Premium Essay

Individual Taxation

In:

Submitted By vpartman
Words 15716
Pages 63
CHAPTER 3 INDIVIDUAL TAXATION

Individual Taxation—An Overview[->0]
OBJECTIVES
After completing Chapter 3, you should be able to:
1. Understand the components of the tax formula.
2. Apply the standard deduction to each filing status.
3. Determine whether an individual qualifies as a personal exemption.
4. Distinguish among the five different filing statuses.
5. Apply the tax tables and the tax rate schedules to taxable income.
OVERVIEW
This chapter discusses the components of the tax formula and studies the implications of the standard deduction to the taxpayer. Additionally, the qualifications for the personal exemption are analyzed. Finally, the basic filing statuses are examined as well as the role of the tax tables and the tax rate schedules.
¶3001 COMPONENTS OF THE TAX FORMULA[->1]
Taxable income is computed using one of the two overall accounting methods, the cash method or the accrual method. It is also possible to use a combination of the two overall methods. Under the cash method, income is reported when it is received and deductions are taken when the expense is paid. The accrual method requires income to be reported when all the events necessary to fix the right to receive payment have occurred and there is reasonable certainty regarding the amount. Likewise, accrual basis taxpayers usually claim a deduction in the year in which all events that fix the liability have occurred, provided the amount of the liability is reasonably determinable.
A basic understanding of the method used to calculate the tax liability is a necessity in the study of federal income taxation. That method is as follows:
|Gross Income|
– |Deductions for Adjusted Gross Income |
=|Adjusted Gross Income|
– |Greater of Itemized Deductions or Standard Deduction|
– |Personal Exemptions |
=|Taxable Income|
×|Tax Rate |
=|Tax Liability|
–|Tax Credits and Prepayments |

Similar Documents

Premium Essay

Taxation, Individual and Corporate Tax

...1. Tomas owns a sole proprietorship, and Lucy is the sole shareholder of a C corporation. In the current year both businesses make a net profit of $60,000. Neither business distributes any funds to the owners in the year. For the current year, Tomas must report $60,000 of income on his individual tax return, but Lucy is not required to report any income from the corporation on her individual tax return.   | a.  | True |   | b.  | False | ANSWER:   | True | RATIONALE:   | Proprietorship profits flow through to the owner and are reported on the owner’s individual income tax return. It does not matter how much of the profit is withdrawn from the proprietorship. Thus, Tomas must report the net profit of $60,000 on his Form 1040 (Schedule C). Shareholders are required to report income from a C corporation only to the extent of dividends received. Consequently, Lucy has no income to report from the corporation for the current year. | POINTS:   | 1 | DIFFICULTY:   | Easy | LEARNING OBJECTIVES:   | SCPE.HRMY.15.LO: 17-01 - LO: 17-01 | NATIONAL STANDARDS:   | United States - BUSPORG: Analytic | STATE STANDARDS:   | United States - AK - AICPA: FN-Reporting | KEYWORDS:   | Bloom's: Application | OTHER:   | Time: 2 min. | | 2. Carol and Candace are equal partners in Peach Partnership. In the current year, Peach had a net profit of $75,000 ($250,000 gross income – $175,000 operating expenses) and distributed $25,000 to each partner. Peach must pay tax on $75,000 of...

Words: 20640 - Pages: 83

Premium Essay

Taxation of Individuals and Limited Companies in the United Kingdom

...Taxation of individuals and limited companies in the United Kingdom Contents Task 1: Duties and responsibilities of the tax practitioner in the UK tax environment 3 Executive summery 3 1.1 UK Tax Environment 3 1.2 The role and responsibilities of the UK Tax Practitioners 6 1.3 The tax obligations of tax payers or their agents and the implications of noncompliance 8 Task 2: Personal Tax Liabilities for Individuals and Partnerships 9 Introduction 9 2.1 a) Calculation of the relevant income and allowances for individual 9 2.1(b): Calculation of the relevant income, expenses and allowances of Mr. Thomas (self-employed): 10 2.2 Calculation of the taxable income and tax payable and tax payment due date for self employed 11 2.3 The relevant documentation and tax return 13 Conclusion 14 Task 3: Corporation Tax Liabilities for Companies 15 Introduction 15 3.1 Calculation of the chargeable profit for the company 15 3.2 Calculation of the tax liability of the company and when it would be due 16 3.3 Explanation of how income tax deductions are dealt with 17 Conclusion 17 Task 4: Capital Gains Tax for Individuals and businesses 17 Introduction 17 4.1 Identify the chargeable asset/s for capital gains tax 18 4.2 Calculation of the amount of capital gains/losses and the amount of taxable gains/losses 18 4.3 Calculation the amount of capital gains/losses and how much amount to pay as a capital gain tax liability 19 Conclusion 19 REFERENCES...

