Ch4 Individual Overview Dependents and Filing status

Potential decreases to taxable income

Deduction is a reduction in a taxpayers:

Taxable income (focused in ch. 6)

Above the line (for AGI deduction)

Below the line (from AGI deductions

Forms:

- 1040 schedule 1: Additional income and adjustments

- 1040 schedule A: Itemized deductions

2019 Form 1040 Instructions

Individual Tax Formula:

Gross Income

-For AGI deductions (tend to be deductions associated with business activities and certain investing activities)

Adjusted Gross Income (AGI)

-From AGI deductions (itemized deductions the standard deduction (OBBA) qualified tip income, qualified over time compensation, qualified car loan interest and for seniors are from AGI

- Greater of

a. Standard deduction or

b. Itemized deduction

Deduction for qualified business income (QBI)

Calculation for Taxes due or refunded

Taxable Income (tax base)

x Tax rates

Income Tax liability

+) Other taxes

Total tax

-) credits

-) prepayments

Taxes due or refund

If realized income always recognized income included in the current year tax return? no

Realized Income

Certain types of realized income items may be deferred to a subsequent year, but no income may be excluded from taxation.O

Ordinary Income or loss that is taxed at the ordinary rates provided in the tax rate

Capital gains/losses on disposition or sale of capital assets

Tax exempt:

Tax deferred: income realized during the year that is not excluded from gross income and never taxed

Ordinary: Income included in Gross Income is the current year and taxed at ordinary rates per tax rate schedules

Capital: gains or losses on investment (or personal use assets that may be taxed or favorable rates)

for AGI

Deductible capital losses can offset

Capital gains: if the losses exceeds the gains then maximum of $3000 may be used to offset ordinary income in any year.

Qualified Dividends: meet certain requirements may be taxed at a favorable rate.

All sources of Inc. are taxable unless specifically excluded through a tax provision.

Deferrals are not permitted unless a specific tax provision allows them.

Deductions for AGI cause a reaction in AGI which increases the deductibility of form AGI deductions subject to AGI limitations.

Income that is realized in the current year (meets the definition above) but is explicitly listed by a tax authority as being excluded (permanently or temporarily) from taxable income is not recognizable income in the current year.

Examples of realized income examples are:

-Wages

-Ordinary business oprations

Ex: you run a lawn care company and charge for mowing

-Gains from sales of assets what are not part of ordinary business

Ex: lawn mowing company sells some old lawn mowers

- Stock dividends

- Alimony if divorce commenced prior to Dec. 31 2018

- If after that date, not taxable income forgiveness of debt

Not all types of realized income are taxed in the same way. The way the tax base x tax rate calculation works can differ depending on the type of activity generating the tax base.

Potential increases to taxable income

Different ways increase can be treated

difference in whether or when it’s included in the tax base:

Taxable (recognized) income: is all included in the base (subject to tax) in the current year

-Tax-exempt income: permanently excluded from the base “exclusions”

- Tax deferred income: temporarily excluded not recognized in current year, but also called deferrals

- Difference ways income can be treated

- Difference in the tax rate applied

- Ordinary Income: does not receive a separate beneficial rate just uses ordinary tax rate schedule (max. MTR, of 37%)

- Types of income receiving a refunded (beneficial) tax rate

Examples of excludable income:

- Gain on the sale of your home for up to $250,000 for a single taxpayer (500,000 for married filing jointly)

- Fringe benefits: employer portion of health insurance, premiums, education coverage on many cases, company car

- Examples of deferred income: non-roth (traditional) IRA for retirement savings you receive a deduction for contributions in the year of contribution in the year of contribution.

Ex: essentially pay no tax on income withdrawal at at retirement it is taxed