Globalization

Quiz 2 – Individuals

Gross Income from whatever source

• All income is subject to tax unless specifically listed by the tax code

Less: Exclusions

• Specifically listed in the tax code and exempt by state
• Examples:

• Gifts
• Interest on municipal bonds (government issued)
• Inheritance
• Life insurance proceeds
• Settlement on account of physical injury
• Child support

= Gross Income subject to tax (where the tax return begins)

Less: Deductions (reduction of taxable income)

• “For AGI” → Better benefits; you never loose them

• Examples:

• Business expenses
• ½ of the self-employment tax paid
• Moving expenses
• IRA and other retirement plan contributions (401k)
• Alimony payments → payment to ex
• Student loan
• Interest (up to $25,000)
• Trade or business expenses
• College tuition and related expenses
• HAS contributions
• Penalties for early withdrawal from savings
• Student loan interest
• Excess capital losses

= Adjusted Gross Income (AGI)

Less: Standard deduction or Itemized

• “From AGI” → Can loose them overtime
• Standard deduction

• $6,200 for a single person
• $12,400 for married people
• $9,100 for head of household
• For over 65 or over or blind:

• $1,550 for single
• $1,200 for married
• $1,550 for head of household

• Itemized → Series of deductions that are given

• Examples:

• Mortgage interest on primary residence (incentive to buy real estate; 2 homes up to $1 million in debt)
• Charitable contributions (has to be a public charity – not for profit; Ex. BC, hospitals, red cross)
• State income tax or sales tax
• Real estate taxes
• Medical expenses > 10% of AGI
• Casualty and theft > 10% of AGI

Less: Exemption

• Worth $3,950 for every deduction you have
• Personal exemption → Everyone gets one except dependents
• Dependency → Someone supports you

• Qualified Child

• Relation (not cousins)
• Residence (lives with you more than half year)
• Age requirement (<19 or <24 for full-time student)
• Cant be self supported (cant provide for more than half support themselves)

• Qualifying relative

• Relationship or live in your house for an entire year
• Support (you have to provide more than half)
• Gross income test (earn less than $3,950)

= Taxable Income

• When you reach $300,000 you start to loose benefits

4 tax rate schedules: (determines on the last day of the taxable year)

1. Single
2. Marries Joint

• Most couples do this
• Advantageous
• Surviving spouse

• File jointly in the year of death and get exemption (only count dead as dependent in the year of death)
• Can file jointly for 2 years after the death if you have a dependent child

1. Marries Separate

• Reason to file separate: you are liable for other’s tax return and may not trust them

1. Head of household → single parent

• Single (unmarried)
• Maintain a home for ½ a year (prove ½ cost) for unmarried qualifying child or dependent family member
• Parent doesn’t have to live there, but has to be dependent
• Abandon spouse

• If you’re abandoned more than 6 moths and have dependent, you can file as Hoh

Tiebreaker rules:

• If only one of the taxpayers is the child’s parents, the parent claims the exemption
• If both taxpayers are the child’s parents and they do not file a joint return, the parent with whom the child resided for the longest period of time during the tax year claims the exemption
• If the child resides with both parents for the same period of time, the parent with the highest AGI claims the exemption
• If none of the taxpayers are the child’s parents, the taxpayer with the highest AGI claims the exemption  

Kiddie tax

• Applies to child <19 or <24 for full-time student who has unearned income of >$2,000

• Unearned income = Investment income → Interest and dividends

• Standard deduction and personal exception of an individual who can be claimed on another person’s tax return
• Standard deduction:

• $1,000
• or $350 + earned income

• When you’re dependent
• Maximum $6,200 for a single person
• Anything that exceeds $2,000 will be taxed at parents rate