CHAPTER 1
The Individual
Income Tax Return
Objectives
After completing this chapter, you should:
• Know the history and objectives of U.S. tax law.
• Know the different entities subject to tax and reporting requirements.
• Understand the tax formula for individual taxpayers.
• Be able to complete a simple individual income tax return.
HISTORY AND OBJECTIVES OF THE TAX SYSTEM
SECTION 1.1
The United States income tax was authorized by the Sixteenth Amendment to the
Constitution on March 1, 1913. Prior to the adoption of this Amendment, the United
States government had levied various income taxes for limited periods of time. For
example, an income tax was used to help finance the Civil War. The finding by the courts
that the income tax law enacted in 1894 was unconstitutional eventually led to the adoption of the Sixteenth Amendment. Since adoption of the Amendment, the constitutionality of the income tax has not been questioned by the federal courts.
Many people believe the sole purpose of the income tax is to raise revenue to operate
the government. This belief is not accurate. The income tax is used also as a tool of economic and social policies. Realizing that, the beginning tax student can better understand why and how the tax law has become so complex. The tax law has many goals other
than raising revenue. These goals fall into two general categories—economic goals and
social goals—and it is often unclear which goal a specific tax provision was written to
meet. Tax provisions have been used for such economic motives as reduction of unemployment, expansion of investment in productive (capital) assets, and control of inflation. Specific examples of economic tax provisions are the limited allowance for expensing of capital expenditures and the accelerated cost recovery system (ACRS or MACRS)
of depreciation. In addition to pure economic goals, the tax law is used to encourage certain business activities and industries. For example, an income tax credit encourages
businesses to engage in research and development activities and a special deduction for
soil and water conservation expenditures, related to farm land, benefits farmers.
Social goals have also resulted in the adoption of many specific tax provisions. The
child and dependent care credit, the earned income credit, and the charitable contribution deduction are examples of tax provisions designed to meet social goals. Social
provisions may influence economic activities, but they are written primarily to encourage taxpayers to undertake activities to benefit themselves and society.
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Chapter 1 • The Individual Income Tax Return
An example of a provision that has both economic and social objectives is the provision allowing the gain on sale of a personal residence up to $250,000 ($500,000 if married) to be excluded from taxable income. From a social standpoint, this helps a family
afford a new home, but it also helps achieve the economic goal of ensuring that the
United States has a mobile workforce.
Self-Study Problem 1.1
Indicate by a check mark whether you think each of the following tax provisions was designed
to meet an economic goal or a social goal of the tax law. If it is not clear which was the
primary goal of the provision, check the box labeled both.
TAX PROVISION
Economic
GOAL
Social
Both
1. The child care credit
2. The earned income credit
3. The medical expense deduction
4. The deduction for a donation to a church
5. The credit for research and development
expenditures
6. The personal exemption
7. The Accelerated Cost Recovery System
8. The disallowance of a deduction for fines
and penalties
9. The home mortgage interest deduction
10. The exclusion of gain on sale of a personal
residence
? WOULD YOU BELIEVE...
The size of the tax code has grown from around 400,000 words in 1955 to over 1,300,000
words today. Yale Law Prof. Michael J. Graetz is quoted as saying, “The tax code is now more
than six times longer than Tolstoy’s ‘War and Peace’ and ‘considerably harder to parse’” (Wall
Street Journal Tax Report, January 24, 2001).
SECTION 1.2
REPORTING AND TAXABLE ENTITIES
Under United States tax law, there are five basic taxable or reporting entities. They are
individuals, corporations, partnerships, estates, and trusts. The taxation of individuals is
the major topic of this text; an overview of the taxation of partnerships and corporations
is presented in Chapters 10 and 11, respectively. Taxation of estates and trusts is a specialized area not covered in this text.
Section 1.2 • Reporting and Taxable Entities
? WOULD YOU BELIEVE...
The IRS reports that net revenue collections for 2003 came from the following sources.
Individual income taxes
51%
Corporate income taxes
10%
Employment, excise and other taxes
39%
The Individual
The taxable unit most people are familiar with is the individual. Taxable income for individuals generally includes wages, salary, self-employment earnings, rent, interest, and
dividends. Individual taxpayers file a Form 1040EZ, a Form 1040A, or a Form 1040. The
Form 1040EZ is the simplest tax form to use, but it may be used only by taxpayers who
have the following characteristics:
1. The taxpayer must be single or married filing a joint return;
2. The taxpayer must not be age 65 or over and/or blind;
3. The taxpayer must not claim any dependents;
4. The taxpayer’s taxable income must be less than $50,000;
5. The taxpayer’s income must include only wages, salaries, tips, unemployment
compensation, taxable scholarships and fellowships, and $1,500 or less of taxable interest income;
6. The taxpayer must not have received advance earned income credit payments;
and
7. The taxpayer must not claim a student loan interest deduction or an education
credit.
Many taxpayers who cannot file Form 1040EZ file Form 1040A. Generally, Form
1040A is filed by taxpayers who are not self-employed and do not benefit from itemizing
their deductions. Form 1040A allows a taxpayer the following items not allowed for taxpayers who file Form 1040EZ:
1. The additional standard deduction for being age 65 or over and/or blind;
2. Exemptions for dependents;
3. Dividend and interest income of any amount;
4. Pension and annuity income;
5. Payments from an IRA;
6. Taxable social security benefits;
7. The deduction for contributions to an individual retirement account (IRA);
8. The child and dependent care credit and the child tax credit;
9. The credit for the elderly;
10. Any allowable filing status;
11. Estimated tax payments;
12. The adoption credit;
13. Student loan interest, education credits and the tuition and fees deduction;
14. Capital gain distributions from mutual funds;
15. Educator expenses;
16. Advance earned income credit payments;
17. The alternative minimum tax; and
18. The retirement savings contributions credit.
Form 1040, the long form, is used by all individual taxpayers who must file a tax
return and do not qualify to file a Form 1040EZ or a Form 1040A.
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Chapter 1 • The Individual Income Tax Return
An individual taxpayer’s interest income (over $1,500) and dividend income (over
$1,500) are reported on Schedule B of Form 1040 (or Form 1040A, Schedule 1), while
income from a trade or business, other than farm or ranch activities, is included on
Schedule C. Farm or ranch income is reported on Schedule F. The supplemental
income schedule, Schedule E, is used to report rental or royalty income. If an individual
taxpayer has capital gains or losses, he or she must generally file Schedule D to report
those gains or losses. Schedule A is completed by individuals who itemize their deductions. Itemized deductions on Schedule A include medical expenses, taxes, interest,
charitable contributions, casualty and theft losses, and other miscellaneous deductions.
These tax forms and schedules and some less common forms are presented in this text.
The Corporation
Corporations are subject to the United States income tax and must report income annually on a Form 1120-A (short form) or a Form 1120 (long form). The tax rate schedule
for corporations is:
Taxable
Of the
Income Over
But Not Over
The Tax Is
Amount Over
0
$50,000
15%
0
$50,000
75,000
$7,500 + 25%
$50,000
75,000
100,000
13,750 + 34%
75,000
100,000
335,000
22,250 + 39%
100,000
335,000
10,000,000
113,900 + 34%
335,000
10,000,000
15,000,000
3,400,000 + 35%
10,000,000
15,000,000
18,333,333
5,150,000 + 38%
15,000,000
18,333,333
—
6,416,667 + 35%
18,333,333
Some corporations may elect S Corporation status. An S Corporation does not pay
regular corporate income taxes; instead, the corporation’s income passes through to the
shareholders and is included on their returns. Chapter 11 includes an explanation of the
S Corporation.
The Partnership
The partnership is not a taxable entity; instead it is a reporting entity. Generally, all
income or loss of a partnership is included on the tax returns of the partners. However,
a partnership must file a Form 1065 to report the amount of income or loss and show
the allocation of the income or loss to the partners. The partners, in turn, report their
share of ordinary income or loss on their tax returns. Other special gains, losses, income,
and deductions of the partnership are reported and allocated to the partners separately, since the items are given special tax treatment at the partner level. Capital gains and
losses, for example, are reported and allocated separately and the partners report their
share on Schedule D of their individual income tax returns.
SUMMARY OF MAJOR TAX FORMS AND SCHEDULES
Form or Schedule
1040EZ
1040A
1040
Schedule A
Schedule B
Schedule C
Schedule D
Description
Individual return – single and joint filers with no dependents
Individual return, short form
Individual return, long form
Itemized deductions
Interest and dividend income
Profit or loss from business or profession
Capital gains and losses
Section 1.3 • The Tax Formula for Individuals
1-5
Schedule E
Supplemental (rent and royalty) income
Schedule F
Farm and ranch income
1120
Corporate tax return, long form
1120-A
Corporate tax return, short form (for small corporations)
1120S
S Corporation tax return
1065
Partnership information return
Schedule K-1
Partner’s share of partnership results
1041
Fiduciary (estates and trusts) tax return
All of the forms listed above and more are available at the IRS Web site
(http://www.irs.gov).
