ACCT 255.D1 INDIVIDUAL INCOME TAX, Spring Quarter 2009
Week 1
There will be an “optional” Orientation 7:00 - 8:00 PM, Thursday, April 9, 2009, in
the Instruction Building, Room IB 2312C - 2412C (Second Floor Conference Room;
entrance is inside, near North set of elevators/stairs).
Although this orientation session is optional, if you have not taken an on-line class
before, it may be useful. Please start on the course during the week, before coming
to the orientation session, if you can. Bring your questions, or any problems you
are having with using the course software! Note – if you have any trouble getting
your textbook right away, don’t worry, as we can also use the IRS Publication 17,
Your Federal Income Tax, as a back-up resource (or temporary replacement) for the
text.
In this first week, we will do the following:
1.
2.
3.
4.
Introduce ourselves to each other.
Find out about online resources available to help us learn about income taxes.
Find out about Internal Revenue Service publications for taxpayers.
Learn about different types of tax systems – flat, progressive (or graduated), regressive,
or even “negative.”
5. Get an overview of the federal income tax system.
6. Learn about the basic formula for determining income-tax liability.
7. Find out which people MUST file income tax returns, and which people don’t have to
file.
8. Find out how the taxpayer’s “Filing Status” is determined.
9. Look at the 2008 tax-rate schedules for different Filing Status taxpayers
10. Prepare our first simple income tax return!

INTRODUCTIONS
Please go to the Discussions board (located in the Communication area) and using the
“Introductions of Class Members” thread, post a brief background about who you are
and why you are taking this class, and provide a picture, so we can associate a face with
your name! It’s always fun to hear about the kinds of extra-curricular activities
(hobbies, sports, etc) everyone is interested in. Often, our students make connections
based on similar interests outside of the usual school activities.

ONLINE RESOURCES
Please click on the link for “Online Resources” on the main website page for the class,
and take a look at some of the materials that are easily available to us online.

IRS PUBLICATIONS & LINKS
There are literally hundreds of IRS publications that are available for our use and study.
However, as a start, we will focus on Publication 17, Your Federal Income Tax. Go to the
following link:
http://www.irs.gov/app/picklist/list/publicationsNoticesPdf.html
You can click on the link to the Publication 17 PDF file to open it. As you will see, this
pdf file is about 300 pages long, and may take a little while to download to your
computer. This file can also serve as a second “text” for you, to compare with the
language in your textbook. (Or, if you do not have your textbook yet, you can use this as
a temporary substitute for the textbook.)
This publication provides an overview of the income tax system, and provides
instructions for the most common income tax forms that we will be using in this class.

DIFFERENT TYPES OF TAX SYSTEMS
As indicated in your text, there are several different types of possible taxing systems
(flat tax, progressive tax, regressive tax) for a government to use to raise revenue to
provide essential government services like police protection, education, retirement,
healthcare, etc. The government can also utilize the tax system to accomplish social
goals as well – to encourage business investment, to encourage people on welfare to
work instead, to encourage people to save ahead for their own retirement, etc.

OVERVIEW OF THE US FEDERAL INCOME TAX SYSTEM
The US income tax system is a progressive tax system, where people making larger
incomes are taxed at a higher rate than people with lower incomes. For people at the
lowest levels of income, there is also a possibility for a “negative” income tax, or small
subsidy, where they get more back from the government than they have paid in!
 BASIC INCOME-TAX FORMULA
A most-basic income tax formula might look something like this:
Income Received
$10,000
(Less Allowable Deductions)
( $ 3,000 )
= Taxable Income
$ 7,000
X Tax Rate of 10%
x
.10
= Income Tax
$ 700
As you will soon see, our income tax formula starts out fairly simple like this, but
then can become quite complex as we get more complicated income and expenses!

