Description
Follow all instructions on the assignment file
APA style for reference 3-6 in maximum
solutions must be CORRECT AND accordance the slides attached to you
Required Texts
Kingdom of Saudi Arabia. (2004, March 6). Income tax law in the Kingdom of Saudi Arabia royal decree no. (M/1)15 Muharam 1425 H/6. Retrieved from http://www.saudiembassy.net/about/country-informat…
Rupert, T. J., Pope, T. R., & Anderson, K. E. (Eds.). (2014). Prentice Hall’s federal taxation 2014 comprehensive. Upper Saddle River, NJ: Pearson Education.
Shihatah, H. H., & Abu Ghuddah, A. A.-S. (2004). A guide to accounting Zakah. Cairo, Egypt: Al-Falah Foundation.
Unformatted Attachment Preview
ACCT422 – Tax& Zakat Accounting
Chapter 1 – Introduction to the Taxes System in Saudi Arabia; Persons Subject to Income Tax
Article 1: Definitions
•
Article 1 includes definitions for use when using interpreting the income tax law
•
Each word will carry the meaning beside it unless the context indicates otherwise
•
Please refer to the meanings throughout the course
Article 2: Persons Subject to Taxation
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A resident capital company
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A resident non-Saudi natural person who conducts business in the Kingdom
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A non resident who conducts business in the Kingdom through a permanent establishment
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A non resident with other taxable income from sources within the Kingdom
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A person engaged in the field of natural gas investment
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A person engaged in the field of oil and hydrocarbons production
Article 3: Concept of Residency
•
A natural person is considered a resident if he meets any of the following conditions:
He has a permanent place of residence in the Kingdom and resides in the Kingdom for a
total period of not less than 30 days
He resides in the Kingdom for a period of not less than 183 days in the taxable year
•
A company is considered a resident in the Kingdom during the taxable year if it meets any of the
following conditions:
It is formed in accordance with the Companies Law
Its central management is located in the Kingdom
Article 4: Permanent Establishment
•
A permanent establishment of a non resident consists of the permanent place of the non resident’s
activity through which it carries out business, including business carried out through its agent
•
The following are considered a permanent establishment:
Construction sites, assembly facilities, and supervisory activities connected therewith
Installations or sites used for surveying for natural resources including drilling equipment
and ships used for surveying
A fixed base where a non resident natural person carries out business
A branch of a non resident company licensed to carry out business in the Kingdom
•
A place is not considered a permanent establishment of a non resident in the Kingdom if it is used
for the following purposes:
Storing, displaying, or delivering goods belonging to the non resident
Keep a stock of goods belonging to the non resident for the purpose of processing by
another person
Purchasing goods for the sole purpose of collection of information for the non resident
Carrying out other activities of preparatory nature for the interests of the non resident
•
A place is not considered a permanent establishment of a non resident in the Kingdom if it is used
for the following purposes:
•
Drafting contracts for signature in connection with loans, delivery of goods or technical services
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Performing any series of activities stated in the above list
Article 5: Source of Income
•
Article 5 lists 10 primary sources of income that are considered accrued in the Kingdom
•
The place of payment of the income shall not be taken into account in determining its source
•
A payment made by a permanent establishment of a non resident in the Kingdom is considered as if
paid by a resident company
Article 6: Tax Base
(a) The tax base of a resident capital company is the shares of non-Saudi partners in its taxable income
from any activity from sources within the Kingdom minus expenses permitted under this law
Sources – Expenses
(b) The tax base of a resident non-Saudi natural person is his taxable income from any activity from
sources within the Kingdom minus expenses permitted under this law
Sources – Expenses
(c) The tax base of a non resident who performs an activity within the Kingdom through a permanent
establishment is his taxable income arising from or related to the activity of such establishment minus
expenses permitted under this law
Income – Expenses
(d) the tax base of each natural person is determined separately
(e) the tax base of a capital company is determined separately of its shareholders or partners
Article 7: Tax Rates
•
(a) the tax rate of the tax base is 20 percent (20%) for each of the following:
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A resident capital company
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A non Saudi resident natural person who conducts business
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A non resident person who conducts business in the Kingdom through a permanent
establishment
•
(b) the tax rate of the tax base for a taxpayer engaged only in natural gas investment activities is 30
percent
•
(c) the tax rate of the tax base for a taxpayer engaged in the production of oil and hydrocarbon
materials is 85 percent
Chapter 2 – Taxable Activity and Tax-Exempt Incomes; Deductions and Losses
Article 8: Income subject to Tax
Taxable income is the gross income including all revenues, profits, and gains of any type and of any form
of payment resulted from carrying out an activity minus exempted income
Article 9: Gains and losses on disposal of assets.
