent on another taxpayer’s return, dependent’s standard deduction is:
• Greater of $1,000 or
See Figures 1.1
Earned income + $350 and 1.2 on pages
But never more than standard deduction
1-7 and 1-8
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 Single
◦ Unmarried or legally separated as of 12/31
◦ And not qualified as married filing separately, head of household or qualifying widow(er)
 Married Filing Jointly (MFJ)
◦ If married on 12/31
– even if didn’t live together entire year
◦ Based on a 2013 Supreme Court ruling that struck down a portion of the Defense of Marriage Act (DOMA), same-sex couples may now file jointly
◦ If spouse dies during year, you can file MFJ in current year
 Married Filing Separately (MFS)
◦ Each file separate returns
◦ Must compute taxes the same way - both itemize or both use standard
◦ If living in community property state, must follow state law
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 Head of Household (HOH)
◦ Tables have lower rates than single or MFS
◦ Taxpayer can file as HOH if:
 Unmarried or abandoned as of 12/31
 Paid > 50% of cost of keeping up home that was principal residence of dependent child or other qualifying dependent relative

There is one exception to principal residence requirement. If dependent is taxpayer’s parent, he/she doesn’t have to live with taxpayer.
Note: A divorced parent who meets above rules and has signed
IRS/legal document, may still claim HOH even if dependency exemption shifted to ex-spouse
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
o
10%, 15%, 25%, 28%, 33%, 35%, 39.6% o
Tax rate schedules for different filing types

o
Rates based on ordinary tax bracket
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