Individual Income Tax Essay Sample
Exclusions- points specifically removed from the revenue enhancement base by jurisprudence Deductions- subtracted from the revenue enhancement base instead than to the full excluded. Flat tax- one individual rate applied to the full revenue enhancement base. Progressive tax- rates increase as revenue enhancement base additions. ( Federal income revenue enhancement ) Tax credit- authorized tax write-off in gross revenue enhancement liability
Real and personal belongings taxes- Real ( existent estate ) Personal ( hard to implement because belongings is easy concealed or moved. with the exclusion of vehicles which must be registered ) Excise tax- imposed on sale of specific points ( coffin nails. luxury goods. etc. ) Use tax- Purpose is to forestall turning away of gross revenues revenue enhancement ( i. e. purchasing goods in Oregon ) . Imposed on usage of personal belongings Transfer tax- revenue enhancement imposed on the right to reassign belongings. either by gift or heritage. Tax imposed on the giver. Includes a once-in-a-lifetime exclusion and per beneficiary exclusion. Two categories- Gift and Estate revenue enhancements Gift tax- Allowed a $ 13. 000 per twelvemonth per beneficiary exclusion ( 26. 000 if given jointly with partner ) . Unlimited matrimonial tax write-offs and charitable part. Taxable gifts allowed an once-in-a-lifetime recognition of $ 1. 730. 000 and for the nonexempt estate. an freedom equivalent of recognition of 1. 730. 000 for 2012 to the extent the recognition was non used for the gift revenue enhancement. Estate tax- Combined with nonexempt gifts. Can subtract parts to spouse and charity. Once-in-a-lifetime freedom equiv. of $ 5. 000. 000 to the extent it was non used for gift revenue enhancement intents. FICA tax-Social security and Medicare. Employee: S. S- 4. 2 % $ 110. 000 basal medicare-1. 45 % . Employer: S. S-6. 2 % medicare- 1. 45 % Self-employment tax- same as FICA 13. 3 % $ 110. 000 base 2. 9 % in surplus of base FUTA tax- Employer revenue enhancement. 6. 2 % on first $ 7000 of covered rewards
– Exclusions
= Gross income
– Above-the-line tax write-offs from gross income
= AGI adjusted gross income
– Below-the-line tax write-offs from AGI
1. Itemized tax write-offs or standard tax write-off ( greater of two )
2. Exemption tax write-offs
= Taxable income
* Applicable revenue enhancement rate ( s )
= Gross revenue enhancement liability
– Tax credits and prepayments
= Net revenue enhancement or refund collectible
Exclusions are similar income points that do non demo up on a return. Tax write-offs are like disbursals and make demo up on a return. Types of exclusions- municipal bonds involvement. gifts. heritages. child support payments. and loans Standard deduction- Married filing jointly ( lasting partner ) $ 11. 900. Head of family $ 8. 700 Extra criterion deductions- Not married: $ 1. 450 if over 65. $ 1. 450 if lawfully blind Married: $ 1. 150 if 65 or over. $ 1. 150 if lawfully blind ( each married taxpayer ) Dependency exemption- $ 3. 800 each dependant ( including ego and partner if married ) . If decease occurs during twelvemonth entitled to exemption for the twelvemonth for asleep partner. If divorces or lawfully offprints during twelvemonth. non entitled to exemption for partner. Qualifying child tests-1 ) must be taxpayers child. stepchild. Besides included grandchildren. siblings. niece. or nephew. 2 ) Child must populate with taxpayer for more than half the twelvemonth. 3 ) Child must be under 19 or 24 if kid is full-time pupil. Classified as full-time pupil if attends college any 5 months during twelvemonth. 4 ) Child can’t provide more than ? of their ain support. Support includes nutrient. vesture. med. attention. lodging. or instruction.
