- We are familiar with basic tax concepts:
- We are familiar with basic tax concepts,
tax rates, tax brackets, tax deductions, tax credits,
average tax rates, marginal tax rates.
Now let's increase our practical understanding
by working through a simple, basic tax return.
We'll use a tax returns for individuals
in the United States as an example.
Some individual tax returns are quite simple.
No dependents, low taxable income, low deductions,
no self-employment income on the side
and no IRA account.
At the other end of the spectrum,
an individual tax return can be very complicated.
High taxable income including some self-employment income,
high deductions, IRA and 401(k) contributions and so forth.
We will use examples that are in the middle.
Some complications, but not too many of them.
First we'll start with an example of Ramona and Kay,
a married couple.
Ramona and Kay have three children.
Their total income is $91,000 dollars
and we'll work through their Form 1040
with this information.
Then we'll work through a second example
in which Kay is a single parent.
He has three children
and his total income is $70,300 dollars.
We'll work through both of these examples systematically
starting with Ramona and Kay.
Now the first part of the tax return is pretty easy.
Name, address, Social Security number,
and names of any children and other dependents.
We put in the Social Security number for Kay
and the Social Security number for Ramona.
Now by coincidence,
they both have the same Social Security number, 123-45-6789.
social security number, 123-45-6789.
I mean it's an amazing coincidence
It's an amazing coincidence
that they met each other and got married
and it turns out that they both have the same
that they both have thesame social security number.
Social Security number.
Now Ramona and Kay have to choose a filing status.
Let's discuss the four basic choices:
single, married filing jointly, married filing separately
married filing separately, andhead of household for single.
and head of household or single.
Ramona and Kay are a married couple
so they're not going to choose the single filing status.
In the year 2016,
71 million tax returns in the United States
71 million tax returnsin the United States
were filed by single people.
This is almost half of all of the returns filed.
Next is married filing jointly.
This is the one that Ramona and Kay are going to choose.
are going to choose.
In the year 2016, there were 54 million returns
representing a 108 million people
that were filed by couples married filing jointly.
Now which couples are considered to be married
for tax purposes?
The general rule is that the IRS
allows the couple to file as married filing jointly
to file as married filing jointly
if that couple is legally married.
Next category is married filing separately.
A married couple can also file separately.
This doesn't happen very often.
Only three million returns in 2016.
When it does happen, they're typically are legal reasons
that the two married individuals
want to keep their tax situations separate from one another.
their tax situationsseparate from one another.
And last category, head of household.
Single parents can file as head of household.
There were 22 million of these filings in 2016.
Now as we will see,
these filing status selections determines
determines which tax rates, deductions
which tax rates, deductions and credits are used
and credits are used incomputing the amount of tax
in computing the amount of tax that must be paid.
that must be paid.
Okay, so we have chosen the filing status
for Ramona and Kay which is married filing jointly.
Now, let's do the next step
which is to identify Ramona and Kay's dependents.
This really usually is just a matter
of listing down the names of the children in the family.
Well technically a dependent can be a child
Technically a dependent canbe a child or a relative
or a relative broadly defined whom you support.
broadly defined whom you support.
But in this case we have Lily, Taraz and Kamila,
the three children of Ramona and Kay
and they're listed down as dependents.
Ramona and Kay will receive tax credits
for each of these children.
Two of these children, Taraz and Kamila
are under 17 years of age as of the end of the year.
are under 17 years of ageas of the end of the year,
They are eligible for the child tax credit.
The other child, Lily is older than 17 years old
so the box credit for other dependents is checked.
These tax credits
and whether the children are less than 17 years old
are less than 17 years old
is going to be important
as we compute the amount of income tax
that Ramona and Kay owe.
So here is what the first part of Ramona and Kay's
of Ramona and Kay's form 1040 looks like.
Form 1040 looks like.
Now we are ready to do some income tax calculations.