Income Tax PowerPoint Presentation

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Income Tax

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US citizen revolt against taxes goes back to the Boston “tea party”. The colonies were taxed on tea imported from England, but had no say in the determination of the tax (“taxation without representation”).When the US Constitution was written, it did not provide for the income taxation of citizens.Instead, the federal government was primarily supported by taxes on imports!

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As America became a power, however, it became necessary to provide more money for the federal government. By the 20th century this need was paramount.So, in 1913 the 16th Amendment was proposed:--1% tax on income above a personal “exemption” (of $20,000)--graduated surtax (to 6%) on income above $20,000 (to $500,000)

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Under the new law, a married citizen making $80,000 would pay an income tax of $1,710.That was 1913—by 1980 the income tax on this same citizen had become $26,914.This tax burden created an understandable zeal for tax reform in the 1980s, which has continued unabated for the past thirty years—taxes are among the most frequently changed laws by the US Congress.

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The “bottom line” is this—you better understand basic tax law, both for personal and professional (business) reasons.Tax “Freedom Day” is April 13th as of 2009.

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Income taxes are not uniformly paid—the top 50% of taxpayers pay about 97% of all US income taxes. In addition, about 38% of taxpayers do not pay any income tax.

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Optometrists are in the top 10% of taxpayers. To determine how the federal income tax is applied, we will examine form 1040, which is the form on which income, deductions, and the tax are calculated, and Schedule A, which is used to add up certain allowable deductions (“itemized deductions”).

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GROSS INCOME minusDEDUCTIONS FROMGROSS INCOME equals ADJUSTED GROSS INCOME First page of Form 1040

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ADJUSTED GROSS INCOME minus STANDARD or ITEMIZED DEDUCTIONS and minus EXEMPTIONS equals TAXABLE INCOME from which can be determined the TAX TABLE TAX and minus CREDITS equals INCOME TAX

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Filing Status Taxes are reported based upon the filing status of the taxpayer; there are five choices: • single • married filing jointly • married filing separate returns • head of household • qualifying widow/widower with dependent child

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IncomeThe Internal Revenue Code (IRC § 61) defines “gross income” as: "Except as otherwise provided … gross income means all income from whatever source derived." Thus taxable "income" doesn't just mean cash—it can take many other forms; services performed and goods sold (both part of an optometrist’s gross income) fall within this definition (as do bartering, illegal income, prizes, and so forth).Income is entered on the first page (lines 7 to 22) of form 1040.

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--line 7 if employee wages are paid and a W-2 is received --line 8a for interest income (e.g., savings, checking accounts) --line 12 for income from a business (Schedule C) --line 21 for 1099 income (e.g., independent contractor)

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Exclusions from IncomeDespite the broad definition, there are several types of income that are excluded from taxation: Life insurance death proceeds—a beneficiary is not taxed on the policy’s death proceeds Gifts—if below $13,000 (for 2009) per donor, the gift is not income for the recipient Retirement income--Social Security payments are excluded from taxation Interest on state and city securities (e.g., state and municipal bonds)—interest on federal securities is taxable Compensation for injuries or sickness—a judgment or settlement paid to a plaintiff in a lawsuit is excluded

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Exclusions from Income Accident or health plan benefits—any insurance payments are excluded, even if the premiums were paid for by the employer Educational plans—education paid for by an employer for the benefit of an employee (e.g., COT training for an employee) is excluded Scholarships and fellowships—tuition, books and supplies are excluded, but not payments for room, board and other expenses Sale of principal residence—exclusion of $250,000 for single homeowner, or of $500,000 if married filing jointly; the seller must have owned and lived in the home 2 of the preceding 5 years (thus the exclusion can be claimed only every 2 years)

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There are 13 deductions from income. They are subtracted from gross income to arrive at the adjusted gross income. The adjusted gross income is used for several calculations on Schedule A.

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Deductions from Income Educator expense—up to $250 of teaching-related expenses can be deducted by elementary and secondary school teachers Business expenses—certain expenses related to military duty, the arts, and government work can be deducted 3. Health savings accounts (Form 8889)--HSAs are set up for employees and offer a combination of high-deductible insurance plan (minimum $1,100 for individuals and $2,200 for families, maximum contributions $2,900 for individuals and $5,800 for families) and tax deferred savings like an IRA; tax deductible contributions may be made to the account by an employee or employer or both, the money is invested and grows on a tax-deferred basis, and when withdrawals are made for medical expenses they are tax-free; amounts left in the account can be used the next year

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Deductions from Income Archer medical savings account (Form 8853)—self-employed individuals may establish a high deductible (minimum $1,950 for individuals and $3,850 for families, maximum contributions $2,900 for individuals and $5,800 for families) health plan, for themselves or for employees, into which tax-deferred deposits are made and interest accrues just like an IRA; funds may be withdrawn tax-free for medical expenses, and if there is money left in the account at the end of the year it may be carried over to the next year; the MSA may be converted to an health savings account or eventually to an IRA 4. Moving expenses (Form 3903)—the move must be connected with employment and there must be at least 50 miles difference between the old home and the new workplace; costs of packing, moving, storage, pets, transportation, and lodging are deductible

