Tax Study Guide-3- Tax Formula and Determination

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Abandoned spouse

The abandoned spouse provision enables a married taxpayer with a dependent child whose spouse did not live in the taxpayer's home during the last six months of the tax year to file as a head of household rather than as married filing separately.

Child tax credit

A tax credit based solely on the number of qualifying children under age 17. The maximum credit available is $1,000 per child through 2010. A qualifying child must be claimed as a dependent on a parent's tax return in order to qualify for the credit. Taxpayers who qualify for the child tax credit may also qualify for a supplemental credit. The supplemental credit is treated as a component of the earned income credit and is therefore refundable. The credit is phased out for higher-income taxpayers. § 24.


A special type of capital asset, the gain from which is taxed at a maximum rate of 28 percent if the holding period is more than one year. Examples include art, rugs, antiques, gems, metals, stamps, some coins and bullion, and alcoholic beverages held for investment.

Head of household

An unmarried individual who maintains a household for another and satisfies certain conditions set forth in § 2(b). Such status enables the taxpayer to use a set of income tax rates [see § 1(b)] that are lower than those applicable to other unmarried individuals [§ 1(c)] but higher than those applicable to surviving spouses and married persons filing a joint return [§ 1(a)]. See also tax rate schedules.

Itemized deductions

Certain personal expenditures allowed by the Code as deductions from adjusted gross income. Examples include certain medical expenses, interest on home mortgages, state income taxes, and charitable contributions. Itemized deductions are reported on Schedule A of Form 1040. Certain miscellaneous itemized deductions are reduced by 2 percent of the taxpayer's adjusted gross income. In addition, a taxpayer whose adjusted gross income exceeds $100,000 ($50,000 for married filing separately) must reduce the itemized deductions by 3 percent of the excess of adjusted gross income over $100,000. For 2009, the indexed amount for the $100,000 is $166,800, and the indexed amount for the $50,000 is $83,400. Medical, casualty and theft, and investment interest deductions are not subject to the 3 percent reduction. The 3 percent reduction may not reduce itemized deductions that are subject to the reduction to below 20 percent of their initial amount. Beginning in 2006, this reduction is subject to partial phaseout. For 2009, two-thirds of the reduction is phased out, and for 2010 all of the reduction is phased out. §§ 63(d), 67, and 68.

Kiddie tax

To reduce the tax savings that result from shifting income from parents to children, the net unearned income of a child under age 19 (or under age 24 if a full-time student) is taxed at the marginal tax rate of the parent(s). For the provision to apply, the child must have at least one living parent and unearned income of more than $1,900 for the tax year. § 1(g). See also unearned income.

Marriage penalty

The additional tax liability that results for a married couple compared with what their tax liability would be if they were not married and filed separate returns.

Multiple support agreement

To qualify for a dependency exemption, the support test must be satisfied. This requires that over 50 percent of the support of the potential dependent be provided by the taxpayer. Where no one person provides more than 50 percent of the support, a multiple support agreement enables a taxpayer to still qualify for the dependency exemption. Any person who contributed more than 10 percent of the support is entitled to claim the exemption if each person in the group who contributed more than 10 percent files a written consent (Form 2120). Each person who is a party to the multiple support agreement must meet all the other requirements for claiming the dependency exemption. § 152(c). See also personal and dependency exemptions.

Qualifying child

An individual who, as to the taxpayer, satisfies the relationship, abode, and age tests. To be claimed as a dependent, such an individual must also meet the citizenship and joint return tests and not be self-supporting. §§ 152(a)(1) and (c). See also personal and dependency exemptions.

Qualifying relative

An individual who, as to the taxpayer, satisfies the relationship, gross income, support, citizenship, and joint return tests. Such an individual can be claimed as a dependent of the taxpayer. §§ 152(a)(2) and (d). See also personal and dependency exemptions.

Standard deduction

The individual taxpayer can either itemize deductions or take the standard deduction. The amount of the standard deduction depends on the taxpayer's filing status (single, head of household, married filing jointly, surviving spouse, or married filing separately). For 2010, the amount of the standard deduction ranges from $5,700 to $11,400. Additional standard deductions of either $1,100 (for married taxpayers) or $1,400 (for single taxpayers) are available if the taxpayer is either blind or age 65 or over. For 2008 and 2009, a real property tax standard deduction is available in the amount of $500 ($1,000on a joint return). For 2009, there also is a limited auto sales taxes standard deduction. Limitations exist on the amount of the standard deduction of a taxpayer who is another taxpayer's dependent. The standard deduction amounts are adjusted for inflation each year. § 63(c).

Surviving spouse

The joint return tax rates apply for a surviving spouse. Such rates apply for the two tax years after the tax year of the death of the spouse. To qualify as a surviving spouse, the taxpayer must maintain a household for a dependent child. § 2.

Tax rate schedules

Rate schedules that are used by upper-income taxpayers and those not permitted to use the tax table. Separate rate schedules are provided for married individuals filing jointly, head of household, single taxpayers, estates and trusts, and married individuals filing separate returns. § 1.

Tax table

A tax table that is provided for taxpayers with less than $100,000 of taxable income. Separate columns are provided for single taxpayers, married taxpayers filing jointly, head of household, and married taxpayers filing separately. § 3.

Unearned income

Also referred to as investment income, it includes such income as interest, dividends, capital gains, rents, royalties, and pension and annuity income. See also kiddie tax.

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