CHAPTER 1
The Individual Income Tax Return
Income Tax Fundamentals 2016
Student Slides
Gerald E. Whittenburg
Martha Altus-Buller
Steven Gill
©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.
1
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
©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.
2
Objectives of Tax Law

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

Credits for taxpayers in disaster areas
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)
©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.
3
Primary Entities/Forms

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
©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.
4
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 (TI)
times: Tax Rate (using tax tables or rate schedules)
Gross Tax Liability
less:
Tax Credits and Prepayments
Tax Due or Refund
©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.
5
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 $1,050
or
Earned income + $350
But never more than standard deduction
©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.
See Figures 1.1 and
1.2 on page 1-8
6
Standard Deduction
2015 standard deduction
Single
Married Filing Joint (MFJ)
Qualifying Widow(er)
$ 6,300
12,600
12,600
also known as Surviving Spouse
Head of Household (HOH)
Married Filing Separate (MFS)
9,250
6,300
*Plus additional amounts for blindness or over 65: $1,250 if MFJ,
MFS or qualifying widow(er) and $1,550 if HOH or Single
Exemption = $4,000/person
©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.
7
Filing Status

Single
◦
◦

Married Filing Jointly (MFJ)
◦
◦

Unmarried or legally separated as of 12/31
And not qualified as married filing separately, head of household
or qualifying widow(er)
If married on 12/31 – even if didn’t live together entire year
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
©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.
8
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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duplicated, or posted to a publicly accessible website, in whole or in part.
9
Tax Computation


Seven brackets
o
10%, 15%, 25%, 28%, 33%, 35%, 39.6%
o
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
©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.
10
Special Rules for High-Income
Taxpayers

Two laws effected tax increases for high-income
taxpayers in 2013
o
The Affordable Care Act (“Obamacare”)
o
The American Taxpayer Relief Act (“Fiscal cliff” legislation)
 Additional 3.8% Medicare tax on net investment income
o
If modified AGI > $250,000 (MFJ), $200,000 (S) or $125,000
(MFS)

Additional .9% Medicare tax on earned income
o
Same income thresholds as above (details in Chapter 9)
o
Reported on Form 8959
11
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website, in whole or in part.
Special Rules for High-Income
Taxpayers (continued)

Top capital gains tax rate increased to 20%
o
If taxpayer is in 39.6% top marginal rate, then
qualified dividends and long-term capital gains are
taxed at 20%

Itemized deduction and exemption phase-outs
reinstated
12
©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.
Tax and The Internet
 Volumes of tax information available on internet
o

The IRS has also launched a YouTube video site and
an iTunes podcast site; these feature topics like how
to obtain refund or file an extension
o

www.irs.gov contains forms and publications and a
search engine to aid the user in obtaining useful
information
Also, there are feeds on Twitter (@IRSnews), a
Facebook page, a mobile phone app (IRS2GO), and
other social media modalities
A good income tax preparation site is
www.hrblock.com
13
©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.