Words: 4587 - Pages: 19

Premium Essay

Individual Taxation Research Paper-Arene Case

...Facts * As a result of a bitter divorce, Arlene had no means of support. * Forced to lead a living for herself, she established a business (and LLC) that integrated equestrian activities with a home and barn design activity. * Arlene competed in horse shows and then contacted directly with potential clients at the shows. She didn’t use advertising media. She used her knowledge of the idiosyncrasies of her client’s horses to design home and barn for clients. * Arlene’s overall business produced substantial profits in six of the seven years. For the loss year, the amount of the loss was small. Issues * Whether equestrian activity and design activity could be considered an integrated activity? * Was the integrated activity for profit? * Whether expenses related to equestrian activity should be considered personal expenses or expenses incurred in the integrated business? Conclusion Arlene’s equestrian activity and home and barn design activity could be treated as a single integrated activity, and the single integrated activity was held for profit. Meanwhile, equestrian-related expenses should be considered expenses incurred in the integrated business rather than personal expenses. Therefore, Arlene’s position of reporting two activities on a single Schedule C is correct. Rationale * The first issue to be addressed is whether equestrian and design undertakings could be considered a single integrated activity. Topping, Tracey, (2007) TC Memo 2007-92...

Words: 563 - Pages: 3

Free Essay

Belmont Report Citi

...1. Respect for Persons. -- Respect for persons incorporates at least two ethical convictions: first, that individuals should be treated as autonomous agents, and second, that persons with diminished autonomy are entitled to protection. The principle of respect for persons thus divides into two separate moral requirements: the requirement to acknowledge autonomy and the requirement to protect those with diminished autonomy. An autonomous person is an individual capable of deliberation about personal goals and of acting under the direction of such deliberation. To respect autonomy is to give weight to autonomous persons' considered opinions and choices while refraining from obstructing their actions unless they are clearly detrimental to others. To show lack of respect for an autonomous agent is to repudiate that person's considered judgments, to deny an individual the freedom to act on those considered judgments, or to withhold information necessary to make a considered judgment, when there are no compelling reasons to do so. However, not every human being is capable of self-determination. The capacity for selfdetermination matures during an individual's life, and some individuals lose this capacity wholly or in part because of illness, mental disability, or circumstances that severely restrict liberty. Respect for the immature and the incapacitated may require protecting them as they mature or while they are incapacitated. Some persons are in need of extensive...

Words: 1420 - Pages: 6

Premium Essay

Busn105

...Unit 1. Individual project Karlotta Osk Jonsdottir American Intercontinental University Trista Iodice - BUS105 Abstract The scenario in question gives us the portfolio of a person that likes to do things around the home and has come up with an idea that might benefit his/her home and perhaps other homes globally. Another version of this idea already exists on the market but the person believes his invention might further simplify and make the “appliance” more user friendly and safer. This person does not have available funds for the project and would therefore have to look to an outsider to complete the task at hand. The inventor has researched the market of the other “appliance” and found that it has an annual growth of 2%. He believes this invention could increase that growth because he thinks this invention might be used in many other “appliances” making the product quite versatile and therefore appealing to a wide range of markets. For the person to be able to make a wise decision about how to make his project a reality we look at three types of business, the sole proprietorship, general partnership and corporation, while considering the advantages and disadvantages. After looking thoroughly at these types of businesses, we try to make an informed decision in ...