Self-Study Problem 1.2
Indicate which is the most appropriate form or schedule for each of the following items. Unless
otherwise indicated in the problem, assume the taxpayer is an individual.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
ITEM
Bank interest income of $1,600 received by a taxpayer who
itemizes deductions
Capital gain on the sale of AT&T stock
Income from a farm
Income of a trust
An individual partner’s share of partnership income reported by
the partnership
Salary of $70,000 for a taxpayer who itemizes deductions
Income from a sole proprietorship business
Income from rental property
Dividends of $2,000 received by a taxpayer who does not
itemize deductions
Income of a large corporation
Loss for a partnership
Charitable contribution deduction for an individual who
itemizes deductions
Single individual with no dependents whose only income is
$18,000 (all from wages) and who does not itemize deductions
Form or Schedule
____________
____________
____________
____________
____________
____________
____________
____________
____________
____________
____________
____________
____________
THE TAX FORMULA FOR INDIVIDUALS
Individual taxpayers calculate their tax in accordance with a tax formula. Understanding
the formula is important, since all tax calculations are based on the result. The formula is:
Gross Income
– Deductions for Adjusted Gross Income
——————————————————————————
= Adjusted Gross Income
– Greater of Itemized Deductions or the Standard Deduction
– Exemptions
—————–——
= Taxable Income
× Tax Rate
——————
= Gross Tax Liability
– Credits and Prepayments
—————————————————
= Tax Due or Refund
————————–————
————————–————
SECTION 1.3
1-6
Chapter 1 • The Individual Income Tax Return
Gross Income
The calculation of taxable income begins with gross income. Gross income includes all
income, unless the tax law provides for a specific exclusion. The exclusions from gross
income are discussed in Chapter 2.
Deductions for Adjusted Gross Income
The first category of deductions are the deductions for adjusted gross income. These
deductions include trade or business expenses, certain reimbursed employee business
expenses paid under an accountable plan, alimony payments, moving expenses, certain
educator expenses, student loan interest, a tuition and fees deduction, the penalty on
early withdrawal from savings, and contributions to qualified retirement plans. Later
chapters explain these deductions in detail.
Adjusted Gross Income
The amount of adjusted gross income is important, since it is the basis for several deduction limitations, such as the limitation on medical expenses. A taxpayer’s adjusted gross
income is also used to determine the phase-out of the otherwise allowable itemized
deduction and personal and dependency exemption amounts.
? WOULD YOU BELIEVE...
The Wall Street Journal (Tax Report, April 24, 1996) reported: “Humorist Dave Barry says the
IRS is making progress in ‘its mission to develop a tax form so scary that merely reading it will
cause the ordinary taxpayer’s brain to explode.’ He cites Schedule J, Form 1118: ‘Separate
Limitation Loss Allocations and Other Adjustments Necessary to Determine Numerators of
Limitation Fractions, Year-End Recharacterization Balances, and Overall Foreign Loss
Account Balances.’”
Standard Deduction or Itemized Deductions
Itemized deductions are personal items that Congress has allowed as deductions.
Included in this category of deductions are medical expenses, certain interest expense,
certain taxes, charitable contributions, casualty losses, and other miscellaneous items.
Taxpayers should itemize their deductions only if the total amount exceeds their standard deduction amount. The following table gives the standard deduction amounts
for 2004.
Filing Status
Single
Married, filing jointly
Married, filing separately
Head of household
Qualifying widow(er)
2004 Standard Deduction
$4,850
9,700
4,850
7,150
9,700
Taxpayers who are 65 years of age or older or blind are entitled to an additional standard deduction amount. For 2004, the additional standard deduction amount is $1,200
for unmarried taxpayers and $950 for married taxpayers and surviving spouses.
Taxpayers who are both 65 years of age or older and blind are entitled to two additional standard deduction amounts. See Section 1.7 for a complete discussion of the basic
and additional standard deduction amounts.
Section 1.4 • Who Must File and Where to File
1-7
Exemptions
Exemptions are worth $3,100 each for 2004. The two types of exemptions, personal and
dependency, will be described later in this chapter.
The Gross Tax Liability
A taxpayer’s gross tax liability is obtained by reference to the tax table or use of a tax rate
schedule. Tax credits and prepayments are subtracted from gross tax liability to calculate
the net tax due the government or the refund due the taxpayer.
Taxpayers may provide information on their Form 1040, 1040A, or 1040EZ authorizing the
IRS to deposit refunds directly into their bank account. Taxpayers with balances due may pay
their tax bill with a credit card.
In addition, all federal taxes can now be paid via the Internet by both individuals and
businesses.
TAX BREAK
Self-Study Problem 1.3
Bill is a single taxpayer. In 2004, his salary is $28,500 and he has interest income of $1,500.
In addition, he has deductions for adjusted gross income of $2,100 and $6,250 of itemized
deductions. If Bill claims one exemption for this year, calculate the following amounts:
1.
2.
3.
4.
Gross income
Adjusted gross income
Standard deduction or itemized deduction amount
Taxable income
$
$
$
$
____________
____________
____________
____________
SECTION 1.4
WHO MUST FILE AND WHERE TO FILE
Several conditions must exist before a taxpayer is required to file a U.S. income tax
return. These conditions primarily relate to the amount of the taxpayer’s income and
the taxpayer’s filing status. Figures 2 through 4 summarize the filing
requirements for taxpayers in 2004. If a taxpayer has any nontaxable
income, the amount should be excluded in determining whether the
taxpayer must file a return.
Taxpayers are also required to file a return if they have net earnings from self-employment of $400 or more, receive advanced earned
income credit payments (AEIC), or owe taxes such as Social Security
A good way to increase your income is
taxes on unreported tips. When a taxpayer is not required to file but is
to increase your education level. On
average, a holder of a bachelor’s degree
due a refund for overpayment of taxes, a return must be filed to obtain
earns almost twice the amount a high
the refund. A dependent’s basic standard deduction, when filing his or
school graduate earns, according to the
her own tax return, is limited to the greater of $800 or the sum of $250
U.S. Census Bureau. Those taking some
plus earned income up to the basic standard deduction amount for the
college courses or achieving associate
year. A dependent who is 65 or over or blind is also allowed an additional
degrees typically earn about 20 percent
standard deduction amount.
more than those with only high school
MONEY TIPS
educations.
1-8
Chapter 1 • The Individual Income Tax Return
A taxpayer who is required to file a return should mail the return to the appropriate
Internal Revenue Service Center. Figure 1 lists these locations. Generally, individual
returns are due on the fifteenth day of the fourth month of the year following the close
of the tax year. For a calendar year taxpayer, therefore, the due date is April 15, unless
the taxpayer requests a filing extension.
FIGURE 1
WHERE TO FILE
FIGURE 2
WHO MUST FILE
Section 1.4 • Who Must File and Where to File
*
FIGURE 3
*
FIGURE 4
* By the time this was prepared, the 2004 information was not available.
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Chapter 1 • The Individual Income Tax Return
Self-Study Problem 1.4
Indicate by a check mark whether the following taxpayers are required to file a return for 2004
in each of the following independent situations:
Filing Required?
Yes
No
1. Taxpayer (age 45) is single with income of $7,850.
_____
_____
2. Husband (age 67) and wife (age 64) with income of $16,250,
filing a joint return.
_____
_____
3. Taxpayer is a college student with salary from a part-time job
of $6,000. She is claimed as a dependent by her parents.
_____
_____
4. Taxpayer has net earnings from self-employment of $4,000.
_____
_____
5. Taxpayers are married with income of $12,800 and file a joint
return. They expect a refund of $600 from excess withholding.
_____
_____
6. Taxpayer is a waiter and has unreported tips of $450.
_____
_____
7. Taxpayer is a qualifying widow (age 65) with a dependent
son (age 18) and income of $7,850.
_____
_____
8. Taxpayer has income of $4,500 and is single. His age is 45
and he received advanced earned income credit payments.
_____
_____
SECTION 1.5
FILING STATUS AND TAX COMPUTATION
An important step in calculating the amount of a taxpayer’s tax is the determination of
the taxpayer’s correct filing status. The tax law has five different filing statuses: single;
married, filing jointly; married, filing separately; head of household and qualifying
widow(er). A tax table that must be used by most taxpayers, showing the tax liability for
all five statuses, is provided in Appendix A. The tax table can be used unless the taxpayer’s taxable income is $100,000 or over, or the taxpayer is using a special method to calculate the tax liability. If taxpayers can use the tax table to determine their tax, they must
do so; otherwise, a tax rate schedule is used. Single taxpayers use Tax Rate Schedule X;
married taxpayers or qualifying widows(ers) use Tax Rate Schedule Y-1; married taxpayers filing separately use Tax Rate Schedule Y-2; and taxpayers filing as heads of households use Tax Rate Schedule Z. The tax rate schedules are also presented in Appendix A.
Single Filing Status
Taxpayers who do not qualify for married, qualifying widow(er), or head of household status file as single. This status must be used by taxpayers who are unmarried or legally separated from their spouses by divorce or separate maintenance decree as of December 31 of
the tax year. State law governs whether a taxpayer is married, divorced, or legally separated. If a taxpayer’s spouse dies during the year, the taxpayer’s status is married for that year.
Married Filing Jointly
Taxpayers are married for tax purposes if they are married on December 31 of the tax year.
Also, in the year of one spouse’s death, the spouses are considered married for the full year.
In most situations, married taxpayers pay less tax by filing jointly than by filing separately.
Married taxpayers may file a joint return even if they did not live together for the entire year.
As the law currently stands, same-sex couples can’t file joint returns. The question
came up recently when Massachusetts recognized same-sex marriages. For Federal tax
purposes, such marriages are not recognized.
Section 1.5 • Filing Status and Tax Computation
? WOULD YOU BELIEVE...
Allowing married couples to file joint returns was first proposed in 1941. The proposal
sparked a controversy, and according to the Kiplinger Tax Letter (April 7, 1995), opponents of
joint filing were called champions of emancipated womanhood.
Married Filing Separately
Married taxpayers may file separate returns and should do so if it reduces their total tax
liability. They may file separately if one or both had income during the year. If separate
returns are filed, both taxpayers must compute their tax in the same manner. For example, if one spouse itemizes deductions, the other spouse must also itemize deductions.
