Whittenburg Gerald E., Altus-Buller Martha. Income Tax Fundamentals
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Gerald E. Whittenburg
San Diego State University
Martha Altus-Buller
San Diego, California
Income Tax Fundamentals
2011
Edition
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Income Tax Fundamentals, 2011 Edition
Gerald E. Whittenburg and Martha Altus-Buller
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Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
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I
ncome Tax Fundamentals 2011 Edition is designed as a self-contained book for an
introductory course in individual income taxation. We take pride in the concise,
current, and practical coverage of the income tax return preparation process.
Whittenburg/Altus-Buller continues to be the market-leading text with a forms approach
and is a reliable choice, with an experienced author team that offers a commitment to
accuracy. The text workbook format presents materials in practical sections with multiple
examples, Internet activities, and review problems. The presentation of the material does
not assume that the reader has taken a course in accounting, making it appropriate for
use as a self-study guide to federal income tax. Whittenburg/Altus-Buller adopters tell us:
“I use a forms-based approach to this course, and I chose this textbook for the
illustrations and the end of chapter materials. The problems and comprehensive
problems are very good.”
— Judy Daulton, Piedmont Technical College
“I have found the examples and illustrations to be of great benefit to the students in
their ability to comprehend the material.”
— John S. Ribezzo, Community College of Rhode Island
“I have found the examples and illustrations to be sufficient in quantity and detail.
The Self-Study Problems are particularly helpful. They allow students to check their
understanding of a small part of the material as they progress through the chapter.”
— Norma J. Hunting, Chabot College
Whittenburg/Altus-Buller’s hallmark “Forms Approach” allows students to practice
filling out tax returns right in the book without having to download tax forms online.
The “forms approach” is supported by an annotated 1040 map. The 1040 map is an
expanded tax formula, showing where each piece of the tax formula is covered in the
book. It is a helpful visual tool for instructors who like to reference the tax formula in
class. The 1040 map helps students understand how all of the elements of the text fit
together. To see the annotated 1040 map, please turn to pages x–xi.
Each individual tax form needed to complete the problems in the
text is included within Income Tax Fundamentals and within the
complimentary At Home™ software from H&R Block. H&R Block
At Home™ is practical and remarkably easy to use, with many helpful features available to
new users. The H&R Block At Home™ Web site (www.hrblock.com) offers useful tips,
calculators, and other current tax information. All of the 2010 Individual Income Tax
Return problems in the text may be solved using this software, or students may prepare
the tax returns by hand. If you would like to use H&R Block At Home™ on your campus
computers, please contact the publishing team.
Income Tax Fundamentals’
Winning Forms Approach Is Time-Tested
CONCISE, CURRENT & PRACTICAL!
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
iv
Income Tax Fundamentals
The 2011 Edition is updated to include the following new features and tax changes for tax year 2010. Due
to the back-up of tax bills in Congress, any bills affecting 2010 that are not passed when we go to press
will be covered in detail on the companion Web site.
t A Student Guide to H&R Block At Home™ software is available on the companion Web site.
Instructions are accompanied by useful pointers and practical suggestions for each tax return problem
included in the text. The guide, written by Susan Snow Davis, Green River Community College, is
particularly helpful to new users of H&R Block At Home™ software and is a valuable resource for more
experienced users, as well.
t Chapter 1 highlights several of the most prominent tax aspects of health care reform for 2010
and future years. The two health care reform acts that became law in March of 2010 (the Patient
Protection and Affordable Care Act and the Health Care and Education Reconciliation Act) contain
numerous tax provisions.
t New tax provisions to assist the unemployed and businesses were added by the HIRE Act and the Small
Business Jobs Act, both passed in 2010. Selected tax changes from each tax act are covered in the text,
including the expanded Section 179 expensing rules and the extension of bonus depreciation through
the end of 2010.
t Several tax provisions passed in prior years affecting 2010 are covered in the text. These include the
complete elimination of the phase-outs for itemized deductions and exemption deductions.
t The Test Bank has been expanded by approximately 100 new multiple-choice questions.
Evolves Each Year
to Benefit You
As we go to press, expected extensions of 2009 law to 2010 include:
t The passage of an alternative minimum tax “patch.” Without a patch, an estimated one in five
taxpayers will pay alternative minimum tax in 2010.
t The continuation of an itemized deduction for sales tax for taxpayers with little or no state income tax.
t The continuation of the property tax deduction for taxpayers using the standard deduction.
t The continuation of the tuition deduction.
t The continuation of the $250 deduction for educator expenses.
Additionally, the 2010 law contains a $100 floor for casualty loss deductions, which we have used for all
casualty loss problems in the text. This $100 floor may be changed to $500 in the final weeks of 2010. To
access information on tax laws passed after the publication of this text, please visit www.cengage.com/
community/taxation or www.cengagebrain.com. At the CengageBrain.com home page, fill in the ISBN of
your title (from the back cover of your book) using the search box at the top of the page. This will take
you to the product page where free companion resources can be found.
