CCH Essentials of Federal Income Taxation Tax Determination, Payments, and Reporting Procedures 2002, CCH INCORPORATED 4025 West Peterson Ave. Chicago, IL 60646-6085 http://tax.cchgroup.com
Taxpayer Filing Status by Rank (for same amount of income) Highest Tax Married filing separately Single Head of household Married filing jointly [also, qualifying widow(er)] Lowest Tax CCH Essentials of Federal Income Taxation 2 of 38
Federal Taxes Withheld Income Based on three factors Amount earned / period Marital status exemptions & deductions FICA (social security and Medicare) 6.2% on first $97,500 of wages 1.45% on all wages for HI CCH Essentials of Federal Income Taxation 3 of 38
Tax Rate Schedules example p. 2-3 Step 1 Choose the correct rate schedule (based on filing status). Step 2 Locate the proper income bracket and note the tax applicable to the lowest income in that bracket. Step 3 Subtract the lowest income in that bracket from taxable income. Step 4 Multiply this difference by the listed tax rate. Step 5 Add this result to the tax in step 2 to arrive at the tax on taxable income. CCH Essentials of Federal Income Taxation 4 of 38
Jesse James is a single taxpayer who has a 12 year old dependent son who live with him. Jesse s income came from his salary which was $148,500; interest of $225 and dividends of $2,400. Calculate his income tax liability. CCH Essentials of Federal Income Taxation 5 of 38
Tax Tables back of book Tax Table Cannot Be Used by: A person filing for a short period (less than 12 months) because of a change in accounting period A person claiming the foreign earned income exclusion A person filing Form 1040 with taxable income of $100,000 or more An estate or trust CCH Essentials of Federal Income Taxation 6 of 38
Amanda and Samuel Adams are married and lived together during the tax year, with their two children, both under age 19. Amanda works one job and earned $29,500. Samuel worked two jobs and earned $18,500 on the first, and $11,400 on the second. Samuel also earned tips of $4,650. They have no other source of income. Find their tax liability. CCH Essentials of Federal Income Taxation 7 of 38
Excess Social Security Tax Sometimes employees have too much in OASDI taxes withheld from their wages. Too much withholding can occur when a person works for two or more employers. Taxpayers can recover the excess through the tax reporting system. How much must a taxpayer earn before excess OASDI taxes occur? CCH Essentials of Federal Income Taxation 8 of 38
Assignment Problems 1--4 CCH Essentials of Federal Income Taxation 9 of 38
Tax Credits Use to reduce tax liability after tax is determined Refundable credits guarantee a payment from the givernment even when the amount of the credit exceeds the tax liability Nonrefundable taxpayer will not receive a refund for the credit if their tax liability is zero CCH Essentials of Federal Income Taxation 10 of 38
Personal Tax Credits Nonrefundable Child and dependent care credit Elderly or disabled credit Adoption credit Child tax credit Education credits Retirement savings contributions credit Hybrid automobile credit Residential energy credits Refundable Earned income credit Additional child tax credit Federal tax withholdings and payments Excess OASDI taxes withheld CCH Essentials of Federal Income Taxation 11 of 38
Nonrefundable Credits Most tax credits are nonrefundable. Nonrefundable credits can reduce the taxpayer s regular tax liability to zero but cannot result in refund. CCH Essentials of Federal Income Taxation 12 of 38
Tax Credits Guaranteed? Refundable Credits Credit for federal income tax withheld or paid toward the current year s tax liability Earned Income Credit (EIC) Additional child tax credit Excess OASDI tax withheld CCH Essentials of Federal Income Taxation 13 of 38
Child and Dependent Care Credit See page 2-10--11 Qualified expenses are the amounts taxpayers spend for child and dependent care so that they can work, look for work, or go to school. Maximum expense allowed is $3000/$6000 Credit amount ranges from 35% down to 20% of AGI This is Nonrefundable Uses form 2441 or Schedule 2, p. 2-13 CCH Essentials of Federal Income Taxation 14 of 38
Child and Dependent Care Credit Qualified person: The taxpayer must maintain a home where one of the following persons live: A child under age 13 whom the taxpayer may claim as a dependent A dependent physically or mentally unable to provide self-care A spouse physically or mentally unable to provide self-care CCH Essentials of Federal Income Taxation 15 of 38