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Deductions from Income 5. Self-employment social security taxes--calculated on Schedule SE; only 50% of the tax is deductible) 6. Contributions to an SEP IRA, Keogh Plan, SIMPLE Plan, 401(k) plan, or other tax-deductible retirement plan 7. Self-employed health insurance premium—100% of the premium is deductible 8. Penalties for early withdrawal of savings 9. Alimony paid to an ex-spouse (child support is not deductible) 10. Contributions to a traditional IRA are deductible; contributions to a Roth IRA are not deductible

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Deductions from Income 11. Student loan interest deduction—maximum deduction for 2009 is $2,500; the student must not be a dependent on parents' tax return; adjusted gross income must be below $60,000 (to $75,000) if single and below $120,000 (to $150,000) if filing jointly 12. Deduction for tuition and fees--maximum deduction for 2009 is $4,000; the student must not be a dependent on the parent's tax return; adjusted gross income must be below $65,000 (to $80,000) if single, and below $130,000 (to $160,000) if married filing jointly 13. Domestic production activities--deduction is for businesses that manufacture or provide products

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Standard Deduction The “standard deduction” is a personal expense deduction that is granted to all taxpayers, regardless of income level, for certain personal expenses (medical costs, taxes, interest, gifts, casualty losses, and job-related expenses that are unreimbursed). The standard deduction for 2009 is: • $5,700 for single taxpayers • $11,400 for a married couple filing jointly An extra amount may be deducted by taxpayers who are blind or who are over 65 years of age. In 2009 this amount is: • $1,400 for single taxpayers • $1,100 for married taxpayers filing jointly Thus the standard deduction for a single taxpayer who is blind and over 65 is $1,400 + $1,400 + $5,700 = $8,500

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For purposes of claiming the deduction for blindness, the taxpayer must get a statement certified by the "eye doctor or registered optometrist" that: visual acuity is worse than 20/200 in the better eye with glasses or contact lenses; or the field of vision is 20 degrees or less The statement must also assert that the acuity or field of vision is "not likely to improve".

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The standard deduction is used if a taxpayer does not have personal deductions that are more than the standard amount allowed. For 2009, the standard amount is: $5,700 for single taxpayers $11,400 for married taxpayers filing jointly To determine if personal (itemized) deductions are actually more than this standard amount, Schedule A must be completed.

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Medical, dental, optometric and other health care expenses: • doctor bills, medications (e.g., prescription drugs, insulin) • eyeglasses, contact lenses • health insurance premiums • transportation (24¢ a mile), lodging ($50 a night per person) for care Note: this deduction is permitted only to the extent it exceeds 7 ½ % of adjusted gross income Example: For an adjusted gross income of $50,000, 7 ½% is $3,750

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Personal taxes • state and local income taxes • real estate taxes • personal property (automobile) taxes Note: State and local general sales taxes may be deducted instead of state and local income taxes; either actual expenses or an amount figured using the Optional State Sales Tax Tables (Publication 600) can be used. (For a married Birmingham resident earning $50,000, the sales tax deduction in 2009 is $1,200.)

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Personal interest expense • mortgage loans • second mortgage loans Note: interest on personal car loans and credit cards is not deductible

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Charitable contributions • both money and property may be deducted • for items worth more than $500 documentation is required (Form 8283) Note: it is the “fair market value” of donated non-cash items that can be deducted; thrift and consignment store prices are good indicators of this value; see IRS publication 561 for details

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Casualty losses • uninsured loss by fire, theft or casualty may be deducted (form 4684 required) Note: this deduction is permitted only to the extent it exceeds 10% of adjusted gross income

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Miscellaneous deductions (Personal) [Professional (employees)] • investment counsel • license fees • IRA fees • malpractice insurance • safe deposit box • professional society dues • tax services • 50% of unreimbursed • legal and accounting fees business related meal or entertainment expenses • unreimbursed business- related travel expenses • expenses of looking for a job Note: this deduction is allowed to the extent it exceeds 2% of adjusted gross income—for $50,000, 2% is $1,000.

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The deductions on Schedule A are added together to constitute the “itemized deductions” However, for 2009, if the adjusted gross income exceeds $83,400 (single) or $166,800 (married filing jointly), the itemized deductions will begin to be reduced. Whether the standard deduction or itemized deductions are used, the amount is entered on line 40a of form 1040.