Each taxpayer reports his or her income, deductions, and credits and is responsible only
for the tax due on his or her return. If the taxpayers live in a community property state,
they must follow state law to determine community income and separate income. The
community property states include Arizona, California, Idaho, Louisiana, Nevada, New
Mexico, Texas, Washington and Wisconsin. See Chapter 6 for additional discussion
regarding income and losses from community property.
A legally married taxpayer may file as head of household (based on the general filing
status rules), if he or she qualifies as an abandoned spouse. A taxpayer qualifies as an
abandoned spouse only if all of the following requirements are met:
1. A separate return is filed,
2. The taxpayer paid more than half the cost (rent, utilities, etc.) to keep up his or
her home during the year,
3. The spouse did not live with the taxpayer at any time in the last six months of
the year, and
4. For over six months during the year the home was the principal residence for a
dependent child, stepchild or adopted child. Under certain conditions a foster
child may qualify as a dependent.
In certain circumstances, married couples may be able to reduce their total tax liability by
filing separately. For instance, since some itemized deductions, such as medical expenses
and casualty losses, are reduced by a percentage of adjusted gross income (discussed in
Chapter 5), a spouse with a casualty loss and low separate adjusted gross income may be
better off filing separately.
Head of Household
If an unmarried taxpayer can meet special tests, he or she is allowed to file as head of
household. Head of household rates are lower than rates for single or married filing separately. A taxpayer qualifies for head of household status if both of the following conditions exist:
1. The taxpayer was unmarried (or abandoned) as of December 31 of the tax year,
and
2. The taxpayer paid more than half of the cost of keeping a home that was the
principal place of residence of a dependent.
TAX BREAK
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Chapter 1 • The Individual Income Tax Return
If the dependent is the taxpayer’s parent, the parent need not live with the taxpayer.
Also, an unmarried child, grandchild, adopted child, or stepchild does not have to be
a dependent; the child must only live with the taxpayer. Any other qualifying individual, such as a foster child, must be a dependent of the taxpayer and live in the taxpayer’s home.
Surviving Spouse
A taxpayer may continue to benefit from the joint return rates for two years after the
death of his or her spouse. To qualify to use the joint return rates, the widow(er) must
pay over half the cost of maintaining a household where a dependent child, stepchild,
adopted child, or foster child lives. After the two-year period, these taxpayers usually
qualify for the head of household filing status.
Tax Computation
For 2004, there are six income tax brackets (10 percent, 15 percent, 25 percent, 28 percent, 33 percent, and 35 percent). The individual tax rates for 2004 are presented in the
Tax Rate Schedules in Appendix A. The tax rate schedule for single taxpayers is summarized below:
When calculating their tax liability, taxpayers who have adjusted gross income in
excess of threshold amounts are required to reduce the amount of their otherwise allowable personal exemptions and itemized deductions. The provisions for reducing exemptions and itemized deduction amounts result in a marginal tax rate that is slightly higher than the official maximum 35 percent rate. These provisions will be discussed later in
this chapter.
The tax rates applicable to net long-term capital gains range from 5 percent to 28 percent depending on the taxpayer’s tax bracket and the kind of capital asset. The calculation of the tax on capital gains is discussed in detail in Chapter 8, and the applicable tax
rates are discussed in Section 1.9 of this chapter.
The 2003 Tax Act introduced new lower rates for qualifying dividends, discussed in
detail in Chapter 2, effective for tax years before 2009. After 2008, tax rates revert to pre2003 tax law. The new tax rates on dividends are as follows:
Ordinary Tax Bracket
10% and 15%
Higher brackets
Qualifying Dividend Rate
2008
2003–2007
5%
0%
15%
15%
Section 1.6 • Personal and Dependency Exemptions
EXAMPLE
Carol, a single taxpayer claiming one exemption, has adjusted gross income
of $120,000 and taxable income of $105,000 for 2004. Her tax is calculated
using the 2004 Tax Rate Schedule from Appendix A as follows:
$24,027 = $14,325 + 28% × ($105,000 – 70,350)
EXAMPLE
Meg is a single taxpayer during 2004. Her taxable income for the year is
$27,530. Using the tax table in Appendix A, her gross tax liability for the year
is found to be $3,771.
Taxpayers considering marriage may be able to save thousands of dollars by engaging in
tax planning prior to setting a date. If the couple would pay less in taxes by filing as married rather than as single (which will frequently happen if one spouse has low earnings for
the year) they may prefer a December wedding. They can take advantage of the rule that
requires taxpayers to file as married for the full year even if they were married on the last day
of the year. On the other hand, if filing a joint return would cause the couple to pay more in
taxes (which frequently happens if both spouses have high incomes) they may prefer a
January wedding.
1-13
TAX BREAK
Self-Study Problem 1.5
Indicate the filing status (or statuses) in each of the following independent cases, using
this legend:
A – Single
D – Head of household
B – Married, filing a joint return
E – Qualifying widow(er)
C – Married, filing separate returns
Filing
Case
Status
1. The taxpayers are married on December 31 of the tax year.
____________
2. The taxpayer is single, with a dependent child living in
her home.
____________
3. The taxpayer is unmarried and is living with his girlfriend.
____________
4. The taxpayer is married and his spouse left in midyear
and has disappeared. The taxpayer has no dependents.
____________
5. The unmarried taxpayer supports her dependent mother,
____________
who lives in her own home.
6. The taxpayer is divorced and her son lived with her
all year. Her son is a dependent of his father.
____________
7. The taxpayer’s wife died last year. His 15-year-old
dependent son lives with him.
____________
PERSONAL AND DEPENDENCY EXEMPTIONS
Taxpayers are allowed two types of exemptions: personal and dependency. For 2004,
each exemption reduces adjusted gross income by $3,100. However, the exemption
deduction is phased out for high income taxpayers. If a taxpayer’s adjusted gross income
(AGI) exceeds a certain threshold amount, the exemption deduction is reduced by
SECTION 1.6
1-14
Chapter 1 • The Individual Income Tax Return
2 percent for each $2,500 ($1,250 for married taxpayers filing separately) or fraction
thereof by which the taxpayer’s AGI exceeds the threshold amount. The threshold
amounts for 2004 are:
Threshold Amount
Filing Status
Single
$142,700
Married, filing jointly
214,050
Married, filing separately
107,025
Head of household
178,350
The maximum reduction in the exemption deduction is 100 percent.
EXAMPLE
In 2004, Heather is a single taxpayer with adjusted gross income of $173,250.
She is entitled to one exemption worth $3,100. Heather’s exemption must be
reduced by $806 (26% × $3,100). The 26 percent is calculated as follows:
1. ($173,250 – 142,700) / $2,500 = 12.2, which is rounded up to
13.
2. 2% × 13 = 26%, the exemption reduction.
Heather’s allowed exemption amount is $2,294 ($3,100 – $806). The
allowed exemption amount may also be calculated using the Personal
Exemption Worksheet provided in the Form 1040 Instructions, as shown
below. If Heather had an exemption for a dependent, this exemption would
also be reduced to $2,294.
*
x
3,100
173,250
142,700
30,550
13
26
806
2,294
Personal exemptions are granted to taxpayers for themselves; almost every taxpayer
and spouse are each entitled to one personal exemption. Children who may be claimed
as dependents on their parents’ tax returns are not allowed to claim a personal exemption for themselves on their own tax returns.
? WOULD YOU BELIEVE...
Estimates by the Joint Committee on Taxation show that to rank in the top 1 percent for
2001, a taxpayer must have had adjusted gross income of approximately $340,000. This
group paid about 23 percent of total individual taxes for 2001.
* By the time this was prepared, the 2004 form was not available.
Section 1.6 • Personal and Dependency Exemptions
Dependency Exemptions
Please note: For tax years beginning after 2004 the definition of a qualifying dependent has
been changed in accordance with the Working Families Tax Relief Act of 2004. However,
for purposes of 2004 tax returns the five dependency tests discussed below are correct.
An additional exemption may be claimed for a person other than the taxpayer or spouse
if five tests are met. The five dependency tests relate to income, support, return filed by
the dependent, citizenship, and member of household or relationship.
1. Income test
The dependent must receive less than $3,100 in gross income for the 2004 tax
year. This test does not have to be met if the dependent is the taxpayer’s child
who is (1) under age 19 at the end of the year or (2) a full-time student, under
age 24 at the end of the year and in school for at least five months during the
year. To qualify, the school must have a regular teaching staff, a regular enrolled
student body, and a regular course of study. The term “school” generally
includes elementary, junior, and senior high schools; colleges and universities;
and technical, trade, and mechanical schools. Correspondence schools and onthe-job training do not qualify, unless the on-the-job training consists of farm
courses given by a school or local government.
2. Support test
The dependent must receive over half of his or her support from the taxpayer
and spouse. Support includes expenditures for such items as food, lodging,
clothes, medical and dental care, and education. To calculate support, the taxpayer uses the actual cost of the above items, except lodging. The value of lodging is calculated at its fair rental value. Money received by the dependent from
nontaxable sources (for example, Social Security) must be used in calculating
support. However, funds received by students as scholarships are excluded from
the support test.
If the dependent is a child of divorced parents who together pay more than half of
the child’s support, the parent with custody for most of the year is generally entitled to
the exemption. This rule not only applies to cases of divorce and legal separation, but
also to situations in which the parents live apart during the last six months of the tax year.
However, the parent without custody may claim the exemption if:
1. The custodial parent agrees on Form 8332 not to claim the dependent for the
year, or
2. A divorce decree executed prior to 1985 states that the noncustodial parent is
entitled to the exemption and that parent provided at least $600 in child support during the year.
If a dependent is supported by two or more taxpayers, a multiple support agreement
may be filed. To file the agreement, the taxpayers (as a group) must provide over 50 percent of the support of the dependent. Assuming that all other dependency tests are met,
the group may give the exemption to any member of the group who provided over 10
percent of the dependent’s support.
