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CHAPTER 1
The Individual
Income Tax Return
Income Tax Fundamentals 2011 edition
Gerald E. Whittenburg
Martha Altus-Buller
Student’s Copy
2011 Cengage Learning
Objectives of Tax Law

Raise revenue

Tool for social and economic policies
◦ Social policy encourages desirable activities and discourages
undesirable activities
 Credits for investment in solar and wind energy
 Can deduct charitable contributions
 Credits for higher education expenses
◦ Economic policy as manifested by fiscal policy
 Encourage investment in capital assets through depreciation
◦ Both economic and social
 Exclude gain on sale of personal residence up to $250,000 ($500,000 if married)
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Primary Entities/Forms

Individuals
◦ Taxable income includes wages, salary, selfemployment earnings, rent, interest and dividends
◦ An individual may file the simplest tax form that he/she
qualifies for
 1040EZ
 1040A
 1040
If error made on one of the three above forms, can
amend with a 1040X.
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Tax Formula for Individuals
This model follows Form 1040
Gross Income
less:
Deductions for Adjusted Gross Income [AGI]
AGI
less:
Greater of Itemized or Standard Deduction
less:
Exemptions
Taxable Income
times: Tax Rate
Gross Tax Liability
less:
Tax Credits and Prepayments
Tax Due or Refund
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Standard Deductions & Exemption
2010 standard deduction ($)
Single
Married Filing Joint (MFJ)
Qualifying Widow(er)
5,700
11,400
11,400
also known as Surviving Spouse (SS)
Head of Household (HOH)
Married Filing Separate (MFS)
8,400
5,700
*Taxpayers 65 or older and/or blind get an additional amount
$1,100 if MFJ, MFS or SS
$1,400 if HOH or Single
2010 exemption
$3,650 – personal & dependency
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Filing Status

Single
◦ Unmarried or legally separated as of 12/31
◦ And not qualified as married filing separately, head of household or
qualifying widow(er)

Married Filing Jointly (MFJ)
◦ If married on 12/31 – even if didn’t live together entire year
◦ Same-sex couples may not file jointly
◦ If spouse dies during year you can file MFJ in current year

Married Filing Separately (MFS)
◦ Each file separate returns
◦ Must compute taxes the same way - both itemize or both use standard
◦ If living in community property state, must follow state law to determine
community and separate income
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Filing Status

Head of Household (HOH)
◦ Tables have lower rates than single or MFS
◦ Taxpayer can file as HOH if:
 Unmarried or abandoned* as of 12/31
 Paid > 50% of cost of keeping up home that was principal
residence of dependent child or other qualifying
dependent relative
 There is one exception to principal residence requirement. If
dependent is taxpayer’s parent, he/she doesn’t have to live with
taxpayer.
Note: A divorced parent who meets above rules and
has signed IRS/legal document, may still claim HOH even if
dependency exemption shifted to ex-spouse
*See pages 1-10 and 1-11 for requirement for abandoned spouse
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Filing Status
 Qualifying
Widow(er) with Dependent
Child
◦ Also known as surviving spouse
◦ Available for two subsequent years after
death of spouse
 Must pay over half the cost of maintaining a
household where a dependent child, stepchild,
adopted child or foster child lives
◦ Gets benefits of married filing joint tax
rates
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Personal/Dependency Exemptions
 Personal
exemptions may be taken for self and
spouse
 Additional exemptions may be taken for
individuals who are either taxpayer’s
◦ Qualifying child
or
◦ Qualifying relative
 For
2010 each exemption = $3,650
In years prior to 2010, exemptions phased-out for highincome taxpayers. It is anticipated that the phase-out
will be reintroduced in 2011
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Capital Gains/Losses
 A capital
asset is any property (personal or
investment) held by a taxpayer, with certain
exceptions as listed in the tax law
◦ Examples: stocks, bonds, land, cars and other items
held for investment
◦ Gains/losses on these assets are subject to special
rates

Holding period of asset determines treatment
◦ Long-term is held >12 months (taxed at capital rates –
see next screen)
◦ Short-term is held <= 12 months (taxed at ordinary
rates)
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