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Exemptions A modest amount of income is exempted from taxation. Exemptions may be claimed by the taxpayer, spouse, children, and other dependents (such as a dependent parent, who must receive more than 50% support to be claimed). For 2009, the exemptions that may be claimed are: • for the taxpayer filing the claim $3,650 • for the taxpayer's spouse $3,650 • for each dependent of the taxpayer $3,650 A “dependent” is defined as a person who: • received more than 50% of his or her support for the tax year from the taxpayer claiming the exemption • is related to the taxpayer • is a US citizen or resides in the US, Canada, or Mexico Exemptions begin to be phased out if the adjusted gross income is above: • $166,800 for single taxpayers • $250,200 for married taxpayers filing jointly

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2009 Tax Brackets Single 10% Bracket $0 to $8,350 15% Bracket $8,350 to $33,950 25% Bracket $33,950 to $82,250 28% Bracket $82,250 to $171,550 33% Bracket $171,550 to $372,950 35% Bracket $372,950 and up Joint 10% Bracket $0 to $16,700 15% Bracket $16,700 to $67,900 25% Bracket $67,900 to $137,050 28% Bracket $137,050 to $208,850 33% Bracket $208,850 to $372,950 35% Bracket $372,950 and up

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Tax Credits Unlike deductions, which merely lower the amount of income upon which the income tax is calculated, tax credits are a dollar-for-dollar reduction in the tax itself. Therefore, they are highly desirable. Allowable credits include: Foreign tax credit Credit for child and dependent care Education credit Retirement savings contribution credit Child tax credit Adoption credit

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Credits Credit for child and dependent care expenses A credit may be claimed for expenses incurred to have someone take care of a child under 13 years of age or a dependent or spouse who cannot care for himself or herself. The maximum allowable credit is $3,000 per child or dependent, and $6,000 total. However, if the taxpayer's adjusted gross income is over $43,000, only 20% of the credit may be claimed. Use Form 2441. Child tax credit A tax credit may be claimed for a child who is a dependent and is under age 17 at the end of the tax year. To receive the credit, the taxpayer's adjusted gross income must be below $75,000 if single and below $110,000 if married filing jointly (above that, the credit is phased out at $50 per $1,000 of income). The credit is $1,000 per child in 2009.

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Credits Adoption Credit A credit of up to $12,150 (for 2009) can be claimed for “qualified expenses” related to the adoption; the credit begins to be phased out at $182,180 of modified adjusted gross income and is eliminated at $222,180. Use Form 8839. Education credits A credit may be claimed for expenses paid for a taxpayer, spouse, or child to enroll in and attend the first 2 years of college or vocational education. The student must be enrolled in a degree-earning program and must carry at least a half academic load. The Hope credit is up to $2,000 per student for 2 years. The lifetime learning credit does not apply to a degree-earning program and is up to $2,000 per family for an unlimited number of years. Either credit is phased out if the adjusted gross income is $50,000 (to $60,000) for single taxpayers and $100,000 (to $120,000) for married taxpayers filing jointly. Use Form 8863.

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The American Opportunity Credit This new credit modifies the Hope Credit for tax years 2009 and 2010. The credit is $2,500 per student per year, for 4 years, and required course materials qualify as expenses.The full credit is available to individuals whose modified adjusted gross income is less than $80,000; it is phased out at $90,000. For married couples filing a joint return, the maximum modified adjusted gross income level is $160,000, with phase out at $180,000. These income limits are higher than under the existing Hope and lifetime learning credits. See Publication 970, Tax Benefits for Education.

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Credits Earned Income Credit (EIC) The EIC can be claimed by low-earning single or married filing jointly taxpayers; credits differ if there are 0, 1 or 2 children; for example, for a married couple earning $10,000 with 1 child the credit is $5,028, if earning $20,000 the credit is $2,232, and if earning $30,000 the credit is $3,855 (as of 2009)

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Who Must File a Return A return does not have to be filed by taxpayers who earn less than a certain stated amount. For persons under 65 years of age, that amount is (for 2009): • $9,350 for single individuals ($3,650 + $5,700) • $18,700 for married couples ($7,300 + $11,400) Special rules apply to returns for children (under 19 years). • If the child earns income (e.g., a job), no tax return needs to be filed unless the child earns more than $5,700. • If the child has unearned income (e.g., stock dividends), a return must be filed if the child receives more than $950. If a child is 19 or older, a return must be filed if earned or unearned income is above $950.

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Special rules also apply to taxes paid by children. A child below 19 years is not taxed on the first $950. For unearned income, the child is taxed at his or her bracket (i.e., 10%) from $951 to $1,900, and is taxed at the parent's bracket (e.g., 10%, 15%, 25%, 28%, 33%, 35%) for unearned income in excess of $1,900. For earned income, the child is taxed only on amounts in excess of the standard deduction, which is $5,700, at the child’s rate (e.g., 10%). For a child 19 years to age 24, the first $950 is excluded from taxation, and earned or unearned income in excess of $950 is taxed at the child’s rate (e.g., 10%); however, the child may claim the standard deduction, up to $5,700.

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Summary for Child Tax Reporting

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Tax returns must be postmarked no later than April 15th or interest (on the taxes due) and penalties (5% of the amount due for each month or part of a month the return is late, to a maximum of 25%) will be applied.An automatic two month extension in filing the form 1040 will be granted if a form 4868 is filed by April 15th. However, the tax must still be paid by April 15th.A previous return may be amended by filing a form 1040X. However, the return is sure to be examined.

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