CHAPTER 1
The Individual Income Tax Return
Income Tax Fundamentals 2013
Student Slides
Gerald E. Whittenburg
Martha Altus-Buller
Steven Gill
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History of Taxation
Since 1913, when 16th
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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Objectives of Tax Law
 Raise revenue
 Tool for social and economic policies
o
Social policy encourages desirable activities and discourages
undesirable activities
• Deductions for charitable contributions
• Credits for higher education expenses
o
Economic policy as manifested by fiscal policy
• Encourage investment in capital assets through depreciation
• Credits for investment in solar and wind energy
o
Both economic and social
• Exclude gain on sale of personal residence up to $250,000 ($500,000 if
married)
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Primary Entities/Forms
 Individual
o
o
o
Taxable income includes wages, salary, selfemployment earnings, rent, interest and dividends
An individual may file simplest tax form qualified for
• 1040EZ
• 1040A
See next slide
• 1040
If error made on one of the three above forms, can
amend with a 1040X
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Tax Formula for Individuals
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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Standard Deduction and Exemptions
2012 standard deduction
Single
Married Filing Joint (MFJ)
Qualifying Widow(er)
$ 5,950
$11,900
$11,900
also known as Surviving Spouse
Head of Household (HOH)
Married Filing Separate (MFS)
$ 8,700
$ 5,950
*Plus additional amounts for blindness or over 65: $1,150 if MFJ,
MFS or qualifying widow(er) and $1,450 if HOH or Single
Exemption = $3800/person
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Who Must File
 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 $950
See Figures 1.1
or
and 1.2 on page 1-8
Earned income + $300
But never more than standard deduction
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Filing Status
 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
◦ Same-sex couples may not 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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Filing Status
 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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Tax Computation
 Six brackets
o
o
10%, 15%, 25%, 28%, 33%, 35%
Tax rate schedules for different filing
types
 Qualifying dividends and net long-term
capital gains may be taxed at lower
rates
o
Rates based on ordinary tax bracket
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