Principles of Taxation
Chapter 13
The Individual Tax Formula
Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc., 2000
Objectives
Slide 13-2
 filing status
 computing taxable income
 standard deduction versus itemized
deductions
 exemptions
 tax rates
 credits and AMT
 payment and filing requirements
Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc., 2000
Filing Status - Married
Slide 13-3
 If married on the LAST day of the year.
 MFJ (married filing joint) rates
 If spouse incomes very similar, single rates generate
lower tax
 If spouse incomes dissimilar, married rates generate
lower tax.
 MFJ rates apply to Surviving Spouse
 widow or widower with a dependent child
for 2 more years after death of spouse.
 MFS (married filing separately) rates are less
favorable. Typically used by separated
spouses.
Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc., 2000
Filing Status - Unmarried
Slide 13-4
 Single is the default category for unmarried
individuals (neither surviving spouse nor
head of household).
 SeeAP1 for filing status examples.
Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc., 2000
Taxable Income
Computation
Slide 13-5
 Calculate total income totalling Line 22
on 1040.
 Calculate Adjusted Gross Income
(AGI) on Line 32 of 1040.
 Subtract the greater of:
 standard deduction or
 itemized deductions
 Subtract total exemptions
Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc., 2000
Standard Deduction
Slide 13-6
 Depends on filing status. For 1999:




MFJ = $7200
MFS = $3600
HOH = $6350
Single = $4300
 Blind or aged (>=age 65)
 MJF, MFS = $850 per item
 HOH or Single = $1050
 See AP2 for standard deduction examples.
Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc., 2000
Itemized deductions
Slide 13-7
 See Schedule A (Chapter 16 details)
 Bunching. If itemized deductions are about
equal to standard deduction each year, bunch
deductions on alternate years and claim
standard deduction on other years.
 Example: My dad gives $5,000 to charity each
year. He is 72 and single. What is his
standard deduction each year? Does he
itemize? Suppose he gave $10,000 to the
church every other year?
Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc., 2000
Exemptions
Slide 13-8
 Personal exemption for the taxpayer (2 for
MFJ).
 You cannot claim yourself if someone is
claiming you.
 Exemption = $2750 in 1999 for each personal
or dependency exemption.
Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc., 2000
Exemptions for dependents
Slide 13-9
 Family member OR live in your home for entire
year.
 You provide > 1/2 financial support
 Dependent’s gross income < exemption amount
waived for child < 19 OR student-child<24.
 Dependent may not generally file a joint return.
 Dependent must be a U.S. citizen OR a resident of
US, Mex, Can
 See AP3 for practice with rules.
Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc., 2000
Rich People
Slide 13-10
 Phase-out of itemized deductions - If AGI greater
than $126,600 (MFJ) in 1999, itemized deductions are
reduced by 3% of income > $126,600. Can’t reduce
itemized deductions below 20% of the total.
 Phase-out of exemptions - IF AGI greater than
$189,950 (MFJ) in 1999, reduce exemption by 2% for
each $2500 that AGI is above the threshold. Can
reduce to 0.
Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc., 2000
Tax Formula
Slide 13-11
 Total Income
- Adjustments
= AGI
- stand ard or itemized deductions
- exemp tions
= Taxabl e Income
 Take Tax able Income to the rate
schedules at the front of the book.
Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc., 2000
Tax computations
Slide 13-12
 See AP 4 and 5 for practice with tax rate
schedules. What do you notice about married
versus single rates?
 AP4 Would Ms. G and Mr. H prefer married
or single?
 AP5 Would Mr. P and Mrs. P prefer married
or single?
Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc., 2000
Credits
Slide 13-13
 Child Credit = $500 per child in 1999. Phases
out for rich.
 Dependent care credit (child < 13 years old).
Credit amount between 30% and 20% of child
care costs depending on income range.
 Earned income credit. This is refundable - a
transfer payment to working poor. Increases
progressivity of tax rates. Credit is higher for
taxpayers with children and phases out as
income increases.
 Excess FICA withholding is refunded through
a tax return claim.
Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc., 2000
AMT (again!!)
Slide 13-14
 Same purpose - make sure rich people using
“loopholes” pay some tax.
 Taxable income
+ or - adjustments
+ preferences
= AMTI before exemption
- exemption
= AMTI
x 26% or 28%
= TMT
Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc., 2000
Payment and Filing
Requirements
Slide 13-15
 Taxes on wages are withheld each pay
period.
 Estimated taxes on other income due
4/15, 5/15, 9/15 and 1/15.
 Pay 90% of current year tax, 100% of
prior year (or 105% of prior year if 1998
AGI>$150,000).
 Tax return due 4/15, but may be
extended to 8/15 then 10/15 (LAST
DATE).
Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc., 2000