In a multiple support agreement or a divorce, it makes sense to give the exemption to the
taxpayer who will receive the largest tax benefit for the deduction. The additional tax savings
could then be used to further subsidize the dependent’s support.
3. Joint return test
The dependent must not file a joint return with his or her spouse. If neither the
spouse nor the dependent is required to file (see the section on filing require-
TAX BREAK
1-15
1-16
Chapter 1 • The Individual Income Tax Return
ments), but they file a return to obtain a refund of tax, they are not considered
to have filed a return for purposes of this test.
4. Citizenship test
The dependent must be a United States citizen, a resident of the United States,
Canada, or Mexico, or an alien child adopted by and living with a United States
citizen in a foreign country.
5. Member of household or relationship test
Finally, the dependent must be related to the taxpayer or his or her spouse. The
following relatives qualify:
Child
Stepchild
Mother
Father
Grandparent
Brother
Sister
Grandchild
Stepbrother
Stepsister
Stepmother
Stepfather
Mother-in-law
Father-in-law
Brother-in-law
Sister-in-law
Son-in-law
Daughter-in-law
O r, If Related
by Blood:
Uncle
Aunt
Nephew
Niece
A foster child who lives in the taxpayer’s home for the entire year, a legally adopted
child, or a child placed in the taxpayer’s home by a placement agency qualifies as a child
for this test.
In addition to the relatives listed above, any person who lived in the taxpayer’s home
as a member of the household for the entire year meets the relationship test. But a person is not considered a member of the household if at any time during the year the relationship between the taxpayer and the dependent was in violation of local law.
A taxpayer can claim an exemption for a dependent who was born or died during the
year if the dependency tests were met while that person was alive. A dependency exemption may be claimed for a baby born on or before December 31. Taxpayers must provide
a taxpayer identification number (TIN) for all dependents.
Figure 5 illustrates the dependency tests described above. It is helpful in evaluating
whether a person qualifies as a dependent.
Self-Study Problem 1.6
Indicate in each of the following independent situations the number of exemptions the taxpayer(s) should claim on their 2004 income tax return. If a test is not mentioned, you should consider that it is met.
_____ 1. Abel is 72 years old and married. His wife is 64 and meets the test for blindness. How
many exemptions should they claim on a joint return?
_____ 2. Betty and Bob are married and have a 4-year-old son. During the year Betty gave birth
to a baby girl. How many exemptions should Betty and Bob claim on a joint return?
_____ 3. Charlie supports his 16-year-old brother, who is a full-time student. His brother’s
gross income is $4,500 from a part-time job. How many exemptions should Charlie
claim on his return?
_____ 4. Donna and her sister support their mother and provide 60 percent of her support. If
Donna provides 25 percent of her mother’s support and her sister signs a multiple
support agreement giving Donna the exemption, how many exemptions should
Donna claim on her return?
_____ 5. Frank is single and supports his son and his son’s wife, both of whom lived with him
for the entire year. The son (age 20) and his wife (age 19) file a joint return to get a
refund, reporting $2,500 ($2,000 earned by the son) in gross income. Both the son
and daughter-in-law are full-time students. They do not live in a community property
state. How many exemptions should Frank claim on his return?
_____ 6. Gary is single and pays $2,000 towards his 20-year-old daughter’s college expenses.
The remainder of her support is provided by a $2,500 tuition scholarship. The daughter is a full-time student. How many exemptions should Gary claim on his return?
_____ 7. Helen is 50 years old and supports her 72-year-old mother, who is blind. How many
exemptions should Helen claim on her return?
Section 1.6 • Personal and Dependency Exemptions
FIGURE 5
1-17
DEPENDENCY EXEMPTION TESTS FLOW CHART
U.S. Citizen or
resident of U.S.,
Mexico, Canada?
START
No
Yes
Did dependent
file a joint
return?
Yes
No
Was the
relationship
test met?
No
NO
DEPENDENCY
EXEMPTION
Yes
Was the support
test met?
No
Yes
Yes
Is T’s child under
19 or a full-time
student under 24?
No
Is gross income
less than $3,100
(for 2004)?
Yes
DEPENDENCY
EXEMPTION
No
1-18
Chapter 1 • The Individual Income Tax Return
SECTION 1.7
THE STANDARD DEDUCTION
The standard deduction was placed in the tax law to provide relief for taxpayers with few
itemized deductions. The amount of the standard deduction is subtracted from adjusted gross income by taxpayers who do not itemize their deductions. If a taxpayer’s gross
income is less than the standard deduction amount, the taxpayer has no taxable income.
The standard deduction amounts are presented below:
Filing Status
2004 Standard Deduction
Single
$4,850
Married, filing jointly
9,700
Married, filing separately
4,850
Head of household
7,150
Taxpayers may be able to reduce taxes
Qualifying widow(er)
9,700
MONEY TIPS
by itemizing deductions rather than taking the standard deduction. The U.S.
General Accounting Office estimated
that 2.2 million taxpayers using the
standard deduction instead of itemizing
deductions paid almost $1 billion more
than they should have.
Additional Amounts for Old Age and Blindness
Taxpayers who are 65 years of age or older or blind are entitled to an
additional standard deduction amount. For 2004, the additional standard deduction amount is $1,200 for unmarried taxpayers and $950
for married taxpayers and surviving spouses. Taxpayers who are both
at least 65 years old and blind are entitled to two additional standard deduction
amounts. The additional standard deduction amounts are also available for the taxpayer’s spouse, but not for dependents. An individual is considered blind for purposes of
receiving an additional standard deduction amount if:
1. central visual acuity does not exceed 20/200 in the better eye with correcting
lenses, or
2. visual acuity is greater than 20/200 but is limited to a field of vision not greater
than 20 degrees.
EXAMPLE
John is single and 70 years old in 2004. His standard deduction is $6,050
($4,850 plus an additional $1,200 for being 65 years of age or older).
EXAMPLE
Bob and Mary are married in 2004 and file a joint return. Bob is age 68, and
Mary is 63 and meets the test for blindness. Their standard deduction is
$11,600 ($9,700 plus $950 for Bob being 65 years or older and another $950
for Mary’s blindness).
Individuals Not Eligible for the Standard Deduction
The following taxpayers cannot use the standard deduction, but must itemize instead:
1. A married individual filing a separate return, whose spouse itemizes deductions.
2. A nonresident alien.
3. An individual filing a short-period tax return because of a change in the annual
accounting period.
EXAMPLE
Ed and Ann are married individuals who file separate returns for 2004. Ed itemizes his deductions on his return. Ann’s adjusted gross income is $12,000, and she
has itemized deductions of $900. Ann’s taxable income is calculated as follows:
Adjusted gross income
$12,000
Itemized deductions
(900)
Exemption amount
(3,100)
——––——–
$ 8,000
Taxable income
——––——–
——––——–
Since Ed itemizes his deductions, Ann must also itemize deductions and is
not entitled to use the standard deduction amount.
Section 1.8 • Limitation on Total Itemized Deductions
1-19
Special Limitations for Dependents
The standard deduction is limited for the tax return of a dependent. The total standard
deduction may not exceed the greater of $800 or the sum of $250 plus dependent’s
earned income up to the basic standard deduction amount, plus any additional standard
deduction amount for old age or blindness. Also, remember that a dependent may not
claim a personal exemption on his or her own return.
EXAMPLE
Penzer, who is 4 years old, earned $4,900 as a child model during 2004. A
dependency exemption for Penzer is claimed by his parents on their tax return.
Penzer is required to file a tax return, and his taxable income will be $50
($4,900 less $4,850, the standard deduction amount). He is not allowed to
claim an exemption for himself. If Penzer had earned only $400, his standard
deduction would be $800 (the greater of $800 or $650 [$400 + $250]) and
he would not owe any tax or be required to file a return.
Self-Study Problem 1.7
Indicate in each of the following independent situations the amount of the standard deduction
the taxpayers should claim on their 2004 income tax returns.
_____
_____
_____
_____
1.
2.
3.
4.
Adam is 45 years old, in good health, and single.
Bill and Betty are married and file a joint return. Bill is 66 years old, and Betty is 60.
Charlie is 70, single, and blind.
Debbie qualifies for head of household filing status, is 35 years old, and is in good
health.
_____ 5. Elizabeth is 9 years old, and her only income is $3,600 of interest on a savings
account. She is claimed as a dependent on her parents’ tax return.
_____ 6. Frank and Freida are married with two dependent children. They file a joint return, are
in good health, and both of them are under 65 years of age.
LIMITATION ON TOTAL ITEMIZED DEDUCTIONS
Although itemized deductions will be discussed in detail later in the text (see Chapter
5), the overall limitation which is dependent on the taxpayer’s amount of adjusted gross
income will be discussed here. If the taxpayer itemizes deductions, rather than claiming
the standard deduction amount, a reduction in the amount of otherwise allowable itemized deductions may be required.
In 2004, an individual taxpayer whose adjusted gross income exceeds a threshold
amount must reduce the amount of his or her total itemized deductions by 3 percent of
the excess of adjusted gross income over the threshold amount. The threshold amount
for 2004 is $142,700 ($71,350 for married filing separately). The reduction in the itemized deductions is limited to 80 percent of itemized deductions other than the deductions for medical expenses, investment interest expense, casualty and theft losses and
wagering losses to the extent of wagering gains. Thus, medical expenses, investment
interest expense, casualty and theft losses and wagering losses are not subject to the overall limitation.
