As tax law is very complicated, this article is intended only for educational or illustrative purposes and should not be construed to communicate legal or professional advise. You should contact us with any specific questions so we can properly interpret how the tax laws applies to your situation. Killingbeck Tax Preparation, Kokomo, Indiana. 765-452-8000.

There are 4 Steps to Computing Your Tax.

We have outlined in detail below the four steps to computing your tax.  Here's an overview of how it is done. 

The first step to computing your tax is to see if you qualify for an extra standard deduction if you are blind or age 65 or older.  The second step has you compare the standard deduction you can claim with your itemized deductions to see which produces the biggest tax savings.  The third step is to claim the exemptions you qualify for.  Finally you want to  compute your tax using the method that produces the lowest tax. 

Rules for Claiming an Extra Standard Deduction for Age 65 and/or Blindness. 

1. Check the boxes on top of the backside of the 1040 if they qualify under the following rules for extra standard deduction for being  age 65 and/ or blind.

   1. Age 65 and older:  If taxpayer or spouses is 65 or older on the last day of the year, or  their birthday is January 1st,  they may claim extra standard deduction.
   2. A deceased is not allowed an additional standard deduction if they died before their 65th birthday.
   1. Blindness Requirements                   
      1.  Blindness is determined as of December 31st. 
      2. To get an additional standard deduction for blindness, must keep a statement from the eye physician in your records.
      3. If partially blind, must keep a statement from eye doctor in your records stating that  you can't see better than 20/200 in better  eye with glasses or field of vision is not more than 20  degrees.  
      4. If eye condition will never improve, you must keep a physician's statement in your records saying it won’t  improve. Do not have to send in statement.

Which Should I Claim, Standard Deduction or Itemized Deductions?

1. Some taxpayers don't have a choice but are required to itemized by law.  Must check box on back of 1040 that they are required to itemize. 
   

   1. If married and other spouse itemizes you are required to itemize unless you qualify for following exception.

      1. If a spouse qualifies as head of household, that  spouse does not have to itemize.  Other spouse still has to itemize if spouse filing head of household itemizes.   For information on head of household, see listing on How Do I File in the Tax  Preparation menu.

   2. You were a dual-status alien not filing a joint return.

   3. See itemized deduction section in Tax  Preparation menu on items you can deduct. 
      
      
2. Taxpayers should itemize when their allowable deductions exceed their normal standard deduction.   Compare the Standard Deduction you qualify for below to the total Itemized Deductions as computed in the Itemized Deductions section in the Tax Preparation Menu.  
    
3. The standard deduction is determined by filing status, age, blindness & if they are a dependent with unearned income.
   1.                                                                                                              

      If filing status is	And at year end you are	Must file if Gross Income Greater Than
      Single and you are a Dependent	Under 65 with unearned income	greater of $950 or $300 + earned inc.
      	under 65	$ 5,800
      Single	under 65	$ 9,500
      	65 or older	$10,950
      Married Filing Separate	If spouse Itemizes	$ 3,700
      	under 65	$ 9,500
      	65 or older	$10,950
      Head of Household	under 65	$12,200
      	65 or older	$13,650
      Qualifying Widow(er)	under 65	$15,300
      	65 or older	$16,450
      Married	under 65	$19,000
      	One 65 or older	$20,150
      	Both 65 or older	$21,300

   2.                                                                                                               
4.  *Dependents with Unearned Income (interest, dividends, capital gains, etc.) have special rules.
   1. Dependents with unearned income are limited in the amount of standard deduction they may claim.
   2. Unearned income includes: pensions, annuities, capital gains, interest and dividends.
   3. Two separate rules apply.
      1. Dependent with over $950 earned income.
         1. This rule applies regardless of dependents age.
         2. This rule applies whether if dependent is eligible to be claimed as a dependent, whether claimed or not.
         3. Their standard deduction is greater of:  a. $950 (plus additional if age 65 or blind) or earned income plus $300.
      2. A child under age 19 or student under 24 with over $1900 unearned is taxed using form 8615 at line 44 of 1040.  See page 56 for how tax is computed.

Claiming the Exemptions You Qualify For. 