STANDARD DEDUCTION BASICS:
Look at Pages 1-7 through 1-10 in your Johnson text (or pages 138-140 in the IRS
Publication 17 for 2008).
You will see that most taxpayers are allowed to deduct a certain amount (called a
“standard deduction”) from their income, that is not taxed at all ! This standard
deduction varies in amount, depending on what “filing status” the taxpayer has. There
are also some “additional” standard deduction amounts for special taxpayers – those
who are elderly or blind.
But for now, let’s take at the Basic Standard Deduction amount for the following filing
status types:
SINGLE
$ 5,450
MARRIED FILING SEPARATELY
$ 5,450
HEAD OF HOUSEHOLD
$ 8,000
MARRIED FILING JOINTLY
$10,900
(Each year, these are adjusted for inflation.)

PERSONAL EXEMPTION BASICS:
In addition, most taxpayers are allowed to take another deduction for themselves and
one for each dependent. (We will go over dependents soon.) For 2008, this amount is
$3,500, regardless of “filing status.”
When we add the Standard Deduction to the Personal Exemption amount, we find out
the total amount of ALLOWABLE DEDUCTIONS that the person can claim – in other
words, how much can the person earn, and still not have any Taxable Income?

ADDITIONAL STANDARD DEDUCTION AMOUNTS??
Above, we indicated that in addition to the “Basic Standard Deduction” there are also
some “Additional Standard Deduction amounts” that can be deducted by certain
taxpayers – the elderly and the blind. So, how much? It depends on Filing Status!
Anyone who is 65 or older is entitled to an additional amount of either $1,050 (for
Married Filing Jointly, Married Filing Separately, or Surviving Spouse) or $1,350 (for
Single or Head-of-Household).
Anyone who meets the definition of “blind” can qualify for the same amount, for the
same filing status.
So – a SINGLE taxpayer, who is 30, and in good health, would be entitled to just a Basic
Standard Deduction of $5,450.
A SINGLE taxpayer who is 66, and blind, would be entitled to a Total Standard Deduction
of $8,150 (5,450 + 1,350 + 1,350).

WHICH PEOPLE MUST FILE A TAX RETURN? Based on the calculations above, we can see
which taxpayers have to file – the ones who have Taxable Income - where their Income
less (Basic Standard Deduction + Additional Standard Deduction for Elderly + Personal
Exemptions) leaves a balance!
So – a SINGLE taxpayer, age 66, could have a total of $10,300 in income, and not have
any Taxable Income. (The IRS table on this appears to ignore the Additional Standard
Deduction for Blindness.)
Here is a table from page 5 of the IRS Publication 17 for 2008, which illustrates the most
common situations where taxpayers have to file in the 2008 Tax Year:
NOTE: There are some special rules for people in certain circumstances that require
them to file, even if they don’t have the above levels of income:
1. There is a special rule for Married Filing Separate filing status! (see table above)
2. There is a special rule for someone who has Self-Employment net income of $400 or
more.
3. There is a special rule for people who received something called “Advanced Earned
Income Credit” payments from an employer.
4. There is a special rule for people who received tips, and Social Security tax was not
withheld from these tips.

LET’S FIGURE OUT WHAT FILING STATUS OPTIONS WE HAVE:
There are five choices for “Filing Status”
Single
Married Filing Jointly
Married Filing Separately
Head of Household
Qualifying Widow(er) with Dependent Child
The definitions of these five Filing Status choices are not necessarily simple, or what you
would expect – it takes five pages of small print in Pub 17 (pages 20-24), or in your
Johnson text (pages 1-22 to 1-26) to describe the differences in these status choices!