EXAMPLE
Francis and Marcia are married taxpayers who file a joint income tax return
for 2004. In 2004 they have adjusted gross income of $160,000 and itemized
deductions of $20,000. The itemized deductions are from charitable contributions and state income taxes. Only $19,481 ($20,000 – 519) of the itemized deductions are allowed in calculating taxable income. The reduction in
SECTION 1.8
1-20
Chapter 1 • The Individual Income Tax Return
the amount of itemized deductions claimed by Francis and Marcia is calculated as follows:
Lesser of:
$519 = 3% × ($160,000 – 142,700), or
$16,000 = 80% × $20,000
EXAMPLE
Use the same facts as in the preceding example, but assume that gross income
was $180,000 the itemized deductions consist of $18,900 in casualty losses
(after the $100 floor and after applying the 10 percent of adjusted gross
income limitation) and $1,100 in state income taxes. In 2004, Francis and
Marcia may deduct only $19,120 ($20,000 – 880) of itemized deductions.
The reduction in the otherwise allowable itemized deduction amount is equal
to the lesser of $1,119 (3% × [$180,000 – 142,700]) or $880 (80% ×
$1,100). The reduction in the amount of itemized deductions may also be calculated using the Itemized Deductions Worksheet provided in the Form 1040
Instructions, as follows:
*
20,000
18,900
1,100
x
880
180,000
142,700
x
37,300
1,119
880
19,120
Self-Study Problem 1.8
Elvis and Greta are married taxpayers who file a joint income tax return for 2004. On their 2004
income tax return they have adjusted gross income of $145,000 and total itemized deductions
of $12,000. The itemized deductions consist of $5,000 in state income taxes and a $7,000 casualty loss (after the $100 floor and after applying the 10 percent of adjusted gross income limitation). Of the $12,000 of itemized deductions, what amount is allowed as a deduction in calculating taxable income on Elvis and Greta’s 2004 federal income tax return?
$ ____________
SECTION 1.9
A BRIEF OVERVIEW OF CAPITAL GAINS AND LOSSES
When a taxpayer sells an asset there is normally a gain or loss on the transaction.
Depending on the kind of asset sold, this gain or loss will have different tax consequences. Chapter 8 of this text has detailed coverage of the effect of gains and losses on
* By the time this was prepared, the 2004 form was not available.
Section 1.9 • A Brief Overview of Capital Gains and Losses
a taxpayer’s tax liability. Because of their importance to the understanding of the calculation of an individual’s tax liability, however, a brief overview of gains and losses will be
discussed here.
The amount of gain or loss realized by a taxpayer is determined by subtracting the
adjusted basis of the asset from the amount realized. Generally, the adjusted basis of an asset
is its cost less any depreciation (covered in Chapter 7) taken on the asset. The amount
realized is generally what the taxpayer receives from the sale (e.g., the sales price less any
cost of the sale). The formula for calculation of gain or loss can be stated as follows:
Gain (or loss) = Amount realized – Adjusted basis
Most gains and losses realized are also recognized for tax purposes. That is, most gains
or losses that occur are included in the taxpayer’s taxable income. The exceptions to this
general tax recognition rule are discussed in Chapter 8.
EXAMPLE
Lisa purchased a rental house a few years ago for $100,000. Total depreciation to date on the house is $25,000. In the current year she sells the house
for $155,000 and receives $147,000 after paying selling expenses of $8,000.
Her gain on the sale is $72,000 calculated as follows:
Amount realized ($155,000 – $8,000)
Adjusted basis ($100,000 – $25,000)
Gain realized
$147,000
– 75,000
——–————–
$ 72,000
——–————–
——–————–
This gain realized will be recognized as a taxable gain.
Capital Gains and Losses
Gains and losses can be either ordinary or capital. Ordinary gains and losses are treated for
tax purposes just like other items such as salary and interest, and are taxed at ordinary rates.
In general, a capital asset is any property (either personal or investment) held by a
taxpayer, with certain exceptions as listed in the tax law (see Chapter 8). Typical assets
that are not capital assets are inventory and accounts receivable. Examples of capital
assets held by individual taxpayers include stocks, bonds, land, cars, boats, and other
items held as investments.
The rates on long-term capital gains are summarized as follows:
Ordinary Tax Bracket
10% and 15%
All others
2004 Capital
Gains Tax Rate
5%
15%
Gain from property held twelve months or less is deemed to be short-term capital gain
and is taxed at ordinary income tax rates (i.e., up to a maximum rate of 35 percent in
2004).
EXAMPLE
On October 10, 2004, Chris sells AT&T stock purchased five years ago for
$25,000. His adjusted basis (cost) in the stock is $15,000, resulting in a taxable long-term gain of $10,000. Chris’ taxable income without the sale of the
stock is $150,000, which puts him in the 33 percent tax bracket. The tax due
on the long-term capital gain is $1,500 (15% × $10,000) instead of $3,300
(33% × $10,000) if the gain on the stock were treated as ordinary income.
When calculating gain or loss the taxpayer must net all capital asset transactions to
determine the nature of the final gain or loss (see Section 8.4 for a discussion of this calculation). If an individual taxpayer ends up with a net capital loss (short-term or long-
1-21
1-22
Chapter 1 • The Individual Income Tax Return
term), up to $3,000 per year can be deducted against ordinary income. Any unused portion in the current year may be carried forward and used to reduce taxable income in
future years (see Section 8.5 for a discussion of capital losses).
TAX BREAK
Taxpayers may wish to postpone the sale of capital assets until the holding period is met
to qualify for the preferential 15 (or 5) percent long-term capital gains rate. Of course,
there is always the risk that postponing the sale of a capital asset such as stock may result
in a loss if the price of the stock decreases below its cost during volatile markets. The economic risks of a transaction should always be considered along with the tax benefits.
EXAMPLE
Amy purchased gold coins as an investment. She paid $50,000 for the coins.
This year she sells the coins to a dealer for $35,000. As a result, Amy has a
$15,000 capital loss. She may deduct $3,000 of the loss against her other
income this year. The remaining unused loss of $12,000 ($15,000 – $3,000) is
carried forward and may be deducted against other income in future years. Of
course, the carryover is subject to the $3,000 annual limitation in future years.
Self-Study Problem 1.9
Erin purchased stock in JKL Corporation several years ago for $8,750. In the current year, she
sold the same stock for $12,800. She paid a $200 sales commission to her stock broker.
1. What is Erin’s amount realized?
$ ______________
2. What is Erin’s adjusted basis?
$ ______________
3. What is Erin’s realized gain or loss?
$ ______________
$ ______________
4. What is Erin’s recognized gain or loss?
5. How is any gain or loss treated for tax purposes?
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
SECTION 1.10
TAX AND THE INTERNET
Taxpayers and tax practitioners can find a substantial amount of useful information on
the Internet (sometimes called the World Wide Web). The Internet is a global communication system that connects millions of computers throughout the world. Government
agencies, businesses, organizations, and groups (e.g., the IRS, TurboTax, and Thomson
Learning) maintain sites (also called “homepages”) that contain information of interest
to the public. Individuals can gain access to the Internet through a company, a governmental agency, an educational institution or by subscribing to a commercial Internet
provider such as CompuServe, America Online, or Yahoo.
The information available on various homepages is subject to rapid change. Discussed
below are some current Internet sites that are of interest to taxpayers. Taxpayers should
be aware that the locations and information provided on the Internet are subject to
change by the site organizer without notice.
Section 1.11 • Electronic Filing (e-Filing)
1-23
www The IRS Site, http://www.irs.gov/
One of the most useful sites containing tax information is the one maintained by the
IRS. There are several places a taxpayer can enter the IRS site. Entering the main IRS
site shown above and clicking on “site map” provides one of the best entrances since it
allows the user to quickly scan information available from the IRS. Once a user has
reached this Internet page, he or she is provided quick links to other useful pages contained within the IRS site.
In addition, the IRS site has a search function to assist users in locating information.
The Forms and Publications search function is particularly useful, and allows the user to
locate and download almost any tax form or publication available from the IRS. A help
function is available to aid users of the IRS site. Email access to the IRS is provided for
users who have questions or want to communicate with the IRS.
www TurboTax, http://www.turbotax.com/
Another useful Internet site for taxpayers is the one maintained by the computer tax
software company, TurboTax. There are pages with tips on how to reduce taxes for individuals and businesses. Topics include hints for homeowners, how to handle an IRS
audit, medical expenses, record-keeping requirements and new law changes.
www Will Yancey’s Homepage, http://www.willyancey.com/
This site is one of the best indexes available with links to other tax, accounting, and legal
Internet sites. The site has hundreds of links to commercial Web sites, federal government Web sites, state and local Web sites, and international Web sites.
www Practitioner’s Publishing Co., http://www.ppcnet.com/
This is an excellent site that contains a free newsletter. The site also contains information on financial accounting topics and links to other general accounting topics.
Self-Study Problem 1.10
Indicate which of the following statements are true or false by circling the appropriate letter.
T F 1. Most commercial computer services, such as America Online, CompuServe, and
Yahoo, provide subscribers access to the Internet.
T F 2. The Internet is controlled by the Federal Communications Commission, which is
part of the administrative branch of the United States government.
T F 3. Taxpayers can download tax forms and IRS publications from the IRS Internet site.
T F 4. A help function is available to aid users of the IRS site.
T F 5. The TurboTax Internet site is maintained by Practitioner’s Publishing Co. for users
of its textbooks.
ELECTRONIC FILING (E-FILING)
In Transition: The electronic filing rules discussed below are in constant transition as the
IRS works to convert as many taxpayers as possible to electronic filing. Additional information is available at the IRS Web site (http://www.irs.gov).
Electronic filing (e-filing) is the process of transmitting federal income tax return information to the IRS Service Center over telephone lines or a computer with a modem or
Internet access. For the taxpayer, electronic filing offers a faster refund, either through
a direct deposit to the taxpayer’s bank account or by check. IRS statistics show an error
rate of less than 1.0 percent on electronically filed returns, compared with more than 20
percent on paper returns.