(a) The gain or loss from the disposal of an asset is the difference between the compensation received
and its cost base
(b) No gain or loss on disposal of a depreciable asset is taken into account other than what is stated in
Article 17 of this Law.
(c) In determining taxable income, a natural person may not take into account gain or loss on disposal of
an asset that is not for use in the activity
(d) The cost base of an asset purchased, produced, manufactured, or constructed by the taxpayer is the
amount paid or incurred by the taxpayer in cash or in kind in the process of acquiring the asset.
(e) Where a taxpayer disposes of part of an asset, the cost base is apportioned between the part
retained and the part disposed of in accordance with their market value at the time of purchase
(f) Expenses incurred to alter or improve a non-depreciable asset are added to the cost base of the
asset.
(g) The compensation value for disposal of an asset against assets in kind is based on the
market value of those assets in kind, including exemption from debt on the asset
(h) Where a taxpayer disposes of an asset by gift or inheritance, the disposer is treated as
having received compensation equal to the market value at the time of disposal (unless
paragraph (i) applies.
(i) If an asset disposed of is encumbered by debt exceeding its market value, the taxpayer
disposing of the asset is treated as having received compensation equal to the value of the debt
(j) In determining tax base, no gain or loss is taken into account on an involuntary disposal of an
asset, to the extent that the compensation value is used to purchase of the same kind of asset
within one year of the disposal.
(k) The cost base of a replacement asset described in (j) is determined with reference to the
cost base of the replaced asset
(l) Where an asset owned by a taxpayer is converted to personal use or ceases to be used in the
generation of income, the taxpayer is deemed to have disposed of the asset for its market
value, with the recognition of the gain but not the loss.
Article 10: Exempt Income
The following types of income are exempt from income tax;
(a) Capital gains realized from the disposal of securities traded in the Stock Market in the
Kingdom in accordance with restrictions specified in the regulations
(b) Gains resulting from disposal of property other than assets used in the activity.
Article 11: Donations
In determining the tax base of each taxpayer, a deduction is allowed for donations paid during
the taxable year to public agencies or philanthropic societies licensed in the Kingdom which are
non profit organizations and are allowed to receive these donations.
Article 12: Expenses related to earning income
All regular and necessary expenses of earning taxable income, paid or accrued, incurred by the
taxpayer during the taxable year are deductible in determining the tax base, with the exception
of outlays of a capital nature and expenses according to Article 13 of this law.
Article 13: Non Deductible Expenses
No deduction is allowed for the following;
(a) Expenses not connected with the earning of taxable income
(b) Any amounts paid to a shareholder, partner or any of their relatives, which constitute
salaries, wages, awards or the like, or which do not satisfy the conditions for
transactions among independent parties
(c) Recreation expenses
(d) Expenses of a natural person for personal consumption
(e) Income tax paid in the Kingdom or another country
(f) Fines and financial penalties paid or payable to any party in the Kingdom
(g) Bribes or similar amounts considered a criminal offense.