NEW TO THIS EDITION
AS WE GO TO PRESS
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
v
The practical, step-by-step format in Income Tax Fundamentals 2011
Edition builds from simple to complex topics. The authors are
careful to lead students down a path of understanding rather than
overwhelming them with excessive detail and multiple Internal
Revenue Code references.
Step-By-Step Format
Builds Student Confidence
t The Quick Tax
Reference Guide
on the inside of the
back cover of the
textbook includes the
Tax Equation.
t -FBSOJOH0CKFDUJWFT
help organize
information and
are referenced by
the end-of-chapter
exercises.
2010 Federal Tax Rate Schedule
If Taxable Income is Over: But Not Over: The Tax is:
S
INGLE
I
NDIVIDUALS
$0 90>+B+,6/38-97/
:6?=90>2//B-/==9@/<
:6?=90>2//B-/==9@/<
$171,850 :6?=90>2//B-/==9@/<
$171,850 :6?=90>2//B-/==9@/<
:6?=90>2//B-/==9@/<
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ARRIED
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Q
UALIFYING
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IDOW
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$0 $16,750 90>+B+,6/38-97/
$16,750 $68,000 :6?=90>2//B-/==9@/<
$68,000 :6?=90>2//B-/==9@/<
:6?=90>2//B-/==9@/<
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OUSEHOLDS
$0 90>+B+,6/38-97/
$45,550 :6?= 90 >2
$45,550 $117,650
$117,650
Wage Base for Social Security
and Self-Employment Tax $106,800
Wage Base for Medicare No cap
t
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OUSEHOLDS
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In
LEARNING OBJECTIVES
.............................................. .........................
After completing this chapter, you should be able to:
LO 1.1 Understand the history and objectives of U.S. tax law.
LO 1.2 Describe the different entities subject to tax and reporting
requirements.
LO 1.3 Understand and apply the tax formula for individuals.
LO 1.4 Identify individuals who must file tax returns and select
their correct filing status.
f exemptions and the exemption
t The short sections within each chapter offer numerous examples, supported by the
“Self-Study Problems” throughout. The Self-Study Problems encourage students to
answer a series of short questions in a fill-in-the-blank or multiple-choice format. The
solutions to the Self-Study Problems are provided at the end of the text, offering
immediate solutions to students to help build confidence. The Self-Study Problems
are also found in the WebTutor
TM
product.
hip test. A person is no t
household if at any time during the year the relationship
between the taxpayer and the dependent was in violation of local law.
EXAMPLE Scott provides all of the support for an unrelated family friend who
lives with him for the entire tax year. He also supports a cousin who
lives in another state. The family friend can qualify as Scott’s depen-
dent, but the cousin cannot. The family friend meets the member of
the household test. Even though the cousin is not considered a rela-
tive, he could have been a dependent if he met the member of the
household par t of the test. N
2. Gross Income Test
The individual cannot have gross i
($3 65
t Helpful examples
within each chapter
provide realistic
scenarios for students
to consider.
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Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
vi
t Real-world examples within
Tax Break segments provide
actual, effective examples of
tax-planning strategies that
clearly illustrate the concepts
discussed throughout the
book and cover nearly every
basic tax-planning technique
used by tax preparers.
t
The “Would You Sign This Tax
Return?” features place
readers in the office of a tax
preparer with interesting and
even humorous real-world
tax ethics questions that will
intrigue students. Many of
these features are inspired by
the authors’ own experiences
working with various clients
in tax preparation. As part of
each scenario, students decide
if they would sign the tax
return. You, as the instructor,
can use the cases to spark
group discussions on basic tax
preparation ethics.
g hod when they file an initial tax
ethod. To change methods, taxpayers must obtain permission from
the IRS.
The cash method allows a certain amount of flexibility in tax planning. Payment
of business expenses may be accelerated before year-end to generate additional
deductions, if desired. In addition, billings for services may be postponed at year-
end so payment won’t be received and included in income until the following
year. Some itemized deductions such as property taxes, state income taxes, and
charitable contributions may also be paid before year-end for an immediate
deduction.
Self-Study Problem 7.2A
Melaleu I
t
blind a
on her return?
Your clients, Adam and Amy Accrual, have a 21-year-old daughter named
April. April is single and is a full-time student studying for her bachelor’s
degree in accounting at California Poly Academy (CPA) in Pismo Beach, Califor-
nia, where she lives with her roommates year-round. Last year April worked at
a local bar and restaurant 4 nights a week and made $18,000, which she used
for tuition, fees, books, and living expenses. Her parents help April by sending
her $300 each month to help with her expenses at college. This is all of the
support given to April by her parents. When preparing Adam and Amy’s tax
return you note that they claim April as a dependent for tax purposes. Adam is
insistent that they can claim April because of the $300 per month support and
the fact that they ‘‘have claimed her since she was born.’’ He will not let you
take April off his return as a dependent. Would you sign the Paid Preparer’s
declaration (see example above) on this return? Why or why not?
Real World
Applications
Keep Students
Engaged
i
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in
in
o
v
id
i
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es
es
o
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f
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Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.