SECTION 1.11
1-24
Chapter 1 • The Individual Income Tax Return
Electronic filing of individual income tax returns may be done with the IRS using one
of three methods. The first is TeleFile. The IRS sends a tax package to taxpayers with very
simple tax returns who are eligible for the TeleFile system. The taxpayer then uses the
keypad of a touch-tone telephone to transmit information to the IRS. Millions of taxpayers have successfully used this program in recent years.
The second electronic filing method is e-filing using a personal computer and tax preparation software. Individual taxpayers may transmit their returns from home, workplaces,
libraries or retail outlets. The IRS Web site contains detailed information on this process as
the IRS is constantly working to make e-filing more user friendly and widely available.
The third e-filing option is use of the services of a tax professional, including certified
public accountants, tax attorneys, IRS-enrolled agents and tax preparation businesses
qualifying for the IRS tax professional e-filing program.
Electronic filing represents the major significant growth area in computerized tax services. Approximately 60,000,000 electronic returns were e-filed in 2004 for the 2003 tax
year. In the future, electronic filing will affect the entire professional tax return preparation industry. As a result of electronic filing there will be more computerized tax services
and the competitive nature of the tax return preparation industry is likely to change.
? WOULD YOU BELIEVE...
The IRS recently issued a warning to taxpayers about an identity theft scam where information is obtained from taxpayers through fake e-mail audit notices. The e-mail looks official
and requests detailed personal information. However, the IRS never sends audit notices to
taxpayers by e-mail.
Self-Study Problem 1.11
Indicate which of the following statements are true or false by circling the appropriate letter.
T F
T F
T F
T F
1. Compared to paper returns, electronic filings significantly reduces the error rate
for tax returns filed
2. TeleFile is only available for individuals with complex tax returns.
3. Individuals may not use electronic filing for their own personal tax returns, but
must engage a tax professional if they wish to e-file.
4. Taxpayers who e-file generally receive faster refunds.
INTERACTIVE
Reinforce the tax information covered in this chapter by completing the online interactive tutorials located at the Income Tax Fundamentals Web site:
http://whittenburg.swlearning.com
QUIZZES
Questions and Problems
QUESTIONS and PROBLEMS
GROUP 1:
MULTIPLE CHOICE QUESTIONS
_______
1. Which of the following is designed solely to meet a social goal of the
tax law?
a. The home mortgage interest deduction
b. The research and development credit
c. The Accelerated Cost Recovery System
d. The charitable contribution deduction
e. None of the above
_______
2. Which of the following is a deduction for adjusted gross income in 2004?
a. Alimony payments
b. Medical expenses
c. Personal casualty losses
d. Charitable contributions
e. None of the above
_______
3. All of the following are itemized deductions in 2004 except:
a. Charitable contributions
b. Casualty losses
c. Moving expenses
d. Medical expenses
e. All of the above are itemized deductions
_______
4. Ben is a single taxpayer in 2004 who is 32 years old. What is the minimum amount of income that he must have to be required to file a tax
return for 2004?
a. $9,700
b. $7,150
c. $4,850
d. $7,950
e. None of the above
_______
5. Joan, whose husband divorced her in 2003, had filed a joint tax return
with him in 2002. During 2004 she did not remarry and continued to
maintain her home in which her five dependent children lived. In the
preparation of her tax return for 2004, Joan should file as:
a. A single individual
b. Qualifying widow(er)
c. Head of household
d. Married, filing separately
e. None of the above
_______
6. Margaret and her sister support their mother and together provide 85
percent of their mother’s support. If Margaret provides 40 percent of her
mother’s support:
a. Her sister is the only one who can claim their mother as a dependent
b. Neither Margaret nor her sister may claim their mother as a dependent
c. Both Margaret and her sister may claim their mother as a dependent
d. Margaret and her sister may split the dependency exemption
e. Margaret may claim her mother as a dependent if her sister agrees in
a multiple support agreement
1-25
1-26
Chapter 1 • The Individual Income Tax Return
_______
7. Arthur is 65 years old. He supports his father, who is 90 years old and
blind. For 2004, how many exemptions should Arthur claim on his
tax return?
a. 1
b. 2
c. 3
d. 4
e. 5
_______
8. Margaret, age 65, and John, age 62, are married with a 23-year-old
daughter who lives in their home. They provide over half of their daughter’s support, and their daughter earned $3,200 this year from a parttime job. Their daughter is not a full-time student. How many exemptions should Margaret and John claim on a joint return for 2004?
a. 3
b. 4
c. 2
d. 6
e. 5
_______
9. Lyn, age 65, and Robert, age 66, are married and support Lyn’s father
(no taxable income) and Robert’s mother who has $2,200 of gross
income. If they file a joint return for 2004, how many exemptions
may Lyn and Robert claim?
a. 2
b. 3
c. 4
d. 5
e. 6
_______ 10. Ramon, a single taxpayer, has adjusted gross income for 2004 of $149,000
and his itemized deductions total $19,000. The itemized deductions consist of $8,000 in state income taxes, $8,000 of charitable contributions
and $3,000 in casualty losses (after applying the $100 floor limitation
and the 10 percent of adjusted gross income limitation). What amount
of itemized deductions will Ramon be allowed to deduct in 2004?
a. $19,000
b. $18,811
c. $15,200
d. $16,000
e. $189
_______ 11. Which of the following is a capital asset to an individual taxpayer?
a. Stocks
b. A 48-foot sail boat
c. Raw land held as an investment
d. A $50,000 sport utility vehicle
e. All of the above are capital assets
_______ 12. Jayne purchased General Motors stock six years ago for $20,000. In 2004
she sells the stock for $35,000. What is Jayne’s gain or loss?
a. $15,000 long-term
b. $15,000 short-term
c. $15,000 ordinary
d. $15,000 extraordinary
e. No gain or loss is recognized on this transaction
Questions and Problems
_______ 13. Alexis purchased a rental house three years ago for $285,000. Her depreciation to date is $35,000. Due to a decrease in real estate prices, she sells
the house for only $275,000 in 2004. What is her gain or loss for tax purposes?
a. $0
b. $10,000 loss
c. $10,000 gain
d. $35,000 loss
e. $25,000 gain
_______ 14. Shannon has a long-term capital loss of $7,000 on the sale of bonds in
2004. His taxable income without this transaction is $48,000. What is his
taxable income considering this capital loss?
a. $55,000
b. $48,000
c. $45,000
d. $41,000
e. Some other amount
GROUP 2:
PROBLEMS
1. Indicate whether the following income tax provisions were enacted to meet an
economic or social goal of the tax law. Explain the reasons for your answers.
a. The tax credit for research and development.
Economic _______
Social _______
Why?________________________________________________________________
____________________________________________________________________
____________________________________________________________________
b. The child and dependent care credit.
Economic _______
Social _______
Why?________________________________________________________________
____________________________________________________________________
____________________________________________________________________
c. The limited allowance for the expensing of capital expenditures.
Economic _______
Social _______
Why?________________________________________________________________
____________________________________________________________________
____________________________________________________________________
d. The exclusion from gross income of the reimbursement from health insurance
policies.
Economic _______
Social _______
Why?________________________________________________________________
____________________________________________________________________
____________________________________________________________________
2. Jason and Mary are married taxpayers in 2004. They are both under age 65 and in
good health. For this tax year they have a total of $41,000 in wages and $500 interest income. Jason and Mary’s deductions for adjusted gross income amount to
$5,000 and their itemized deductions equal $7,950. They claim two exemptions
for the year on their joint tax return.
1-27
1-28
Chapter 1 • The Individual Income Tax Return
a.
What is the amount of Jason and Mary’s adjusted
gross income?
b. What is the amount of their itemized deductions
or standard deduction?
c. What is their 2004 taxable income?
$ ____________
$ ____________
$ ____________
3. Leslie is a single taxpayer who is under age 65 and in good health. For 2004, she
has a salary of $23,000 and itemized deductions of $1,000. Leslie is entitled to one
exemption on her tax return.
a. How much is Leslie’s adjusted gross income?
$ ____________
b. What amount of itemized or standard deduction(s)
should she claim?
$ ____________
c. What is the amount of Leslie’s taxable income?
$ ____________
4. For each of the following situations, indicate whether the taxpayer(s) is required
to file a tax return for 2004. Explain your answer.
a. Helen is a single taxpayer with wages in 2004 of $7,150.
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
b. Joan is a single college student who is claimed as a dependent by her
parents. She earned $1,550 from a part-time job and has $1,150 in
interest income.
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
c. Leslie (age 64) and Mark (age 66) are married and file a joint return.
They received $16,300 in interest income from a savings account.
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
d. Ray (age 60) and Jean (age 57) are married and file a joint tax return.
They had $14,700 in earnings from wages and $5,000 in “tax-free”
interest income.
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
e. Harry, a 19-year-old single taxpayer, had net earnings from self-employment
of $1,500.
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
5. Geri waits tables in a La Jolla restaurant. Geri received $1,200 in unreported
tips during 2004 and owes Social Security taxes on these tips. Her total income
for the year, including the tips, is $4,300. Is Geri required to file an income tax
return for 2004?
____________
Why?________________________________________________________________
____________________________________________________________________
____________________________________________________________________
Questions and Problems
6. Diego, age 28, married Dolores, age 27, during 2004. Their salaries for the year
amounted to $46,479 and they had interest income of $3,500. Diego and Dolores’s
deductions for adjusted gross income amounted to $1,900, their itemized deductions were $10,172, and they claimed two exemptions on their return.
a. What is the amount of their adjusted gross income?