Child Tax Credit Pages 2-19--21 Taxpayers may be able to claim a credit of $1,000 for each qualifying child, if: The child is a descendent, stepchild, or foster child of the taxpayer who is under the age of 17 as of the end of the tax year, or permanently and totally disabled The child is a citizen, national, or resident of the U.S. The child can be claimed as a dependent on the taxpayer s tax return CCH Essentials of Federal Income Taxation 16 of 38
Child Tax Credit The full child credit is available only to taxpayers whose AGI does not exceed $75,000 (single) or $110,000 (married). This credit is both refundable and nonrefundable. CCH Essentials of Federal Income Taxation 17 of 38
Additional Child Tax Credit This is the refundable part of the Child Tax Credit Taxpayers unable to benefit completely from the child tax credit as a nonrefundable credit can claim a refundable child tax credit to the extent that 15% of their earned income exceeds $11,750. Uses form 8812 (page 2-21) CCH Essentials of Federal Income Taxation 18 of 38
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Education Tax Credits (College tuition) (Nonrefundable) Applies toward what is actually paid Page 2-14 HOPE scholarship credit Maximum of $1,650 per eligible student Only for first two-years of college Must be at least ½ time student, in a degree program No felony drug convictions AGI limits: Phaseout begins at $47,000 or $94,000 May be claimed for yourself or your dependent CCH Essentials of Federal Income Taxation 20 of 38
Education Tax Credits (College tuition) (Nonrefundable) Applies toward what is actually paid Lifetime learning credit Maximum of $2,000 per taxpayer, per year Any post-secondary education courses to acquire or improve job skills Unlimited number of years Student does not need to be seeking degree No minimum enrollment for credits No felony drug convictions Phaseout begins at $47,000 or $94,000 May be claimed for yourself or your dependent CCH Essentials of Federal Income Taxation 21 of 38
Earned Income Credit Refundable p. 2-25 Eligible individuals: Must be over 24 years old, but not more than 64, at the end of the year Cannot be claimed as a dependent by another taxpayer OR Have a qualifying child (relationship, residency, age, citizen) The child does have to meet the <50% rule selfsupport rule. Child is usually qualified for the custodial parent Unmarried child does not have to be the taxpayer s dependent Taxpayer must have earned income Married couples must file jointly May be taken as you earn (Advance EIC) See EIC tables in text appendix CCH Essentials of Federal Income Taxation 22 of 38
Adoption Credit--Nonrefundable Taxpayers adopting a child under age 18 (or one incapable of self-care) may receive a tax credit. The credit is available for qualified adoption expenses including court costs, legal fees, agency fees, and other adoption-related expenditures. The credit is limited to $11,390. Phaseout starts at AGI of $170,820 Other conditions in Pub 17 CCH Essentials of Federal Income Taxation 23 of 38
Retirement Savings Contribution Credit p. 2-22 A nonrefundable credit of up to $1,000 (50% or less of $2,000 of contribution) is available for contributions to a retirement savings plan. It is in addition to any deduction or exclusion relating to the contribution. The credit amount depends on filing status and AGI. Targeted to taxpayers below $26,000/52,000 AGI Phaseouts reduce % allowed CCH Essentials of Federal Income Taxation 24 of 38
Foreign Tax Credit This nonrefundable credit applies to both individuals and corporations. This credit reduces the U.S. income tax by the taxes paid to foreign countries, which prevents foreign income from being taxed twice. Individuals can deduct foreign taxes paid as an itemized deduction. CCH Essentials of Federal Income Taxation 25 of 38
Credit for the Elderly or the Disabled P. 2-14 Taxpayers age 65 or older, and taxpayers under 65 who retire with a permanent and total disability, may receive a special nonrefundable credit. Primarily, this credit benefits elderly, lowincome taxpayers who receive little or no social security income. Use schedule 3 or schedule R See Pub 17, p. 219 CCH Essentials of Federal Income Taxation 26 of 38
Alternative Motor Vehicle Credit p. 2-24 Called the hybrid vehicle credit Varies for type of vehicle May be limited or eliminated depending on sales of cars that qualify Credits range from $250 to $3400 See. Pub 17 p. 247 CCH Essentials of Federal Income Taxation 27 of 38
Residential Energy Credits 10% credit for qualified home energy efficiency improvements like insulation, new windows/doors, high-efficiency heating or cooling or hot water appliances 30% credit for alternative energy installations involving solar or fuel-cell items See Pub 17 p. 248 CCH Essentials of Federal Income Taxation 28 of 38