If dependant does non pass financess received. they don’t count towards support. Scholarship is excluded from support trial. Qualifying relative- 1 ) relationship trial is met if dependant is comparative or household member. Relative includes all relationships for measure uping child class and parents. uncles. aunts. and certain in-laws. Test can be met even if dependant is non related to the taxpayer. but lives with them. 2 ) taxpayers must supply over ? of dependent’s support for the twelvemonth. Possible to run into support test even if no individual individual provides more than ? the support. Under multiple support understanding individual who wants to claim dependent must lend more than 10 % of support and all others who provide more than 10 % of support must hold in composing to allow individual claim freedom. M. S. understanding most common with an aged parent where no individual kid contributes more than 50 % of the support. 3 ) dependant must hold gross income less than the sum of the freedom ( 3. 800 ) .
Scholarships merely count if they are nonexempt ( for room & A ; board ) . Social security payments don’t count in gross income trial but do count in support trial ( to the extent spent ) Dependent’s death- If deceased during the twelvemonth they may be claimed if general conditions were satisfied to twenty-four hours of decease. Children of divorced parents- 1 ) By and large. parent with detention of kid for more than half the twelvemonth would be eligible to claim ( tutelary parent ) 2 ) Custodial parent may hold to let noncustodial partner to claim the kid Personal freedom for dependents- No tax write-off is allowed on the return for person claimed as a dependant. For earned income a taxpayer claimed as a dependant on person else’s return is entitled to a criterion tax write-off up to the sum of earned income plus $ 300. non to transcend the standard tax write-off for individual taxpayers ( 5. 950 ) . Standard tax write-off for dependents- May claim criterion tax write-off equal to the greater of 1 ) $ 950 2 ) person’s earned income plus $ 300 up to standard tax write-off sum of $ 5950 ( Single single rate ) Kiddie Tax ( kids under 19 or 24 if pupil ) – For unearned income one time standard tax write-off is used up. the first $ 950 of unearned income is taxed at child’s rate and unearned income in surplus of that sum is taxed at parent’s rate.
Rule does non use if child ‘s earned income exceeds ? of their support. if kid is married and files jointly. or if both parents are deceased. Married registering jointly- Entitled if married during the twelvemonth or if spouse dies during the twelvemonth. Surviving partner can register joint return for first 2 old ages following the twelvemonth the partner dies provided they maintain a place where a dependent kid or stepchild lives. Head of Household- Must by and large maintain a place that is the legal residence of a dependant who satisfies measure uping kid or comparative standards. For measure uping comparative taxpayer must be related to dependent. Exceptions: 1 ) Person who would be tp’s measure uping kid if the tp had non released the dependence tax write-off to the noncustodial parent still counts as a measure uping kid. 2 ) tp’s parent. if he/she qualifies as a dependant. need non populate with tp. 3 ) Abandoned partner regulation permits a married tp to utilize HOH if the partner maintains a place for dependent kid for the full twelvemonth and the tp’s partner did non populate at place during last six months of the revenue enhancement twelvemonth. Tp must besides pay for more than ? cost of keeping place for revenue enhancement twelvemonth. Single- Tps individual at terminal of the twelvemonth usage this rate. Includes divorced and separated tps Married registering separately- Married twosomes unwilling to unite fiscal records
Recovery of Capital doctrine- by and large. no income is capable to revenue enhancement until the tp recovers the capital investing ( common stock ) Capital expenditures- belongings with utile life more than a twelvemonth is depreciated or amortized over utile life. Cash-equivalent- if tp is paid in sort ( stock portions. auto. etc. ) usage FMV of goods/services received to mensurate income Constructive receipt- tp has nonexempt income if money is made available to them w/out significant limitations ( bank involvement recognition or pay progress ) Claim of right doctrine- income is includable when really or constructively received by the tp even though the tp might be required to refund the sum at a hereafter day of the month. ( income from illegal minutess or insurance committees paid in progress ) if tp is required to refund income it may be deducted in the twelvemonth repaid to the extent it was antecedently included as income. If sum is greater than $ 3. 000 tp can take between the greater of the revenue enhancement decrease due to the tax write-off or the sum of extra revenue enhancement paid due to anterior inclusion. Accrual basis- by and large used by exclusive owners to account for gross revenues and purchases of stock lists. Cash footing may be used for other disbursals and grosss of the concern.
