MGMT 127A Lecture Notes - Lecture 7: Standard Deduction, Unearned Income, Debt Relief

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8 May 2016
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1. Lecture 7: continuation of section 1
Tax return of a dependent
Three rules
No personal exemption
oIf a person is claimed as the dependent of another taxpayer, he cannot claim a
personal exemption on his own tax return
oIt would seem beneficial for the parents to take the personal exemption for
their children if they have a higher income than their children (because they are taxed at a
higher rate), BUT if it gets too high, it can get phased out
oRegardless, you cannot choose whether you claim the dependent or not- the
rightful person under the law has to claim the exemption
oYou can, however, sort of set up your situation so that your would be
dependents provide for more than 50% of their care or something so that they qualify to
take the exemption
Deduction based on earned income (EI)
oIf a person is claimed as the dependent of another taxpayer, his standard
deduction on his own tax return is limited as follows:
If earned income + $350 is: Then the deduction is:
EI + $350 < $1050 $1050
$1050 < EI + $350 < standard
deduction
EI + $350, not to exceed the standard
deduction
EI + $350 > standard deduction Standard deduction
oStandard deduction 2015: $6,300
oBasically the first section shows that if you make $50 babysitting, then your
deduction is $1050 and then you do not need to file
oThese laws are in place because we don't want to penalize kids who have jobs
Kiddie tax
oIf the dependent is a child under age 19 (or under 24 and a full time student),
the "kiddie tax" applies
oThe child's unearned income above $2,100 is taxed at the parent's rate
oThis deals with the problem of parents transferring money to their children by
the way of setting them up for a lot of unearned income
o"The fruit and the tree cannot be separated"- this basically says that if the
parents own the apartment building (the tree), the rent revenue (fruit) cannot go directly
into the kid's bank accounts- it belongs to the parent and they can gift it to the kid, but
again, this gift cannot be more than 14k
oYou cannot get the rent revenue from your parents unless they give you the
apartment building too
oThere are a bunch of calculations that go into getting to the $2,100 number, but
it ends up coming to the fact that any unearned income under $2,100 will be taxed at a
different rate than your parents, and anything over that will be taxed at their rate
oNote that since this is unearned income, this is not including your paycheck
oThese laws only apply if you are a dependent
Calculations on page 31 and 32 won't be tested
**memorize this page**
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Property Transactions
When we are selling something we have to know how to tax that gain or loss you make
off of it
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