Words: 1575 - Pages: 7

Premium Essay

King Kong

...However, not every human being is capable of self-determination. The capacity for self-determination matures during an individual's life, and some individuals lose this capacity wholly or in part because of illness, mental disability, or circumstances that severely restrict liberty. Respect for the immature and the incapacitated may require protecting them as they mature or while they are incapacitated. Some persons are in need of extensive protection, even to the point of excluding them from activities which may harm them; other persons require little protection beyond making sure they undertake activities freely and with awareness of possible adverse consequence. The extent of protection afforded should depend upon the risk of harm and the likelihood of benefit. The judgment that any individual lacks autonomy should be periodically reevaluated and will vary in different situations. In most cases of research involving human subjects, respect for persons demands that subjects enter into the research voluntarily and with adequate information. In some situations, however, application of the principle is not obvious. The involvement of prisoners as subjects of research provides an instructive example. On the one hand, it would seem that the principle of respect for persons requires that prisoners not be deprived of the opportunity to volunteer for research. On the other hand, under prison conditions they may be subtly coerced or unduly influenced to engage in research activities...

Words: 1267 - Pages: 6

Premium Essay

Taxation and Sovereignity

...Taxation is said to be one of the key governance tools of any state including the upholding of Zambians sovereignty. INTRODUCTION The most fundamental function of taxation is raising revenue to pay for governmental expenses and programs. "Taxes are necessary to raise revenue for public goods and infrastructure, as well as to provide other sorts of public services conducive to general welfare and economic growth." Tax revenues pay for the necessary goods – like national defense or a legal system – that an unregulated market cannot provide by itself. More often overlooked is the role of taxation as a catalyst for the development of responsive and accountable government, and for the expansion of state capacity. Taxes, however, do more than simply raise revenue: "Any tax that produces revenue will in some way alter the social and economic order." Taxes that only raise revenue without effecting other changes do not exist in the real world. The concept of fiscal policy captures that link between revenue collection and government spending. More specifically, taxes can be used to increase or decrease inflation and purchasing power, stimulate investment, and prevent harmful concentrations of wealth. Taxation is an underrated tool in the effort to build more capable and responsive states. The role of taxation as a central force in the development of democracy resonates strongly in Anglo-American history. The duty of paying for government legitimizes demands for services...

Words: 2844 - Pages: 12

Premium Essay

Microfinance

...CHAPTER ONE INTRODUCTION 1.1 Background to the Study Since the 1960s to date, small and medium sized enterprises (SMEs) have been given due recognitions especially in the developed nations for playing very important roles towards fostering accelerated economic growth, development and stability within several economies (Yitzhaki, 2006). They make-up the largest proportion of businesses all over the world and play tremendous roles in employment generation, provision of goods and services, creating a better standard of living, as well as immensely contributing to the gross domestic products (GDPs) of many countries (OECD, 2000).Over the last few decades, the contributions of the SMEs sector, the development of the largest economies in the world have beamed the searchlight on the uniqueness of the SMEs; and this have succeeded in overruling previously held views that SMEs were only ―miniature versions‖ of larger companies (Al-Shaikh 1998; Gaskill et al. 1993). And although Small and Medium Enterprises have been at the center of the policy debate for quite some time in both developed and developing countries, little analytical work has been undertaken in this area.The dearth information that exists among researchers on Small and Medium Enterprises however provides a sense of how important this sector is for sustainable development in emerging economies (Medina, 2001). For instance, recent studies conducted by United Nations Industrial Development Organization (UNIDO) concur that SMEs...