Form 1040EZ Users of Form 1040EZ must: Be single or joint filers, under age 65 and not blind Claim the standard deduction Make no claim for a dependency exemption Have very limited sources of gross income Have taxable interest income of $1,500 or less Have taxable income of less than $100,000 Have no dividend income Not earn $20 or more in monthly tips from one employer that are omitted from Form W-2 Not receive any advance earned income credit (EIC) payments CCH Essentials of Federal Income Taxation 29 of 38
Form 1040A Only taxpayers with taxable incomes of less than $100,000 can use Form 1040A Form 1040A permits more types of income than Form 1040EZ, but fewer types than Form 1040 Form 1040A permits only four deductions for AGI: A qualifying IRA contribution Certain interest on student loans Educator expenses Tuition and fees deduction This form allows taxpayers to reduce AGI only by the standard deduction and allowable exemptions CCH Essentials of Federal Income Taxation 30 of 38
Form 1040 Taxpayers must use Form 1040 when they do not qualify to use either Form 1040EZ or Form 1040A. They may also elect Form 1040 over one of these other forms to save taxes (more deductions and credits are available). This form provides for all types of income, deductions, credits, and other taxes that might be owed. CCH Essentials of Federal Income Taxation 31 of 38
Extensions of Time to File Entity Form Number for Extension Extension of Time Individual (Form 1040, 1040A, or 1040EZ) Automatic Second Extension Partnership (Form 1065) Automatic Second Extension S Corporation (Form 1120S) Automatic C Corporation (Form 1120 or 1120A) Automatic Form 4868 Form 2688 Form 8736 Form 8800 Form 7004 Form 7004 Four months Up to two more months Three months Up to three more months Six months Six months CCH Essentials of Federal Income Taxation 32 of 38
Type of Penalty Failure to file Failure to pay Accuracy-related Fraud Fraudulent return Frivolous return filing $500 Tax Penalties Amount of Penalty 5% of amount due for each month or fraction of month that the return is late (maximum penalty = 25%).5% of amount due for each month or fraction of month that the return is late (maximum penalty = 25%) 20% of tax due 75% of tax due (accuracy-related penalties will not also be applied) $10,000 and/or one year in prison Criminal intent to defraud $100,000 and/or five years in prison Preparer penalties Improper disclosure of information acquired from a taxpayer by a tax preparer From $5 to $500 for each wrongful act $1,000 and/or 1 year in prison CCH Essentials of Federal Income Taxation 33 of 38
Reasonable Cause The IRS lists the following circumstances as reasonable causes for failure to comply with the tax laws: Death or serious illness Unavoidable absence Destruction of certain facilities or records Timely mailing Wrong filing place Reliance on competent tax advisor Unobtainable records IRS office visit in which an IRS employee was unable to be seen for reasons beyond taxpayer control Erroneous IRS information CCH Essentials of Federal Income Taxation 34 of 38
Common Information Returns Form 1099-DIV, Dividends and Distributions Form 1099-INT, Interest Income Form 1099-G, Certain Government Payments Form 1098, Mortgage Interest Statement Form 1099-MISC, Miscellaneous Income Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, Etc. Form 1099-B, Proceeds from Broker and Barter Exchange Transactions Form 1099-S, Proceeds from Real Estate Transactions Form 8027, Employer s Annual Information Return of Tip Income and Allocated Tips Form 5498, Individual Retirement Arrangement Information CCH Essentials of Federal Income Taxation 35 of 38
Audit Process An IRS computer checks for the following errors: An error in arithmetic shown on the return Incorrect use of any IRS table, if such use is apparent from the existence of other information on the return Inconsistent entries on the return Omission of information necessary to substantiate a return entry Entry of a deduction or credit item that exceeds a statutory limit based on information appearing on the return CCH Essentials of Federal Income Taxation 36 of 38
Factors Affecting a Return s Selection for Audit Large gross income Self-employed taxpayers with high incomes and large deductions Cash businesses (e.g., restaurants, service businesses) Excessive itemized deductions in relation to income level Claims for large refunds Disagreement between reported income and information returns (e.g., Form 1099, Form W-2) A large increase in exemptions A major decrease in rental income Informant information Prior tax deficiencies CCH Essentials of Federal Income Taxation 37 of 38