Article 14: Bad Debts
(a) A taxpayer my deduct bad debts arising from the sales of goods or services that have
bee previously declared as taxable income of the taxpayer
(b) A bad debt may be deducted when stricken off the taxpayer’s books, when there is
suitable evidence proving the impossibility of collecting it as specified in the regulations
Article 15: Reserves and Allocations
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No reserves or allocations may be deducted except allocations of doubtful debts for banks
•
The regulations shall determine the rules and restrictions specifying such allocations
Article 16: Research and Development Expenses
•
Research and development expenses connected with the earning of taxable income may be
deducted
•
Expenses for the purchase of land or equipment used for research and development may
not be deducted
•
Such equipment shall be subject to depreciation under Article 17 of this Law
Article 17: Depreciation
•
Depreciation is explained in Article 17 paragraphs (a) through (l)
•
Terms and classifications are detailed in the Article to provide extensive guidance
Article 18: Expenses of Asset Repair and Improvement
(a) Expenses incurred by the taxpayer for the repair or improvement of depreciable assets in
each group may be deducted
(b) The amount of expenses deductible in accordance with paragraph (a) for each year shall not
exceed 4% of the balance of the value of the group at the end of that year
(c) The amount exceeding the limit in paragraph (b) will be added to the balance of the value of
the group
Article 19: Expenses for Geological Surveying and Preliminary Work for the Extraction of Natural
Resources
(a) Expenses of this Article are deducted in the form of amortization at the depreciation
rates determined in paragraph (b) of Article 17
(b) This Article also applies to expenses of intangible assets incurred by the taxpayer
Chapter 3 – Employee Expenses and Deferred Compensation; Accounting Periods and
Methods
Article 20: Contributions to an authorized retirement fund
•
Contributions to an Authorized Retirement Fund
(a) An Employer’s contributions to an authorized retirement fund established in accordance with
the laws of the Kingdom may be deducted in favor of the employee
(b) the deduction allowed in paragraph (a) of this article shall not exceed 25% of each
employee’s income, prior to calculating the employer’s contribution
(c) The employee’s contributions to an authorized retirement fund may not be deducted
Article 21: Carrying forward losses
(a) a net operating loss may be carried forward to the taxable year following the year in which
the loss is incurred. The carried forward loss shall be deducted from the tax base of the
following taxable years until the cumulative loss is fully offset. The regulations shall specify the
maximum limits allowed to be annually deducted.
(b) a net operating loss is equal to the excess of the deductions allowed under this Chapter
which are in excess of the taxable income for the taxable year
(c) to calculate the net operating loss for a natural person, the deductions and income for
activity only shall be taken into consideration
Article 22: Taxable Year
(a) The taxable year is the State’s fiscal year.
(b) a taxpayer may use a twelve month period other than the one specified in paragraph (a) of
this Article as a taxable year, in accordance with the restrictions specified in the regulations
(c) see Article 22 for further explanation of about a short year and a long year in accordance
with the regulations
(d) Groups of related companies as defined in Article 64 of this Law, shall use the same taxable
year.
Article 23: Method of Accounting
(a) A taxpayer’s method of accounting must clearly reflect the taxpayer’s income.
(b) The gross income and expenses of a resident company, and any other taxpayer who keeps or
is required by law to keep commercial books according to the accounting principles generally
accepted in the Kingdom, are determined according to such books after adjustments of the
accounts so as to conform to the rules of this Law
(c) For taxation purposes, a natural person may record his transactions on a cash or accrual
basis. However, if his gross income from business for a taxable year exceeds the amount
specified in the regulations, he must use the accrual method in all succeeding taxable years.
(d) A company which keeps or is required by Law to keep commercial books must record income
and expenses on an accrual basis. Otherwise, it may for taxation purposes, use either the cash
or accrual method.
(e) Except for a change from the cash basis to the accrual basis required in accordance with
paragraph (c) or (d) of this Article, a taxpayer may change its method of accounting upon
obtaining the Department’s consent.
(f) If a taxpayer changes his method of accounting, it must perform adjustments to items of
income and deduction, or to debt or any other items in the taxable year following the change, so
that no item is omitted, or included more than once.
Article 24: Cash-Basis Accounting
A taxpayer who uses the cash basis method in its books and records shall register the received income
when received or made available, and the paid expenses when paid
Article 25: Accrual-Basis Accounting
(a) A taxpayer who uses the accrual method shall record income and expenses when they are due
(b) An amount becomes payable to the taxpayer when the taxpayer is entitled to receive it, even if
payment is postponed or pain in installments
(c) An amount becomes payable by the taxpayer when all the facts determining liability have
occurred
Chapter 4 – A Guide to Accounting Zakah Part 1
Introduction
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Zakah is a duty that must be fulfilled by all “capable” Muslims for it constitutes one of the
five pillars of Islam.