Words: 21615 - Pages: 87

Premium Essay

Taxation Papers

...TAXATION PAPERS WORKING PAPER N.33 - 2012 Serena Fatica Thomas Hemmelgarn Gaëtan Nicodème The Debt-Equity Tax Bias: consequences and solutions Taxation and customs union Taxation Papers are written by the staff of the European Commission's Directorate-General for Taxation and Customs Union, or by experts working in association with them. Taxation Papers are intended to increase awareness of the work being done by the staff and to seek comments and suggestions for further analyses. The views expressed in the Taxation Papers are solely those of the authors and do not necessarily reflect the views of the European Commission. Comments and inquiries should be addressed to: TAXUD TAXATION-PAPERS@ec.europa.eu Cover photo made by Milan Pein Despite all our efforts, we have not yet succeeded in identifying the authors and rights holders for some of the images. If you believe that you may be a rights holder, we invite you to contact the Central Audiovisual Library of the European Commission. This paper is available in English only. Europe Direct is a service to help you find answers to your questions about the European Union Freephone number: 00 800 6 7 8 9 10 11 A great deal of additional information on the European Union is available on the Internet. It can be accessed through EUROPA at: http://europa.eu. For information on EU tax policy visit the European Commission's website at: http://ec.europa.eu/taxation_customs/taxation/index_en.htm ...

Words: 7352 - Pages: 30

Premium Essay

Tax Environment

...advisor Mr. Khalid Mahmood whose supervision and guidance in relation to selection of material for perusal and formatting of the research paper helped us to do the work on time and in a professional manner. I extend my gratitude towards University of Lahore Islamabad Campus for giving me such kind of opportunities. Thank you Hooria Majid ABSTRACT Taxes affect citizens, economy of the country, businesses, governance mechanisms, etc. Not only revenue mobilization, an effective system of taxation helps in formalizing the economy, encourages economic growth, shapes political cohesion between tiers of the Government, and results in increase in social sector service delivery. We are now quite used to hearing the rhetoric by the government and bureaucracy on how Pakistan has one of the world’s lowest tax to GDP ratios since long (by their account it has stood between 9.50 and 10.40 percent in recent years), which also happens to be extremely low when compared to its neighboring countries and similar economies. So Government is unable to allocate reasonable funds for development projects. Although Pakistan has adopted best practices of the World through Income Tax Ordinance 2001 and formulation of Inland...

Words: 5922 - Pages: 24

Premium Essay

Tax Incidence

...specific analysis for the OECD economies: 2.6 Tax and subsidy incidence equivalence theories: experimental evidence from competitive markets 2.7 Tax incidence under oligopoly: a comparison of policy approaches 2.8 The incidence of income tax on wages and labour supply 2.9 The incidence of personal income taxation: evidence from the tax reform act of 1986: 2.10 Tax incidence when individuals are time-inconsistent: the case of cigarette excise tax 3. Conclusion References 1. Introduction: Government generally collect taxes to generate revenue and question arise here is that after imposition of taxation, which group will bear the tax burden. After implementation of tax, there would be the division of tax burden between byres and sellers which is known as tax incidence. Tax incidence is linked to the price elasticity of demand and supply. If supply is more elastic than demand then the tax burden falls upon the buyers and when the demand is more elastic than supply then the producers will bear the cost of the tax. Tax incidence is basically the analysis of the effect of taxation on the distribution of economic welfare. Tax incidence expose that which group either consumer or producer is going to pay the price of new tax and it falls mostly on the group that has the inelastic price quantity or respond least to the price. Tax incidence or the tax burden does not depend on that where the revenue is collected but it...

Words: 2655 - Pages: 11

Premium Essay

Project

...(1976) 55-75. 0 North-Holland Publishing Company THE DESIGN OF TAX STRUCTURE: DIRECT VERSUS INDIRECT TAXATION* A.B. ATKINSON University of Essex, Wivenhoe Park, Colchester, England J.E. STIGLITZ Stanford University, Stanford, CA 94305, U.S.A. Revised version received February 1976 1. Introduction The recent literature on optimal taxation may be seen as attempting to clarify the structure of the arguments advanced to support changes in the tax system, tracing the implications of taxes and quantifying (analytically) the trade-offs between the various objectives of tax policy. This literature has examined the optimal structure for particular types of taxation taken in isolation, such as the optimal rates of excise tax and the optimal income tax schedule. Our purpose, on the other hand, is to provide a broader framework and to consider the interaction between different kinds of taxation. To illustrate this, we reexamine the age-old question of direct versus indirect taxation and the relationship of these taxes to the goals of efficiency, vertical equity and horizontal equity. After describing in section 2 the general framework of the analysis, and arguing that any treatment of the choice of tax structures must be centrally concerned with distributional considerations, we begin in section 3 with the extension of the classic Ramsey formula for optimal excise taxation to include vertical equity objectives. This was considered by Diamond and Mirrlees (1971), but the results ...