Most big regular ( C ) corporations must utilize accrual footing Prepaid income- an accrual footing tp. by and large. must acknowledge income if received from postpaid points such as rents. involvement and warrantees. Hybrid basis- jazz band of hard currency and accrual. Tp uses this when the concern has stock lists and wants to account for other disbursals utilizing hard currency footing Assignment of income- tp can’t assign income to person else. If tp retains ownership of belongings. tp is taxed on income derived from belongings Annuities- The remunerator ( normally insurance co. but could be authorities ) makes series of pecuniary payments ( rents ) for either a fixed or contingent clip period to the annuitant. The proprietor pays a premium or series of premiums that the insurance co. invests on the owner’s behalf. The proprietor is non taxed on the annual interior construct up ; alternatively the revenue enhancement is differed until the proprietor begins having periodic payments under the contract. Fundss from rentes are frequently obtained from returns from life insurance policies. pension or profit-sharing program. or an single purchase. Term or simple annuity- collectible for a fixed clip period
Life annuity- a life rente is collectible for the life of the annuitant ( most common ) Joint & A ; survivor annuity- provides payments for every bit long as either the annuitant or another individual. normally the annuitant’s partner. shall populate. Exclusion ratio- determines the part of payments. because they represent a return of capital that is tax-exempt Exclusion ratio= Investment in rente contract / Expected return under contract “Investment in the contract” is an after-tax investing. Meaning. revenue enhancements have already been paid on this sum & A ; shouldn’t have to be paid once more Exclusion ratio * rente payment = the sum that may be excludable from nonexempt income For a life rente. the expected return = ( payments per twelvemonth * life anticipation ) Unisex tabular arraies are used to find the life anticipation for group rentes but non for separately purchased rentes For rentes with get downing day of the month after 1986. if the annuitant dies before retrieving after-tax investing. they are allowed to take an itemized tax write-off on the concluding revenue enhancement return to retrieve the full after-tax investing.
Deduction would be equal to amount of original after-tax investing less the sum of the investing already recovered tax-exempt Once investor has excluded an sum equal to the original investing in the rente. all future payments are to the full nonexempt Partial resignation or hard currency backdowns prior to get downing date- if the hard currency value of the contract exceeds investing in the contract. backdowns are treated foremost as income to the extent that the hard currency value of the contract exceeds the investing. In add-on. early backdowns may be assessed a 10 % punishment on the part that is nonexempt If employee contributed nil or their parts were revenue enhancement deductable to a retirement program. all rente payments are taxed as ordinary income.
The exclusion ratio is unsuitable since no after-tax parts have been made. An illustration would be a military pension Alimony- maintenance and separate care payments are by and large for AGI tax write-offs by the party doing the payments and are includable in the gross income of the party receiving payments. ( Child support supports payments are non deductable to the remunerator or nonexempt to the receiver ) Prizes & A ; awards- both are nonexempt. including awards for which the tp does nil to beg the award such as Nobel or Pulitzer award ( unless given to charity ) . An employee may. nevertheless. except up to $ 400 of touchable personal belongings ( i. e. ticker ) for a nonqualified employee accomplishment program or $ 1. 600 of such belongings for a qualified program ( qualified program must be nondiscriminatory and detailed in composing ) Group Term Life Insurance- If a program is nondiscriminatory. an employee can except from income the premiums paid by the employer on group term life insurance up to confront value of $ 50. 000. Premiums on extra coverage are nonexempt based on a unvarying premium tabular array furnished by the exchequer.
After-tax return ( sum ) = Before-tax return ( Amount ) * ( 1 – fringy revenue enhancement rate ) Before-tax return ( Amount ) = After-tax return ( Amount ) / ( 1 – fringy revenue enhancement rate ) Tax be aftering variables- 1 ) the entity variable is switching nonexempt income to an entity in a lower revenue enhancement bracket or conversely. switching disbursals to a higher bracket revenue enhancement remunerator. 2 ) the clip period variable is proroguing the payment of nonexempt income until a future period in order to prorogue paying revenue enhancements until a ulterior day of the month to take advantage of the clip value of money.