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This premise is taken for granted by all Muslims; scholars as well as common people
The most important questions are:
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How should a Muslim pay Zakah?
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What is the right way to pay Zakah?
Books of Fiqh (Islamic Jurisprudence) provide directions and details for this task
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To calculate alms (Zakah) on money for individuals and companies, an accountant needs
a guide to help him in defining the items of assets, on which alms are due
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The accountant also needs to know how to assess the liabilities which should be
reduced from assets for alms in order to reach the alms category and calculate the alms
which are due to be paid
First Essay: Accountancy Rules and Equations for Alms on Money
1. The annual rule
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Alms are calculated according to the lunar year. Counting starts when the amount of
money attains the Nisab (the minimum amount on which alms should be paid)
•
This includes all kinds of alms except alms on agriculture, fruits, mineral assets and Rikaz
(metals found in the earth)
2. The rule of the independence of each year
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Each alms year is an independent one, and alms on a given amount of money should not
be more than once in the same year.
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Duality should be avoided
3. The rule of actual or assumed growth
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Actual or assumed growth of an amount of money is a condition for any alms to be
given from this money.
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Therefore alms are not due on fixed assets or things for personal use. This is because
the condition of actual or assumed growth would not be met.
4. The rule of capacity for obligation
•
Alms are due on money which is abounding (more than basic needs). No alms are due
for little amounts of money.
•
The amount of money should reach the Nisab. This guarantees that only those who
have the capacity of paying will be obliged to pay.
5. The rule of calculating alms on the total and the net amounts
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For every kind of money or activity there is a rule for calculating alms which are due on it. Some
are calculated in relation to the total amount and others are calculated in relation to the net
amount.
6. The rule of grouping monies of the same kinds
•
It is permissible to group cash money of wealth to cash money available from offers of
commerce and other gained cash money so that for all these monies there would be
one Nisab and one alms year.
•
However, it is not permissible to group different kinds of money. For example, cattle,
cash available from commercial operations, and agriculture and fruits should not be
grouped in one lump sum and the alms paid on them.
7. The rule of evaluating according to the current value of the market
•
Evaluating cash money of wealth and cash money from offers of commerce to define
the alms due should be according to the current value at the time of paying alms
•
They should not be evaluated according to historic value, cost or market, whichever is
less
The equations of calculating alms on money
1. Receptacle of alms money = alms assets – liabilities which are due to be paid at that moment
2. Alms assets = assets which meet the conditions of obligatory alms
The conditions of obligatory alms are:
a. It should be full ownership
b. Growth (actual or assumed)
c. Completion of the year (except alms on agriculture, fruits, mineral wealth, or
minerals of the earth
d. No other kind of alms has been paid on the same assets within the same year
e. Assets should abound basic needs
f. It should not include a debt which is due at the time
g. It should reach the minimum obligatory amount (Nisab)
3. Short term liabilities = short term liabilities which are due payment and in which the
conditions of decision are filled
a. Liabilities should be related to the activity
b. Due payment during coming year
c. Legally permissible
4. The amount due for alms (Nisab)= 85 grams of pure gold evaluated according to current
price
5. The amount of alms due = the receptacle of alms money once it reached the Nisab X the
price of alms
6. The price of alms = varies according to the kinds of money and activity. The range is
2.5% to 20%.
Chapter 5 – A Guide to Accounting Zakah Part 2
Second Essay; Executive Measures for Calculating Alms for Individuals and Companies
Alms on money should be calculated according to the following steps:
1. Defining the date completing the year. Varies according to the circumstances of the
alms giver
2. Different monies owned by the alms giver should be assessed at the end of the year
according to the rules of alms
3. Assessment of liabilities (deductions) which ae due to be decided upon, from alms
money according to the rules of Zakah
4. Defining the receptacle of alms by the deduction of due liabilities from alms money.
According to the following equation:
The receptacle of alms = alms assets minus due liabilities
5. Defining and assessing the amount of Nisab according to the kind of money, the kind of
activity, and the kind of alms. Nisab differs according to the kind of alms (on what will
the alms money be spent).