Words: 9114 - Pages: 37

Premium Essay

Economics of Tax

...usually when the government required more funds. Little if any planned or integrated thinking seems to have taken place. According to the Adam Smith Institute, Great Britain has the most complex tax system in the world, which is largely believed that is roughly five times as long as the German tax code (Geraint Jones, 2011) Currently, governments request to use taxation in some situations for purposes which is different than raising funds to cover up its expenditure. To begin with, the economic resources, which are accessible for the nation are limited, thus a raise in government spending usually leads to a decrease in private expenditure. In addition to this, one technique of transferring recourses from the private to the public sector is the use of taxation, but there are also further methods. One of these alternative methods is the degradation of the currency through the creation of additional money, but the main problem of this method is that it leads to inflation. Moreover, an additional alternative option is for the government to charge the goods and services it offers. However, it is not possible to charge individuals directly on the basis of their utilization of many government services (James and Nobes, 2011). According to Musgrave (1959), the economic function of government may be separated into three major categories. First, is to overcome...

Words: 1985 - Pages: 8

Premium Essay

Public Finance

...Public Finance Methods in Nigeria The Federal Republic of Nigeria is comprised of 36 states located in West Africa geographically bound by the Republic of Niger to the north, the Gulf of Guinea (on the Atlantic Ocean) to the south, the Republic of Cameroon and Chad on the east and Republic of Benin on the west. Since gaining full independence from the British in 1960, Nigeria has gone from a Parliamentary system of government (modeled after the British Parliament), the Biafran Civil War, and numerous dictatorships to the current Democratic system of government. Widely described as the most populous country in Africa (accounting for over half of West Africa’s population alone[i]), the US State Department estimated in 2010 a population of approximately 152 million people of 250 Ethnic groups with the largest ethnic groups comprising of Hausa-Fulani (north), Igbo (south-east), Yoruba (south-west) and Kanuri (north). The religions practiced in Nigeria are Islam, Christianity and indigenous African traditional worship. The Hausa’s are from the northern part of the country and are predominantly Muslims, the Yoruba are from the south west and are predominately an even mix of Christians and Muslims, the Igbos are from the southeast and are predominately Christians. The official language of Nigeria is English in addition to other local dialects. Nigeria’s commercial capital (and former political capital), Lagos, is located in the southwestern part of the country while the political...

Words: 2474 - Pages: 10

Premium Essay

Malaysia Goods and Services Tax

...Part 1 The three key issues concerning the individuals and sole-proprietor business have been introduced in 2015 budget. The first issue is about individual tax. The first change is that the income tax rate is reduced by 1 to 3% for resident individuals depending on different levels of chargeable income since Year of Assessment (YA) 2015 (KPMG, 2014). This results in that tax payers with family and income of Rm4,000 per month will not have tax liability. Besides, the income tax rate for non-resident individuals is reduced by 1% from 26% to 25% (KPMG, 2014) Chargeable Income(RM) | Current Tax Rate (%) | Proposed Tax Rate (%) | Reduction(%) | 1—5,000 | 0 | 0 | - | 5,000—20,000 | 2 | 1 | 1 | 20,001—35,000 | 6 | 5 | 1 | 35,001—50,000 | 11 | 10 | 1 | 50,001—70,000 | 19 | 16 | 3 | 70,001—100,000 | 24 | 21 | 3 | 100,001—250,000 | 26 | 24 | 2 | 250,001—400,000 | 26 | 24.5 | 1.5 | Exceeding 400,000 | 26 | 25 | 1 | This tax brackets illustrates the chargeable income is raised from RM100,000 to RM400,000 and the rate for chargeable income band exceeding RM100,000 is structured into three bands with reduced rates of 24%, 24.5% and 25%, which results in existing taxpayers receiving a saving of at least 5.3% (Reuters, 2014). It is significant to note that the deduction in tax rates is expected to provide tax saving for individuals This significant change in income tax rate aims to increase the disposable income of individuals and in line with GST implementation. Secondly...

Words: 2824 - Pages: 12