$ ____________
b. What is the amount of their itemized deductions or
standard deduction?
$ ____________
c. What is the amount of their taxable income?
$ ____________
d. What is their tax liability for 2004?
$ ____________
7. For each of the following cases, indicate the taxpayer(s) filing status for 2004 using
the following legend.
A – Single
D – Head of household
B – Married, filing a joint return
E – Qualifying widow(er)
C – Married, filing separate returns
Filing
Case
Status
a. Linda is single and she supports her mother, including paying
all the costs of her housing in an apartment across town.
____________
b. Frank is single and he has a dependent child living in
his home.
____________
c. Arthur is single and he supports his brother, who lives
in his own home.
____________
d. Leslie ’s final decree of divorce was granted on
June 18, 2004. She has no dependents.
____________
e. Tom and Carry were married on December 31, 2004.
____________
8. Determine from the tax table in Appendix A the amount of the income tax for
each of the following taxpayers for 2004.
Taxpayer(s)
Filing Status
Taxable Income
Income Ta x
Allen
Single
$21,000
$ ____________
Boyd
MFS
24,545
$ ____________
Caldwell
MFJ
35,784
$ ____________
Dell
H of H
27,450
$ ____________
Evans
Single
45,000
$ ____________
9. Indicate, in each of the following situations, the number of exemptions the taxpayers are entitled to claim on their 2004 income tax returns.
Number of
Exemptions
a. Donna, a 20-year-old single taxpayer, supports her
mother, who lives in her own home. Her mother has
income of $1,350.
____________
b. William, age 43, and Mary, age 45, are married and support
William’s 19-year-old sister, who is not a student. The sister’s
income from a part-time job is $3,500.
____________
c. Devi was divorced in 2004 and receives child support
of $250 per month from her ex-husband for the support
of their son, John who lives with her. Devi is 45.
____________
d. Wendell, an 89-year-old single taxpayer, supports
____________
his son, who is 67 years old.
e. Wilma, age 65, and Morris, age 66, are married.
____________
They file a joint return.
1-29
1-30
Chapter 1 • The Individual Income Tax Return
10. Ulysses and Penelope are married and file separate returns for 2004. Penelope
itemizes her deductions on her return. Ulysses’ adjusted gross income was
$17,400, his itemized deductions were $2,250, and he is entitled to one
exemption. Calculate Ulysses’ income tax liability.
$ ____________
11. Alicia (age 18) is a full-time single college student who is supported by her parents. She earns $5,500 from a part-time job and has taxable interest income of
$1,400. Her itemized deductions are $690. Calculate Alicia’s tax liability for 2004.
$ ____________
12. Jim (age 50) and Martha (age 49) are married with three dependent children.
They file a joint return for 2004. Their income from salaries totals $130,000 and
they received $10,000 in taxable interest, $5,000 in royalties and $3,000 of other
ordinary income. Jim and Martha’s deductions for adjusted gross income amount
to $3,200, and they have itemized deductions totalling $10,000, consisting of
$7,500 in state income taxes and $2,500 in investment interest expense. Calculate the following amounts.
a. Gross income
$ ____________
b. Adjusted gross income
$ ____________
c. Itemized deduction or standard deduction amount
$ ____________
d. Number of exemptions
$ ____________
e. Taxable income
$ ____________
f. Income tax liability
$ ____________
13. Frank, age 35, and Joyce, age 34, are married and file a joint income tax return
for 2004. Their salaries for the year total $180,000 and they have taxable interest
income of $40,000. They have no deductions for adjusted gross income. Their
itemized deductions of $12,000 consist of $4,000 in state income taxes, $5,000 of
charitable contributions and a $3,000 casualty loss deduction (after considering
the $100 floor and the 10 percent of adjusted gross income limitation). Frank and
Joyce do not have any dependents.
a. What is the amount of their adjusted gross income?
$ ____________
b. What is their deduction for personal exemptions?
$ ____________
$ ____________
c. What is the amount of their taxable income?
14. In 2004, Lou has a salary of $54,000 from her job. She also has interest income of
$1,700. Lou is single and has no dependents. During the year Lou sold silver coins
held as an investment for a $7,000 loss. Calculate the following amounts for Lou.
a. Adjusted gross income
$ ____________
b. Standard deduction
$ ____________
c. Exemption
$ ____________
d. Taxable income
$ ____________
www 15. Go to the IRS Web site (http://www.irs.gov) select “The Newsroom” and note the
name of the most recent news release.
www 16. Go to the IRS Web site (http://www.irs.gov) and print out a copy of the most
recent Schedule F of Form 1040.
www 17. Go to the IRS Web site (http://www.irs.gov) and print out a copy of the most
recent Instructions for Schedule R of Form 1040.
Questions and Problems
www
18. Go to Will Yancey’s home page (http://www.willyancey.com) and give the complete Web address for each of the following sites:
a. The California Franchise Tax Board.
b. The New York Department of Taxation and Finance.
c. The American Institute of CPAs home page (AICPA).
www 19. Go to the Practitioner’s Publishing Co. Web site (http://www.ppcnet.com), select
the “News & Views” tab, and then the 5-minute Tax Briefing. Locate the most
recent Practitioners Tax Action Bulletin. Print out a copy of the bulletin.
GROUP 3:
COMPREHENSIVE PROBLEMS
1. Patty Bayan is a single taxpayer living at 543 Space Drive, Houston, TX 77099. Her
Social Security number is 466-33-1234. For 2004, Patty has no dependents, and her
W-2 from her job at a local restaurant where she parks cars contains the following
information:
Wages
$19,400
Withholding (Federal income tax)
3,000
FICA tax
1,484
These wages are Patty’s only income for 2004, and she wishes to donate to the
Presidential Election Campaign Fund.
Required: Complete Form 1040EZ on page 1-33 for Patty Bayan for the 2004 tax
year.
2. Leslie and Leon Lazo are married and file a joint return for 2004. Leslie’s Social
Security number is 466-47-3311 and Leon’s is 467-74-4451. They live at 143
Snapdragon Drive, Reno, Nevada, 82102. For 2004, Leslie did not work, and
Leon’s W-2 from his butcher’s job showed the following:
Wages
$35,500
Withholding (Federal income tax)
4,600
FICA tax
2,716
Leslie and Leon have an 18-year-old son named Lyle (Social Security number
552-52-5552), who is a dependent, a full-time student, and does not qualify for the
child tax credit due to his age.
Required: Complete Form 1040A on page 1-35 for Leslie and Leon for the 2004
tax year.
GROUP 4:
TEAM PROJECT
Dr. Ivan I. Incisor and his wife Irene are married and file a joint return for 2004. Ivan’s
Social Security number is 477-34-4321 and he is 48 years old. Irene I. Incisor’s Social
Security number is 637-34-4927 and she is 45 years old. They live at 468 Mule Deer Lane,
Spokane, Washington, 99206.
Dr. Incisor is a dentist and his 2004 Form W-2 from his job at Bitewing Dental Clinic,
Inc. showed the following:
Wages
$150,000
Withholding (Federal income tax)
28,500
The Incisor’s have a 12-year-old son, Ira, who is enrolled in the seventh grade at the
Perpetual Perpetuity School. Ira’s Social Security number is 690-99-9999. The Incisor’s
1-31
1-32
Chapter 1 • The Individual Income Tax Return
also have an 18-year-old daughter, Iris, who is a part-time freshman student at Snow Mass
Community College (SMCC). Iris’s Social Security number is 899-99-9999. Iris is married
to Sean Slacker (SS No. 896-33-0954), who is 19 years-old and a part-time student at
SMCC. Sean and Iris have a 1-year-old child, Seth Slacker (SS No. 648-99-4306). Sean,
Iris and Seth all live with Ivan and Irene during the entire current calendar year. Sean
and Iris both work for Sean’s wealthy grandfather as apprentices in his business. Their
wages for the year were a combined $50,000 which allowed them to pay all the personal
expenses for themselves and their son, except Ivan and Irene let them live at their house
for free.
Ivan and Irene have savings account interest income of $1,380 from the Pacific
Northwest Bank.
Ira is eligible for the Child Credit discussed in Chapter 6, but the Incisors can not
claim the credit since their income is too high.
Required: Use a computer software package to complete Form 1040 for Ivan and Irene
Incisor for 2004. Be sure to save your data input files since this case will be expanded
with more tax information in later chapters. Make assumptions regarding any information not given.
1-33
Questions and Problems
Department of the Treasury—Internal Revenue Service
Income Tax Return for Single and
Joint Filers With No Dependents (99)
Form
1040EZ
Label
L
A
B
E
L
(See page 12.)
Use the IRS
label.
Otherwise,
please print
or type.
Presidential
Election
Campaign
(page 12)
Attach
Form(s) W-2
here.
Enclose, but
do not attach,
any payment.
其
f
o
s
a 4
Spouse’s social security number
Apt. no.
Payments
and tax
0
t
0
f
2
a
r /
No
Yes. Complete the following.
No
3
4
Add lines 1, 2, and 3. This is your adjusted gross income.
4
5
Can your parents (or someone else) claim you on their return?
If single, enter $7,950.
Yes. Enter amount from
No.
If married filing jointly, enter $15,900.
worksheet on back.
See back for explanation.
5
Subtract line 5 from line 4. If line 5 is larger than line 4, enter -0-.
This is your taxable income.
䊳
Federal income tax withheld from box 2 of your Form(s) W-2.
7
8
Earned income credit (EIC).
8
Add lines 7 and 8. These are your total payments.
b Routing number
䊳
d Account number
12
䊳
䊳
c Type:
䊳
9
10
䊳
Checking
11a
Savings
If line 10 is larger than line 9, subtract line 9 from line 10. This is
the amount you owe. For details on how to pay, see page 20.