6. A comparison should be made between the receptacle of alms defined in step 4 with
Nisab defined in step 5 so as to know whether alms are due or not. If the receptacle
reaches the Nisab then alms would be due.
7. Define the amount which should be taken from the receptacle of alms, which
accountants term as the percentage or price of alms. See Guide for specifics on types
and amounts of alms.
8. Calculate the amount of alms by multiplying the amount of the receptacle by the
amount of the price (percentage) of alms. The result should be the amount of due alms.
9. Defining who pays the due alms are as follows;
a. For individuals and personal establishments; the individual or owner should pay the
due alms.
b. For partnerships; the amount of due alms should be divided between the partners
according to the percentage of his share
c. For investment companies; the amount of due alms should be divided on the
number of shares.
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Each investor then pays alms according to his shares.
d. For partnerships of labor and capital;
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The labor pays alms according to his share of profits
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The financier pays alms on capital and the profit less the laborer’s share
10. Revenue from alms should be distributed according to its due activities and persons in
the light of the rules of Islamic Law.
Alms money should be spent on the following:
1. The poor
2. The needy
3. Those who work in administering alms
4. Those whose hearts have been recently reconciled to the Truth
5. To free slaves
6. Those who are in debt
7. In the Path of Allah
8. The wayfarers
In order to calculate alms on money, an accountant needs the following tools and methods:
1.
General balance (financial situation) made on the date of calculating alms
2. Final accounts for the ended year on which alms are to be calculated
3. Clarification concerning the balance and the final accounts
4. The price of gold at the time when paying alms is due in order to calculate the Nisab.
5. Different monies possessed by the alms giver should be grouped if of the same kind
6. Different contemporary fatwas concerning alms
7. The Guide for calculating alms
8. Other accountancy tools and methods which may be useful for calculating alms
Chapter 6 – A Guide to Accounting Zakah Part 3
Simplified Accountancy Forms
•
These forms are meant to be used as a guide for accountants when assessing the receptacle
of alms and when advising the alms giver whether he is an owner of a personal
establishment or a partner with others in a private company or a shareholder in an
investment company
Accountancy form to assess and calculate alms on wealth in cash
•
The receptacle of alms on cash wealth includes banknotes, coins, silver, gold money and
ingots of gold, current accounts in banks and investment accounts
•
The Nisab for cash wealth is 85 grams of pure gold, or its equivalent in cash, or 595 grams of
pure silver
•
The Islamic Commission for Research has recommended to use the Nisab in gold.
The assessment and calculation steps are as follows:
a. Define the time when alms are due, (Al-Hawl), which starts from the time when the
amount of money reaches Nisab
b. Define all items of cash wealth, on which alms must be paid (alms assets)
c. Assess all items of cash wealth according to market value at the time when alms is
due
d. Settle all due liabilities on the alms giver from his cash wealth so that to know the
receptacle of alms
e. Compare between the receptacle of alms and the Nisab, if the receptacle reaches
the Nisab, then alms is due to be paid.
f. Calculate the amount of alms by multiplying the receptacle by the price of alms,
which is 2.5%.
g. See form on page 29 of Guide
Accountancy form to assess and calculate alms on goods for trading and industrial activities
•
What is meant by goods for trading is anything which is to be bought or sold with the
intention of trading to earn a profit
•
No alms are due on goods obtained for personal use
The assessment and calculation steps are as follows:
a. Define the end of the alms year, which is the same date as the end of the financial
year for an establishment or company
b. Define and assess the elements of alms assets such as goods, etc.
c. Define and assess the elements of immediate current liabilities which are due for
payment from the alms assets
d. Define the receptacle of alms by deducting item (c) from item (b) and add any
earned money
e. Define the amount of the Nisab, and then compare with the receptacle of alms
f. Calculate the amount of alms. If the receptacle reaches the Nisab, then alms should
be paid as 2.5% if lunar year and 2.577% if solar year.
g. See form on page 32 in Guide
Accountancy form to assess and calculate alms on agriculture and fruits
•
Agriculture is anything that comes out of the earth and is planted by seeds from which man,
animal, and bird feed
•
Fruits is everything which trees carry which is to be eaten
•
Alms on agriculture and fruits are due at the time of harvest or collecting
•
If an area of land produces more than one crop within the year, its owner should pay alms
on each crop separately.
