ACCT 307 Spilker 11e

Chapter 4: Individual Income Tax Overview, Dependents, and Filing Status

The Individual Income Tax Formula

Gross income

Minus: For AGI (above the line) deductions

Equals: Adjusted gross income (AGI)

Minus: From AGI (below the line) deductions

Greater of (a) standard deduction or (b) itemized deductions and 

Deduction for qualified business income (QBI deduction)

Equals: Taxable income

Times: Tax rates

Equals: Income tax liability

Plus: Other taxes

Equals: Total tax

Minus: Credits

Minus: Prepayments

Equals: Taxes due or (refund)

Individuals report taxable income to the IRS on Form 1040

Gross income

  • S. tax laws use all-inclusive income concept.
  • Realized income is the measurable change in property rights.  o Recognized income is what is reported on the tax return
  • Excluded income is income never included in taxable income (e.g., municipal bond interest, gain on sale of personal residence)
  • Deferred income is income included in a subsequent tax year (e.g., installment sales, likekind exchanges)

Character of income (Example 4-1)

  • Tax-exempt income is not taxable
  • Tax-deferred is not taxable in the current year
  • Ordinary income is taxed at the ordinary rates from tax rate schedule
  • Qualified dividends are taxed at 0%, 15%, or 20% depending on taxpayer’s income level.
  • Capital gain or loss depends on whether short-term or long-term o If capital asset is held more than a year, gain or loss is long-term; otherwise it is shortterm
    • Net long-term gains taxed at preferential rates.
    • Capital assets are generally all assets except accounts receivable, inventory, and assets used in trade or business
    • Net long-term capital gains in excess of net short-term capital losses are generally taxed at 0%, 15%, or 20% depending on the taxpayer’s taxable income.
    • Short-term capital gains taxed at ordinary rates.
    • Net capital losses (losses in excess of gains for year): $3,000 deductible against ordinary income for year, losses in excess of $3,000 are carried forward

Deductions (Examples 4-2, 4-3)

  • Deductions for AGI o Deductions above the line to determine AGI o Reduce taxable income dollar for dollar o See Exhibit 4-5 for some common for AGI deductions
  • Deductions from AGI o Deducted from AGI to determine taxable income o Deduction for qualified business income o Greater of standard deduction or itemized deductions o See Exhibit 4-6 for the primary categories of itemized deductions o See Exhibit 4-7 for the standard deduction amounts by filing status

Income tax calculation (Example 4-4)

  • Progressive tax rate schedule
  • Long-term capital gains and qualified dividends are taxed at preferential rates
  • See Appendix D for the tax rate schedules

Other taxes

  • Alternative minimum tax (AMT)
  • Self-employment (SE) taxes
  • 8% net investment income tax (NIIT)
  • 9% additional Medicare tax

Tax credits reduce tax liability dollar for dollar

Tax prepayments (Example 4-5)

  • Income taxes withheld from wages by employer
  • Estimated tax payments made during the year
  • Taxes overpaid in prior year and applied toward current year’s liability

Dependents of the Taxpayer

Relevant for determining filing status, eligibility for certain tax credits, and other tax-related computations.

Dependency requirements

  • Must be a citizen of United States or resident of United States, Canada, or Mexico
  • Must not file joint return with spouse (exception—if no tax liability filing jointly or separately)
  • Must be a qualifying child or a qualifying relative of taxpayer

Qualifying child (Examples 4-6, 4-7)

  • Relationship test: Taxpayer’s son, daughter, stepchild, an eligible foster child, brother, sister, half-brother, half-sister, stepbrother, stepsister, or a descendant of any of these relatives
  • Age test: Child must be younger than the individual claiming the child as a qualifying child and either
    • Under age 19 at the end of the year,
    • Under age 24 at the end of the year and a full-time student, or o Permanently and totally disabled.
  • Residence test: Same residence as taxpayer for more than half the year (exception for temporary absences such as education)
  • Support test: Child must not provide more than half of his or her own support. (Scholarships of actual child (not grandchild, for example) are excluded from support computation.)
  • Tiebreaking rules o Parent over nonparent o If both parents, based on who child resided with most. o If same, parent with higher AGI o If nonparents, highest AGI gets exemption

Qualifying relative (Examples 4-8, 4-9)

  • Relationship test o A descendant or ancestor of the taxpayer (e.g., child, grandchild, parent, or grandparent),
    • A sibling of the taxpayer, including a stepbrother or stepsister o A son or daughter of the taxpayer’s brother or sister (not cousins) o A sibling of the taxpayer’s mother or father
    • An in-law (mother-in-law, father-in-law, sister-in-law, or brother-in-law) of the taxpayer o An unrelated person who lives in taxpayer’s home entire year
  • Support test: Taxpayer must pay more than half of living expenses (support). (Scholarships of actual child excluded) 
  • Gross income test: Gross income less than $4,200 in 2019

Filing Status (Examples 4-10, 4-11, 4-12, 4-13, 4-14)

Married filing jointly

  • Must be married on the last day of the year
  • If one spouse dies, the surviving spouse is considered to be married to decedent spouse at year-end. (Exception—The surviving spouse remarries before year’s end)
  • Joint and several liability for tax

Married filing separately

  • Taxpayers are married but file separate returns
  • Typically not beneficial from tax perspective (tax rates and other tax benefits)
  • May be beneficial for nontax reasons (no joint and several liability)

Qualifying widow or widower (surviving spouse)

  • Available for the 2 years following the year of spouse’s death
  • Surviving spouse does not qualify if remarries during 2-year period
  • Surviving spouse must maintain household for dependent child


  • Unmarried unless qualifying for head of household

Head of household

  • Unmarried or considered unmarried at end of year [See discussion of married individuals treated as unmarried (abandoned spouses) below.]
  • Not a qualifying widow or widower
  • Pay more than half the costs of keeping up a home during the year
  • Lived in taxpayer’s home with a “qualifying person” for more than half of the year

(dependent parent is not required to live with taxpayer) 

Married individuals treated as unmarried (abandoned spouse)

  • Married at end of year (or is not legally separated from the other spouse)
  • Does not file a joint tax return with the other spouse
  • Pays more than one-half the cost of maintaining a household that serves as principal abode for a qualifying child for more than half the year
  • Lived apart from the other spouse for the last 6 months of the year (other than temporary absences)
Want latest solution of this assignment
AssignmentHippo Features
  • On Time Delivery

    Our motto is deliver assignment on Time. Our Expert writers deliver quality assignments to the students.

  • Plagiarism Free Work

    Get reliable and unique assignments by using our 100% plagiarism-free services.

  • 24 X 7 Live Help

    The experienced team of AssignmentHippo has got your back 24*7. Get connected with our Live Chat support executives to receive instant solutions for your assignment problems.

  • Services For All Subjects

    We can build quality assignments in the subjects you're passionate about. Be it Programming, Engineering, Accounting, Finance and Literature or Law and Marketing we have an expert writer for all.

  • Best Price Guarantee

    Get premium service at a pocket-friendly rate. At AssignmentHippo, we understand the tight budget of students and thus offer our services at highly affordable prices.