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Leture Fundamentals of Taxation 2014 - Chapter 2: Expanded tax formula, forms 1040A and 1040, and basic concepts

When you have completed this chapter, you should understand the following learning objectives: Describe the expanded tax formula and the components of the major sections of Form 1040A and Form 1040, determine the proper filing status, calculate personal exemptions,. | Chapter 2 Expanded Tax Formula, Forms 1040A and 1040, and Basic Concepts “Taxes: Of lifes two certainties, the only one for which you can get an automatic extension.” -- Author Unknown 1 LO #1 The Expanded Tax Formula and the Major Sections of Form 1040A and Form 1040 The Tax Return Forms 1040A and 1040 are more complex than the 1040EZ A taxpayer must always use the proper form Adjusted Gross Income (AGI) Gross income minus a list of permitted deductions Many deductions and credits are based on AGI 2-2 2 LO #1 The Expanded Tax Formula and the Major Sections of Form 1040A and Form 1040 The Expanded Tax Formula Gross Income(GI) - Permitted Deductions from Gross Income ------------------------------------------ = Adjusted Gross Income (AGI) Standard Deduction or Itemized Deductions Personal and Dependency Exemptions ------------------------------------------ = Taxable Income (TI) x by Appropriate Tax Rates ------------------------------------------------ = Tax Liability - Tax Credits + Other Taxes - Tax Payments and Refundable Credits ------------------------------------------------ = Tax Refund or Tax Due with Return 2-3 3 LO #2 How to Determine the Proper Filing Status There are five filing statuses: Single Not married as of the last day of the year Married Filing Jointly (MFJ) Must be legally married on the last day of the year The marital status of a couple is determined under the laws of the state in which they reside It does not matter if only one has earned income 2-4 4 LO #2 How to Determine the Proper Filing Status Married Filing Separately (MFS) Must be married but elect to file separately The standard deduction can be taken only if both make the same selection Must show the social security number of the other spouse on the taxpayer’s return Only in unusual circumstances is it advantageous for a married couple to file MFS 2-5 5 LO #2 How to Determine the Proper Filing Status Head of Household Must be unmarried at the end of the year A married taxpayer . | Chapter 2 Expanded Tax Formula, Forms 1040A and 1040, and Basic Concepts “Taxes: Of lifes two certainties, the only one for which you can get an automatic extension.” -- Author Unknown 1 LO #1 The Expanded Tax Formula and the Major Sections of Form 1040A and Form 1040 The Tax Return Forms 1040A and 1040 are more complex than the 1040EZ A taxpayer must always use the proper form Adjusted Gross Income (AGI) Gross income minus a list of permitted deductions Many deductions and credits are based on AGI 2-2 2 LO #1 The Expanded Tax Formula and the Major Sections of Form 1040A and Form 1040 The Expanded Tax Formula Gross Income(GI) - Permitted Deductions from Gross Income ------------------------------------------ = Adjusted Gross Income (AGI) Standard Deduction or Itemized Deductions Personal and Dependency Exemptions ------------------------------------------ = Taxable Income (TI) x by Appropriate Tax Rates ------------------------------------------------ = Tax Liability - Tax Credits