The following are the steps of assessing the alms on agriculture and fruits:
a. Measure the total production of the land either by production or by cash
b. Define the expenses on the production, if the opinion adopted is that which says
that expenses should be deduced as far as they do not exceed the third, which is
the opinion of the Sixth Fiqh Seminar of Barakah.
c. Define the receptacle of alms by deducing item (b) from item (a).
d. Define the amount of Nisab, which is the equivalent to 5 Awsaq, or the
equivalent to 50 Egyptian Kaylah, or 653 kg of wheat or the average food for
most people
e. Calculate the amount of alms:
a. In the case of watering by cost alms = receptacle of alms X 5%
b. In the case of watering without cost, alms = receptacle of alms X 10%
See form on page 35 of the Guide
Accountancy form to assess and calculate alms on cattle
•
Cattle includes camels, cows, and sheep
•
Alms are due only if they are bred for multiplication and not used as animals of burden
•
Nisab for alms on cattle differs according to the kind of species
•
For camels it is five, for sheep it is forty, whereas for cows it is thirty
•
Refer to Fiqh books for more details
The following are the steps of assessing the alms on cattle:
a. Define the number of cattle deducing the working animals and the ones ready for trade
b. Compare the number with Nisab, If it is less than Nisab then no alms are due.
c. Define the category the number falls into, in order to define the amount of alms due
d. Define the alms due according to tables in Fiqh books
See form on page 37 in the Guide
Accountancy form to assess and calculate alms on mineral and marine wealth and minerals in
the earth
•
Mineral and marine wealth include anything of value which is brought out from the earth
or the bottom of rivers, seas, or oceans
•
Minerals in the earth (Rikaz) are treasures which are buried in the earth
The following are the steps for defining the receptacle of alms on mineral and marine wealth:
a. Define the net production from the earth or sea, on which alms must be paid
b. Compare the net production with the Nisab (85 grams of gold) in he case of minerals of
wealth. For Rikaz there is no Nisab.
c. Calculate the amount of alms, if the receptacle reaches the Nisab, on the basis of 2.5%
for minerals and 20% for Rikaz
See form on page 39 of the Guide
Accountancy form to assess and calculate alms on revenue of investment assets
•
•
Investment assets are any assets which remain fully owned whilst revenue from investing
them are re-occurring, such as real estate, cars, and others
No alms are due on the assets, however alms are due on the revenues once they reach
Nisab after deducing actually paid expenses and debts
Receptacle of alms on investment assets is calculated according to the following steps:
a. Define the total annual revenue at the end of the year
b. Define all expenses of getting the revenue
c. Deduce the expenses from the total revenue to get net revenue
d. Deduce currently due debts which the alms giver must pay
e. The net of all of the above should be added to any cash and trade goods owned by the
alms giver in which no alms were paid at the end of the year to ascertain the receptacle
of alms
f. Compare the receptacle (e) with the Nisab which is the equivalent to 85 grams of gold, if
the receptacle reaches the Nisab, then alms should be calculated on the basis of 2.5%,
which is the chosen opinion of the present guide.
See form on page 42 of the Guide.
Accountancy form to assess and calculate alms on revenue from work
•
•
This category includes wages, salaries, income from freelance work and won money
Alms must be paid on what remains of this money at the end of the year by adding it to
other monies owned by the alms giver when calculating the Nisab and the alms year
The steps to define the receptacle of alms and calculate what is due at the end of the year are:
a. Define what remains from the revenue at the end of the year after deducing what is
paid from cost of basic need and after paying outstanding debts
b. Compare step (a) to Nisab (85 grams of gold) to know whether alms are due or not
c. Calculate the amount of alms if the receptacle reaches the Nisab on the basis of 2.5%
See form on page 44 of the Guide
See page 45 of the guide to determine alms on freelance work
See page 46 for form for freelance work
ACCT422 – Tax& Zakat Accounting
Chapter 2 – Determination of Tax
Formula for Individual Income Tax
Gross income – Exclusions = Gross Income (after exclusions)
Gross Income (after exclusions) – Deductions for AGI = Adjusted Gross Income (AGI)
•
Tax rate schedules, std. deduction, personal exemptions, & other amounts are adjusted for inflation.