1. On the back of the 1040, you deduct $3700 for each exemption claimed on the front of the 1040.
   1. 2010 - 2012 no phase out applies
2. See rules under "Which Filing Status?"  and "Can I Claim My Dependents?" to determine how many exemptions you get to claim

Computing Your Tax for the Lowest Tax Possible.

1. If Capital Gains or Dividends are involved, the tax program also computes a capital gains worksheet & Sch. D to determine the correct tax.
   1. It’s important that you use worksheets & watch the coding you use on the various worksheets so that tax will compute properly.
   2. See "What Income is Taxable?" in the Tax Preparation menu for more information on taxation of capital gains and dividends. 
      
      
2.  Lump Sum Distribution.   Form 4972:       
   1. If taxpayer was born before 1936, Use 10 year averaging.  The distribution must be the total amount from an IRS approved plan made due to separation from service, death or disability.  Must have been in the plan for 5 years.  Can only use averaging once.   Beneficiaries can also use.
      
3. Farm Averaging.  Sch J:
   1. Access this form when farmers have had a big jump in their income.  It requires information from the 3 previous tax years.  You should be able to look up from previous year tax programs.
4. Recapture on Education Credit  if either tax-free education assistance or refund of  qualified education expense was received.
5. Foreign Earned Income Worksheet  exclusion or foreign housing exclusion.  Access the form if you have these exclusions.  See the "Federal Deductions that Save" section in the Tax Preparation menu for more information on these deductions. 
6. KIDDIE TAX:  Form 8615  (Option form 8814)
   1. Must use if you have a dependent under 19 or student under 24 with Investment Income.
      
   2. Dependents whose income exceeds $950 with more than $300 of investment income must file a return as the Standard Deduction is thegreater of $950 or earned income plus $300.
   3.  Kiddie Tax rules apply to
      1. A child under age 18
      2. A child age 18 who is not a full time student and does not have earned income that provides over ½ their own support.And full-time students under age 24 unless the child’s earned income exceeds ½ of their support or the child files a joint return.
   4. You need to do parent’s return first before computing Kiddie tax on child's return.. 
      
   5. The child is taxed on the greater of:
      1. Tax as figured using child’s lower standard deduction (page 46.)
      2. Amounts over $1900 are taxed at parents  top tax rate.  
      3. If parents live together but file separately, use parent with higher taxable income. 
      4. If parents are separated or divorced, use  the income of the parent who has physical custody of the child or can claim Head of Household on child.
   6. There are three exceptions to being subject to this kiddie tax.
      1. If child is married and files a joint return.
      2. Distributions from certain qualified disability trusts
      3. If both parents are deceased. 
   7.  Option: File Kiddie tax on Parents return:   Instead of filing a separate return, can file form 8814 on  parents return. 
      1. Filing this way may produce a higher tax.
      2. . Can only use form 8814 if:
         1. Child's gross income is under $9500
         2. No federal income tax withholding.
         3. Income is only from interest & dividends.
         4. No estimated tax paid for child.
7. Alternate Minimum Tax.
   1. You may incur alternate minimum tax with one or more of the following deductions.               
      1. Substantial itemized deductions from taxes,  medical expenses or most misc. itemized deductions.
      2. You have to make a special entry for refinanced loan interest that exceeds original purchase loan and the money used for home improvements.  (In other words, if they take additional equity out of home and don’t do home improvements then you have to make entry.)  
      3. A substantial number of dependents.       
      4. Certain tax-exempt interest, incentive stock option and accelerated depreciation.
   2. The tax is imposed if it exceeds regular income tax.  The tax is 26% to 28% of AMT taxable income.
   3. The tax program usually will compute automatically but certain modifications may be necessary.
   4. Alternate Minimum Tax  Exemptions
      1. $47,450 for single or head of household
      2. $72,450 for joint or Qualifying widow
      3. $36,225 married filing separately
   5. Alternate Minimum Tax Exemption phases out by 25% of amount that alternate minimum taxable income exceeds
      1. $150,000 joint or QW
      2. $112,500 single or HH and
      3. $75,000 MFS.
         
         

8. Regular tax computation.

   1. After taking all the above special tax considerations into account, the income  tax preparation software  will compute the lowest possible tax taking  all these factors into account. 

Give us a call if you have questions or we can be of help, 765-452-8000.  Killingbeck Insurance & Tax Preparation, Kokomo, Indiana.