Federal Income Tax For Individuals And Small Business

March 13, 2024

8504 / Who is eligible to file a federal income tax return as head of household?

<div class="Section1">An individual who meets the following requirements may file a tax return as head of household:<div class="Section1"> <blockquote>Taxpayer is not married or considered married (excluding a qualifying widow(er) with dependent child,<a href="#_ftn1" name="_ftnref1">1</a> see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8503">8503</a>); Taxpayer paid more than half the cost of maintaining a home for the tax year; A “qualifying person” (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8505">8505</a>) lived with the individual for more than half the year (except for temporary absences); and Taxpayer is not a nonresident alien.<a href="#_ftn2" name="_ftnref2">2</a></blockquote> </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.   IRC § 2(b)(1). <a href="#_ftnref2" name="_ftn2">2</a>.   IRC §§ 2(b), 2(d). </div></div>

March 13, 2024

8512 / What indexing factor does the IRS use to make the adjustments for inflation?

<div class="Section1">The indexing factor (referred to in the IRC as the cost-of-living adjustment) used prior to the 2017 tax reform was the percentage by which the Consumer Price Index (CPI) for the prior calendar year exceeds the CPI for a year designated as a reference point in each respective IRC Section. In all cases, the CPI is the average Consumer Price Index as of the close of the 12-month period ending on August 31 of the calendar year.<a href="#_ftn1" name="_ftnref1">1</a><div class="Section1"> The 2017 tax reform legislation provides that items that are adjusted annually for inflation will be adjusted based on the Chained Consumer Price Index for All Urban Consumers (C-CPI-U), as published by the Department of Labor, for tax years beginning after December 31, 2017 (this change is therefore permanent).<a href="#_ftn2" name="_ftnref2">2</a> <hr> Planning Point: One key criticism of this modification to the inflation indexing method was that it could push more taxpayers into higher tax brackets more quickly than under prior law. This is both because of the fact that C-CPI-U indexing makes it appear that inflation is growing faster than under CPI indexing, and because many employment-related increases in income are based on the CPI. Tax policy center research shows that, since 2000, the C-CPI-U has grown at a consistently slower rate than the CPI.<a href="#_ftn3" name="_ftnref3">3</a> <hr> Essentially, the C-CPI-U is designed to take into account the fact that individuals change their purchasing habits as the cost of certain goods increases or decreases (in order to substitute lower priced goods for higher priced goods). C-CPI-U is designed to take into account purchasing patterns both before and after a price change. Regardless of the system used, in calculating the new tax rate schedules, for example, the minimum and maximum dollar amounts for each rate bracket (except as described below) are increased by the applicable cost-of-living adjustment. The rates (percentages) themselves are not adjusted automatically for inflation. This method of increase explained above, however, does not apply to the phase out of the marriage penalty in the 15 percent bracket.<a href="#_ftn4" name="_ftnref4">4</a> The Secretary of the Treasury has until December 15 of each calendar year to publish new tax rate schedules (for joint returns, separate returns, single returns, head of household returns and for returns by estates and trusts) that will be effective for taxable years beginning in the subsequent calendar year.<a href="#_ftn5" name="_ftnref5">5</a> As a practical matter the new numbers for the following tax year are often available as early as October of the preceding year. For a schedule of current tax rates, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8510">8510</a>. </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.   IRC §§ 1(f)(3), 1(f)(4). <a href="#_ftnref2" name="_ftn2">2</a>.   IRC §§ 1(f)(3), 1(f)(6). <a href="#_ftnref3" name="_ftn3">3</a>.   See Bureau of Labor Statistics Release (comparing CPI movement vs. C-CPI-U movement), available at https://www.bls.gov/news.release/cpi.t05.htm. <a href="#_ftnref4" name="_ftn4">4</a>.   IRC § 1(f)(2). <a href="#_ftnref5" name="_ftn5">5</a>.   IRC § 1(f)(1). </div></div>

March 31, 2020

8502 / How are 2020 federal income tax filing and payments requirements impacted by the COVID-19 pandemic?