LOOKING AT TAX-RATE SCHEDULES FOR 2008 TAX RETURNS. (These are shown on Page
271 of IRS Pub 17 – the Johnson text does not have these printed.)
Let’s take a look at the tax rates for a SINGLE taxpayer:
Range:
Tax Rate:
Size of Bracket:
Taxable Income from $1 to $8,025:
10%
The First $ 8,025
Taxable Income from $8,026 to $32,550:
15%
The Next $ 24,525
Taxable Income from $32,551 to $78,850:
25%
The Next $ 46,300
Taxable Income from $78,851 to $164,550:
28%
The Next $ 86,700
Taxable Income from $164,551 to $357,700:
33%
The Next $193,150
Taxable Income over $357,700:
35%
Everything Over
So, if we have a Single taxpayer who has $7,000 in Taxable Income, her income tax
would be calculated like this:
Total Taxable Income:
$7,000
All taxed at 10% rate:
x 10% = $700 Tax
A Single taxpayer who has $18,025 in Taxable Income would pay the following tax:
Total Taxable Income: $18,025
First $ 8,025 x 10% = $ 802.50
Next $10,000 x 15% = $ 1,500.00
Total Tax =
$ 2,302.50
A Single taxpayer who has $35,000 in Taxable Income would pay the following tax:
Total Taxable Income: $35,000
First $ 8,025 x 10% = $ 802.50
Next $24,525 x 15% = $ 3,678.75
Next $ 2,450 x 25% = $ 612.50
Total Tax =
$ 5,093.75
A Single taxpayer who has $300,000 in Taxable Income would pay the following tax:
Total Taxable Income: $300,000
First $ 8,025 x 10% = $
802.50
Next $ 24,525 x 15% = $ 3,678.75
Next $ 46,300 x 25% = $ 11,575.00
Next $ 86,700 x 28% = $ 24,276.00
Next $135,500 x 33% = $ 44,715.00
Total Tax =
$ 85,047.75
(What “average” tax rate does this come to?)
In your Johnson text, just after Page 15-66, you will see several pages of “Tax Tables” for
2008 that are prepared by the IRS (this is also on pages 258-269 of IRS Pub 17), so that
taxpayers don’t have to do all of the calculations that we just did above. The IRS has
calculated a tax amount, for income increments of $50, so it is not likely that our
calculations will be exactly the same as the IRS has calculated. As long as the taxpayer’s
Taxable Income is under $100,000, we are supposed to use the IRS Tax Tables to
calculate the tax owed.
IF the taxpayer’s Taxable Income is over $100,000, we are supposed to use the IRS Tax
Rate Schedules found on page 271 of Publication 17.

DEPENDENTS – WHO QUALIFIES ???
This is covered on pages 1-13 through 1-21 in the Johnson text, and also on pages 25-35
of IRS Pub 17. At first glance, you would think it is quite easy to figure out who a
dependent is – someone who depends on the taxpayer, right? That’s a little too simple
for the government!! You will see that there are FIVE TESTS that must EACH be passed
for someone to qualify as a Dependent for income-tax purposes. Please read through
the pages in Johnson text first, then go for the details in the Pub 17 if you have time:
Gross Income Test
Support Test
Citizenship/Residency Test
Joint-Return Test
Relationship Test

LET’S PREPARE OUR FIRST BASIC INCOME-TAX RETURN.
We will start with the Form 1040 EZ for 2008
This is supposed to be the “simplest” income tax form.
Basic Name and Address goes into the top section, along with Social Security Numbers.
Line 1 – Here put the Wages from Box 1 of Form W-2 for wages income.
Line 2 – Here put the total interest income (from banks, brokers, savings & loan
associations, etc.)
Line 3 – Here put any Unemployment Compensation the taxpayer may have received.
Line 4 – total it up
Line 5 – ASSUMING the taxpayer is not a dependent of another, put in a deduction of
$8,950 for a Single taxpayer with No Dependents, or $17,900 for Married Filing Jointly
with No Dependents. (For Singles, this is the total of the Single Standard Deduction
$5,450, plus one Exemption of $3,500. For MFJ, this is the total of the MFJ Standard
Deduction of $10,900, plus two Exemptions of $3,500 each.)
Example:
SINGLE taxpayer has $20,000 in Wages on Form W-2. No Interest Income, and No
Unemployment Compensation.
So, Line 1 is $20,000
Line 2 is blank
Line 3 is blank
Line 4 is $20,000
Line 5 is $8,950 – these are the Deductions
Line 6 should be $11,050 – this is the Taxable Income
Line 11 Tax from the Tax Tables should be $ 1,260
Will the taxpayer get a refund from the IRS? Will the taxpayer owe money to the IRS?
That will depend on how much he/she has paid in, or has credit for – which we will deal
with shortly.