䊳
Do you want to allow another person to discuss this return with the IRS (see page 20)?
Sign
here
6
7
Tax. Use the amount on line 6 above to find your tax in the tax table on pages
24–28 of the booklet. Then, enter the tax from the table on this line.
No
1
2
11a If line 9 is larger than line 10, subtract line 10 from line 9. This is your refund.
Third party
designee
Yes
Unemployment compensation and Alaska Permanent Fund dividends
(see page 14).
䊳
Spouse
Yes
Wages, salaries, and tips. This should be shown in box 1 of your Form(s) W-2.
Attach your Form(s) W-2.
D2/04
You
䊳
Taxable interest. If the total is over $1,500, you cannot use Form 1040EZ.
9
Amount
you owe
You must enter your
SSN(s) above.
2
10
Refund
䊱 Important! 䊱
3
6
Paid
preparer’s
use only
Last name
OMB No. 1545-0675
Your social security number
Note. Checking “Yes” will not change your tax or reduce your refund.
Do you, or your spouse if a joint return, want $3 to go to this fund?
1
Joint return?
See page 11.
Keep a copy
for your
records.
If a joint return, spouse’s first name and initial
2004
City, town or post office, state, and ZIP code. If you have a foreign address, see page 12.
Income
Have it directly
deposited! See
page 19 and fill
in 11b, 11c,
and 11d.
Last name
Home address (number and street). If you have a P.O. box, see page 12.
H
E
R
E
䊳
Note. You
must check
Yes or No.
Your first name and initial
12
Designee’s
Phone
Personal identification
䊳
䊳 (
)
䊳
name
no.
number (PIN)
Under penalties of perjury, I declare that I have examined this return, and to the best of my knowledge and belief, it is true, correct, and
accurately lists all amounts and sources of income I received during the tax year. Declaration of preparer (other than the taxpayer) is based
on all information of which the preparer has any knowledge.
Your occupation
Daytime phone number
Your signature
Date
(
Spouse’s signature. If a joint return, both must sign.
Preparer’s
signature
Date
䊳
Firm’s name (or
yours if self-employed),
address, and ZIP code
Date
䊳
For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see page 23.
)
Spouse’s occupation
Check if
self-employed
Preparer’s SSN or PTIN
EIN
Phone no.
Cat. No. 11329W
(
)
Form
1040EZ
(2004)
1-34
Chapter 1 • The Individual Income Tax Return
1-35
Questions and Problems
Form
Department of the Treasury—Internal Revenue Service
1040A
U.S. Individual Income Tax Return
Label
Your first name and initial
(See page 17.)
L
A
B
E
L
(99)
Otherwise,
please print
or type.
H
E
R
E
Presidential
Election Campaign
(See page 18.)
Filing
status
Check only
one box.
Exemptions
IRS Use Only—Do not write or staple in this space.
OMB No. 1545-0085
Your social security number
If a joint return, spouse’s first name and initial
Spouse’s social security number
Last name
f
o
s
a
4
t
0
f
0
a
2
r
/
D /14
9
0
Use the
IRS label.
2004
Last name
Home address (number and street). If you have a P.O. box, see page 18.
Apt. no.
䊱 Important! 䊱
You must enter your
SSN(s) above.
City, town or post office, state, and ZIP code. If you have a foreign address, see page 20.
䊳
You
Note. Checking “Yes” will not change your tax or reduce your refund.
Do you, or your spouse if filing a joint return, want $3 to go to this fund?
䊳
Yes
Spouse
No
Yes
No
1
2
3
Single
4
Head of household (with qualifying person). (See page 19.)
If the qualifying person is a child but not your dependent,
Married filing jointly (even if only one had income)
enter this child’s name here. 䊳
Married filing separately. Enter spouse’s SSN above and
5
Qualifying widow(er) with dependent child (see page 19)
full name here. 䊳
Boxes
6a
Yourself. If someone can claim you as a dependent, do not check
checked on
box 6a.
6a and 6b
b
Spouse
No. of children
on 6c who:
(4) if qualifying
c Dependents:
(3) Dependent’s
(1) First name
Last name
(2) Dependent’s social
security number
其
relationship to
you
If more than six
dependents,
see page 19.
child for child
tax credit (see
page 21)
● lived with
you
● did not live
with you due
to divorce or
separation
(see page 20)
Dependents
on 6c not
entered above
Add numbers
on lines
above 䊳
d Total number of exemptions claimed.
Income
Attach
Form(s) W-2
here. Also
attach
Form(s)
1099-R if tax
was withheld.
If you did not
get a W-2, see
page 22.
Enclose, but do
not attach, any
payment.
7
Wages, salaries, tips, etc. Attach Form(s) W-2.
7
8a
b
9a
b
10
11a
Taxable interest. Attach Schedule 1 if required.
Tax-exempt interest. Do not include on line 8a.
8b
Ordinary dividends. Attach Schedule 1 if required.
Qualified dividends (see page 22).
9b
Capital gain distributions (see page 23).
IRA
11b Taxable amount
distributions.
(see page 23).
11a
12a Pensions and
12b Taxable amount
annuities.
(see page 24).
12a
8a
9a
10
11b
12b
13 Unemployment compensation and Alaska Permanent Fund dividends.
14a Social security
14b Taxable amount
benefits.
(see page 25).
14a
Adjusted
gross
income
13
14b
15
16
17
18
19
20
Add lines 7 through 14b (far right column). This is your total income.
Deduction for clean-fuel vehicles (see page 26). 16
IRA deduction (see page 26).
17
Student loan interest deduction (see page 29). 18
Tuition and fees deduction (see page 29).
19
Add lines 16 through 19. These are your total adjustments.
䊳
21
Subtract line 20 from line 15. This is your adjusted gross income.
䊳
For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see page 56.
15
20
Cat. No. 11327A
21
Form 1040A (2004)
1-36
Chapter 1 • The Individual Income Tax Return
Form 1040A (2004)
22
Tax,
credits,
23a
and
payments b
Page 2
Enter the amount from line 21 (adjusted gross income).
Check
if:
兵
You were born before January 2, 1940,
Spouse was born before January 2, 1940,
Blind
Blind
其
22
Total boxes
checked 䊳 23a
If you are married filing separately and your spouse itemizes
䊳 23b
deductions, see page 30 and check here
24 Enter your standard deduction (see left margin).
Subtract line 24 from line 22. If line 24 is more than line 22, enter -0-.
● People who 25
checked any
26 If line 22 is $107,025 or less, multiply $3,100 by the total number of
box on line
exemptions claimed on line 6d. If line 22 is over $107,025, see the
23a or 23b or
who can be
worksheet on page 32.
claimed as a
27 Subtract line 26 from line 25. If line 26 is more than line 25, enter -0-.
dependent,
see page 30.
This is your taxable income.
● All others:
28 Tax, including any alternative minimum tax (see page 31).
Single or
29 Credit for child and dependent care expenses.
Married filing
Attach Schedule 2.
29
separately,
$4,850
30 Credit for the elderly or the disabled. Attach
Married filing
Schedule 3.
30
jointly or
31
Education credits. Attach Form 8863.
31
Qualifying
widow(er),
32 Child tax credit (see page 35).
32
$9,700
33 Retirement savings contributions credit. Attach
Head of
Form 8880.
33
household,
$7,150
34 Adoption credit. Attach Form 8839.
34
35 Add lines 29 through 34. These are your total credits.
36 Subtract line 35 from line 28. If line 35 is more than line 28, enter -0-.
37 Advance earned income credit payments from Form(s) W-2.
38 Add lines 36 and 37. This is your total tax.
39 Federal income tax withheld from Forms W-2
and 1099.
39
40 2004 estimated tax payments and amount
If you have
applied from 2003 return.
40
a qualifying
41
Earned income credit (EIC).
child, attach 41
42 Additional child tax credit. Attach Form 8812.
42
Schedule
EIC.
43 Add lines 39 through 42. These are your total payments.
44 If line 43 is more than line 38, subtract line 38 from line 43.
Refund
This is the amount you overpaid.
Direct
45a Amount of line 44 you want refunded to you.
deposit?
See page 49 䊳 b Routing
䊳 c Type:
Checking
Savings
number
f
o
s
a
4
t
0
f
0
a /2
r
D /14
9
0
Standard
Deduction
for—
and fill in
45b, 45c,
and 45d.
䊳
47
48
27
28
35
36
37
䊳 38
Amount of line 44 you want applied to your
2005 estimated tax.
46
Amount you owe. Subtract line 43 from line 38. For details on how
to pay, see page 50.
Estimated tax penalty (see page 50).
48
Do you want to allow another person to discuss this return with the IRS (see page 51)?
Sign
here
Paid
preparer’s
use only
䊳
䊳
43
䊳
44
45a
䊳
47
number
Third party
designee
Joint return?
See page 18.
Keep a copy
for your
records.
26
d Account
46
Amount
you owe
24
25
䊳
Yes. Complete the following.
No
Designee’s
Phone
Personal identification
䊳
䊳 (
)
䊳
name
no.
number (PIN)
Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my
knowledge and belief, they are true, correct, and accurately list all amounts and sources of income I received during the tax year. Declaration
of preparer (other than the taxpayer) is based on all information of which the preparer has any knowledge.
Your occupation
Daytime phone number
Your signature
Date
(
Spouse’s signature. If a joint return, both must sign.
Preparer’s
signature
䊳
Firm’s name (or
yours if self-employed),
address, and ZIP code
Date
)
Spouse’s occupation
Date
䊳
Check if
self-employed
Preparer’s SSN or PTIN
EIN
Phone no.
Printed on recycled paper
(
)
Form 1040A (2004)