Actual amount paid
مبلغ معياري بموجب القانون
األكبر من االثنين
Adjusted Gross Income (AGI) – Deductions from AGI→ 1- Greater of
itemized deductions OR standard ded.
2- Personal and dependency exemptions
= Taxable Income
Taxable Income X Tax rate or rates = Gross tax
Gross tax – Credits and prepayments = Net tax payable OR refund due
Deductions from Adjusted Gross Income
•
•
•
•
•
•
Itemized deductions
Standard deduction
Personal exemptions
Dependency exemptions
Child credit
Making work pay credit and social security tax reduction
Bashaier
Itemized Deductions
See Table 6 for partial list
o
o
o
o
o
o
•
•
Medical expenses
Taxes
Investment and residential interest
Charitable contributions
Personal casualty and theft losses
Miscellaneous deductions
Only claim itemized deductions if total greater than std. deduction
Some items limited by varying percentages of adjusted gross inc.
o Medical expenses
o Casualty losses
o Miscellaneous itemized deductions
Standard Deduction
•
•
•
•
Varies based on:
o Filing status, age, and vision
o $6,100 – $12,200 in 2013
▪ Increase over 2012 to adjust for inflation
Increase std. ded. if elderly &/or blind
Used when std. ded. > itemized ded.
Limited std. ded. in certain situations
Personal Exemptions
•
•
Generally, each taxpayer allowed one
o Unless claimed as dependent on another return
o $3,900 in 2012
Additional allowed for spouse on joint return
Bashaier
Dependency Exemptions
Requirements for All Dependents
•
•
•
•
Have a qualifying identification number
Meet a citizenship test
Meet a separate return test
Not themselves claim another person as a dependent
Additional Requirements for Qualifying Children
•
•
•
•
Relationship test
Age test
• < 19 or full-time student < 24
Abode test
• Live w/taxpayer > ½ of year
Support Test
• Dependent provides < ½ own support
Additional Requirements for Other Relatives
•
•
•
Relationship test
• Related to or live w/taxpayer whole yr
Gross income test
• Dependent’s gross inc. < exemption amt.
Support test
• Taxpayer provides > ½ support
Determining the Amount of Tax
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•
•
•
•
•
•
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Filing status
Joint return
Surviving spouse
Head of household
Single taxpayer
Married filing a separate return
Abandoned spouse
Dependents with unearned income
Bashaier
Filing Status
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Married filing jointly
• Marital status on last day of tax year
• Common law marriages recognized
• Spouses must be U.S. citizens or residents
• Federal Defense of Marriage Act of 1996 defines marriage as between a man and a woman
▪ Same-sex couples cannot file a joint federal return, but may file joint state return
in some states
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Surviving spouse
• Files as married filing jointly
Head of household
• Unmarried and maintains home in which dependent lives > ½ yr
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•
•
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Married filing separately
Single – taxpayers not in other categories
Relative tax liability by filing status from lowest to highest
• Married filing jointly
• Surviving spouse
• Head of household
▪ Includes abandoned spouse
• Single
• Married filing separately
Bashaier
Chapter 3 – Gross Income: Inclusions
Concepts of Income
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•
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Economic concepts of income
Accounting concepts
Tax concept of income
Economic Concepts of Income
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Wealth that flows to individuals
Changes in value in individuals’ wealth
o Unrealized gains
o Gifts & inheritances considered income
Accounting Concepts of Income
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•
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Values are measured by a transaction approach
Income realized as result of completed transactions
Use historical cost
Tax Concept of Income
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•
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Conditions to make income taxable
Administrative convenience
Wherewithal to pay
Gross income defined
Conditions to Make Income Taxable
▪
▪
▪
Economic benefit to taxpayer
Income must be realized
• Earnings process complete
Income must be recognized
Administrative Convenience
▪
▪
Economic concept is considered too subjec
