Determination of Income Tax Liability Gross Income - “Above the Line Deductions” = AGI (Adjusted Gross Income) - Standard or Itemized Deductions -Personal and Dependency Exemptions = Taxable Income Tax Based on Filing Status -Credits = Tax Due

Types of income

Earned Income Wages, salary Self-employment

Investment Income Interest, dividends, capital gains, rent

Exclusions from income

Gifts Transfer not made as compensation. No strings attached. No consideration given in return Carryover in basis from donor to donee

Inheritances Step up in basis to value at time of death

Exclusions from income Life insurance proceeds due to death Disability insurance benefits

If you paid the premiums Long-term care benefits: limit Interest: state and municipal bonds

State income tax? Taxable equivalent yield Sale of muni bonds at gain/loss Impact on taxable social security; AMT

Exclusions from Income U.S. Treasury bills, notes and bonds

Interest not subject to state income taxes U.S. Savings bonds

Bought at a discount. Buy $50 bond for $25 Interest is taxable when bonds are cashed

Exception to normal rule where interest taxable each year

Interest not taxable if used for education expenses

Phase out starts at $104,900 for MFJ in 2010

Social Security Benefits Contributions to social security have

already been subjected to income tax Up to 85% of social security payments

represent taxable income As income increases, amount of social security

which is taxable increases Formula is very complex to determine amount

taxable Even interest income on municipal bonds

increases taxable social security income

Exclusions from income Forgiveness of debt

If bankrupt Certain student loans

Otherwise, can be taxable Gain from sale of home

MFJ: $500,000 Single: $250,000 Principal residence: 2 of last 5 years

Exclusions from income

Attributable to physical injury or sickness Not taxable

Other damages are Emotional distress Punitive Discrimination

Exclusions from Income Fringe benefits

Meals and lodging for employer convenience No additional cost

Flights Employee discounts: can’t exceed gross

profit percentage Scholarships Adoption assistance Return of capital: getting money back

Income timing Constructive receipt

Could you have had the funds? Pay me for my soybeans next year

Imputed interest Below market interest rate on loan

Lender has imputed income Lender has generally also made a gift

Prepaid income Generally income in year received if cash basis

Above the Line Deductions Expenses incurred in sole proprietorship

(business) Expenses associated with rental property Capital losses: up to $3,000 per year

Above the Line Deductions Education expenses: up to $4,000 in 2010???

$2,000 if AGI > $130,000 MFJ; $0 if AGI > $160,000

IRA contributions In general, if not covered by employer pension

Traditional vs. Roth Under age 50: contribute $5,000 in 2010

Over 50: $6,000 Earned income

Student loan interest up to $2,500 in 2010 Single phaseout: $60,000 - $75,000 MFJ phaseout: $120,000 - $150,000

Above the Line Deductions Alimony Self-employed health insurance Moving expense: more than 50 miles increase

in commute due to new job One-half self-employment tax Sales taxes on vehicle purchases in 2009

Cost of vehicle up to $49,500 Phaseout: $250,000 to $260,000 MFJ

AGI determines

Limitation of itemized deductions Prior to 2010, reduced by 1/3 (in 2009) of

lesser of: 3% for AGI above $166,800 in 2009 80% of itemized deductions

Example: Itemized deductions: $10,000 AGI: $270,000 vs. AGI $500,000

AGI determines

Phaseout for personal and dependent exemptions Prior to 2010, reduced by 1/3 of 2% for

each $2,500 AGI above $250,200 in 2009.

Example: Exemptions: $7,300 AGI: $300,000

Standard Deduction 2009 MFJ: $11,400 Single: $5,700 Head of Household: $8,350 Plus $1,050 for each spouse over 65 Plus real estate property taxes up to

$1,000 Dependents: > of

$950 Or earned income plus $300

Itemized Deductions Home mortgage interest

First/second homes Home equity loan interest on up to $100,000

loan Taxes

Property taxes State income taxes

Charitable contributions Medical expenses

Above 7.5% of AGI

Personal Exemptions

$3,650 in 2009 Get exemption for self if not claimed

as a dependent

Dependent Exemptions $3,650 in 2009 Get exemption for dependent if

Family member Lives with you Provided more than half than support

Divorced parents: custodial Multiple support agreement

If no one provides majority Child under 19 or student under 24 Dependent can’t file joint tax return with spouse