<div class="Section1">Generally, both the federal tax filing deadline and payment deadline for the 2019 tax year were extended from April 15, 2020 to July 15, 2020 in response to the coronavirus pandemic. The previously applicable caps ($1 million (for individuals) and $10 million (for corporations)) were removed in subsequent IRS guidance,<a href="#_ftn1" name="_ftnref1">1</a> so that any amount of tax due could be deferred to July 15.<div class="Section1"> The IRS released FAQ that clarifies that the filing and payment extensions (from April 15 to July 15 in 2020) applied regardless of whether the taxpayer was sick or quarantined because of COVID-19. The time deadline for making a 2019 IRA contribution (or pay the 10 percent penalty tax for distributions included in income) was also extended to July 15. Employees who made excess deferrals to a retirement plan and were required to remove those amounts by April 15 remained subject to the April 15 deadline. The deadline for making HSA and MSA contributions for 2019 was moved to July 15, 2020. For fiscal year taxpayers with 2019 returns due April 15, the deadline was extended to July 15 regardless of whether April 15 was an original or extended filing deadline. The relief did not apply to payroll or excise tax payments (deposit dates remained unchanged, but employers may have been eligible for the COVID-related tax credits, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8553">8553</a>). Taxpayers did not have to do anything to take advantage of the extension--they simply filed their returns and made required payments by the July 15 deadline. For taxpayers whose federal income tax return filing due date was postponed from April 15 to July 15, 2020, the due date of that taxpayer’s Section 965 installment payment was also postponed to July 15, 2020. For any taxpayer whose federal income tax return filing deadline was postponed from April 15 to July 15, 2020, the due date for Form 8991 and the BEAT payment was also postponed to July 15, 2020.<a href="#_ftn2" name="_ftnref2">2</a> Taxpayers who wished to make a claim for a refund based on the 2016 tax year (which had to be made by April 15, 2020) remained subject to the April 15 deadline. The relief similarly did not change the deadlines for making 2019 estimated tax payments. Subsequent IRS guidance in Notice 2020-23 expanded relief to taxpayers with a federal filing or payment obligation arising after April 1, 2020 and before July 15, 2020. Specifically, deadlines were extended to July 15, 2020 for actions required with respect to (1) estate and trust income tax payments and return filings, (2) estate and generation-skipping transfer tax payments and return filings on Form 706 and related forms, (3) gift and generation-skipping transfer tax payments and return filings on Form 709 and related forms, (4) estate tax payments of principal or interest due as a result of an election made under IRC Sections 6166, 6161, or 6163 and annual recertification requirements under Section 6166. Similarly, taxpayers who faced deadlines with respect to Tax Court actions between April 1 and July 15 had their deadlines postponed until July 15. Notice 2020-23 also gave the IRS itself an additional 30 days to perform certain time-sensitive actions with respect to “affected taxpayers” made difficult because of a lack of access to information during the COVID-19 outbreak. “Affected taxpayers” is defined as follows: <blockquote>(1)   persons who were currently under examination (including an investigation to determine liability for an assessable penalty under subchapter B of Chapter 68); (2)   persons whose cases were with the Independent Office of Appeals; and (3)   persons who, during the period beginning on or after April 6, 2020 and ending before July 15, 2020, filed written documents described in IRC Section 6501(c)(7) (amended returns) or submitted payments with respect to a tax for which the time for assessment would have otherwise expired during this period.</blockquote> The 30-day extension applied if the last date for performance of the action was on or after April 6, 2020, and before July 15, 2020.<a href="#_ftn3" name="_ftnref3">3</a> </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.   Notice 2020-18. <a href="#_ftnref2" name="_ftn2">2</a>.   IRS FAQ available at: https://www.irs.gov/newsroom/filing-and-payment-deadlines-questions-and-answers. <a href="#_ftnref3" name="_ftn3">3</a>.   Notice 2020-23. </div></div>

February 06, 2018

8509 / How does a taxpayer compute annual tax liability?

<div class="Section1">Editor’s Note: The 2017 tax reform legislation suspended the personal exemption from 2018-2025 and limited many itemized deductions to which a taxpayer might have otherwise been entitled.<div class="Section1"> A taxpayer computes the amount of tax owed using the following basic steps: <blockquote>1. Gross income for the taxable year is determined (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8513">8513</a>); 2. Certain deductions are subtracted from gross income (above the line deductions) to arrive at adjusted gross income (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8521">8521</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8523">8523</a>); 3. The deduction for personal and dependency exemptions is determined (prior to 2018 and after 2025, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8516">8516</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8520">8520</a>); 4. Itemized deductions are totaled (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8524">8524</a>), compared to the standard deduction and the additional standard deduction, if applicable (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8521">8521</a>), and (generally) the greater amount, along with the deduction for exemptions (prior to 2018 and after 2025), is deducted from adjusted gross income to arrive at taxable income; 5. The proper tax rate is applied to taxable income to determine the tax (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8510">8510</a>); 6. The following amounts are subtracted from the tax to determine the net tax payable or overpayment refundable: (1) credits (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8563">8563</a> and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8564">8564</a>), and (2) prepayments toward the tax (e.g., overpayments or credits from a prior tax year carried over, tax withheld by an employer or estimated tax payments).</blockquote> In some cases, there may be an alternative minimum tax liability. The steps in calculating the alternative minimum tax are explained in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8573">8573</a>. </div></div>