Income Tax Income Tax ConceptsConcepts

chapter (2)chapter (2)

Tax prepaymentsTax prepayments::

- -Employees prepay taxes on wages through payroll-tax Employees prepay taxes on wages through payroll-tax withholdingwithholding. .

- -The tax prepayments are subtracted from the income tax The tax prepayments are subtracted from the income tax liability to determine whether the taxpayer has liability to determine whether the taxpayer has underpaidunderpaid and and owes additional tax with the return (owes additional tax with the return (tax duetax due) or is entitled to ) or is entitled to a refund of a refund of overpaidoverpaid taxes additional tax with the return taxes additional tax with the return ((refund duerefund due))..

Tax creditTax credit::

A tax credit is a direct reduction in the income tax liability. A tax credit is a direct reduction in the income tax liability. Tax credit are treated like tax prepayments, a credit is Tax credit are treated like tax prepayments, a credit is not deducted to arrive at taxable income but is instead not deducted to arrive at taxable income but is instead subtracted directly from the income tax liabilitysubtracted directly from the income tax liability..

Individuals allowed tax credit for certain circumstances Individuals allowed tax credit for certain circumstances and activities, andand activities, and

- -Buildings and land tax (article 12)Buildings and land tax (article 12)

- -Withholding (article 31- item 5)Withholding (article 31- item 5)

Income definedIncome defined

))includes income from all resourcesincludes income from all resources((

Minus:Minus: excluded income (nontaxable income) excluded income (nontaxable income)

Equals: gross incomeEquals: gross income

Minus: Minus: deductiondeduction

Equals: net incomeEquals: net income

MinusMinus :exemptions :exemptions

Equals: taxable incomeEquals: taxable income

* * tax rate (from tax law)tax rate (from tax law)

Equals: income taxEquals: income tax

Minus: - tax prepaymentsMinus: - tax prepayments

- - tax credittax credit

Equals: tax (refund) due with returnEquals: tax (refund) due with return

Case (11)Case (11): :

The following are information for a taxpayer taken from his self The following are information for a taxpayer taken from his self assessment for the ended year 2008assessment for the ended year 2008::RevenuesRevenues::

- -Salary from job during the year =10,000$Salary from job during the year =10,000$ - -Sales for his own shop= 48,000$Sales for his own shop= 48,000$

- -Net profit from shares =22,000$ (note: it is not the nature of Net profit from shares =22,000$ (note: it is not the nature of

his trade)his trade) - -Revenue from farming project= 12,000$Revenue from farming project= 12,000$

- -had a share of the patrimony from relative person =11,000$had a share of the patrimony from relative person =11,000$ExpensesExpenses::

- -Cost of goods sold for his own shop =18,000$Cost of goods sold for his own shop =18,000$ - -Purchased a REFRIGERATOR for the shop amounted= 3000$ Purchased a REFRIGERATOR for the shop amounted= 3000$

and the depreciation rate 10% annuallyand the depreciation rate 10% annually.. - -Rent for the shop= 1200$Rent for the shop= 1200$

- -The depreciation for the car =2000$ only 50% accepted by tax The depreciation for the car =2000$ only 50% accepted by tax officerofficer..

- -Utilities expenses for business (water, electricity, phone)= Utilities expenses for business (water, electricity, phone)= 500$500$

- -Rent of his house =5000$Rent of his house =5000$ - -Medical care expenses for his son (documented) =3000$Medical care expenses for his son (documented) =3000$

- -Cost of school premium for his sons. (American school)= 1400$Cost of school premium for his sons. (American school)= 1400$ - -Living cost for his family =5000$Living cost for his family =5000$

Personal informationPersonal information::

- -Married and has two sonsMarried and has two sons..

- -The owner for his job deduct 100$ monthly paid to tax officeThe owner for his job deduct 100$ monthly paid to tax office..

RequiredRequired::

11 - -total incometotal income

22 - -non taxable incomenon taxable income

33 - -taxable incometaxable income

44 - -deductionsdeductions

55 - -exemptionsexemptions

66 - -net taxable incomenet taxable income

77 - -Tax prepaymentTax prepayment

88 - -accrued taxaccrued tax

99 - -tax value to be paid or refundtax value to be paid or refund

1010 - -Not accepted deductions or exemptions (if any)Not accepted deductions or exemptions (if any)

1111--Prepare the adjusting journal entry for the income tax Prepare the adjusting journal entry for the income tax expense at December 31,2008expense at December 31,2008 . .

1212 - -Assume 20 /01/2009 taxpayer paid income tax . Assume 20 /01/2009 taxpayer paid income tax . Prepare Prepare the payment journal entrythe payment journal entry . .

AnswerAnswer::incomeincome::Salary from job during the year= 10,000$Salary from job during the year= 10,000$Sales for his own shop= 48,000$Sales for his own shop= 48,000$Net profit from shares= 22,000$Net profit from shares= 22,000$ Revenue from farming project= 12,000$Revenue from farming project= 12,000$A share of the patrimony= 11,000$A share of the patrimony= 11,000$

11 - -Total income = 103,000Total income = 103,000$ $ non taxable incomenon taxable income::Net profit from shares =22,000$Net profit from shares =22,000$ Revenue from farming project =12,000$Revenue from farming project =12,000$A share of the patrimony =11,000$A share of the patrimony =11,000$

22 - -non taxable income= 45,000non taxable income= 45,000taxable incometaxable income::Salary from job during the year =10,000$Salary from job during the year =10,000$Sales for his own shop =48,000$Sales for his own shop =48,000$

33 - -taxable income= 58,000$taxable income= 58,000$DeductionsDeductions::

* *Cost of goods sold for his own shop =18000$Cost of goods sold for his own shop =18000$ * *REFRIGERATOR depreciation = 300$REFRIGERATOR depreciation = 300$

* *Rent for the shop= 1200$Rent for the shop= 1200$ * *The depreciation for the car 50%*2000= 1000$The depreciation for the car 50%*2000= 1000$

* *Utilities =500$Utilities =500$44 - -deductions = 21,000$deductions = 21,000$

ExemptionsExemptions::

Resident =3000$Resident =3000$

Rent of house= 2000$Rent of house= 2000$

Medical care =3000$Medical care =3000$

Wife 500$Wife 500$

Sons 1000$Sons 1000$

55 - -exemptions = 9500$exemptions = 9500$

66 - -net taxable income = (58000-21,000-9500)= 27500$net taxable income = (58000-21,000-9500)= 27500$

77 - -Tax prepayment = 100$* 12= 1200$Tax prepayment = 100$* 12= 1200$

88 - -accrued tax =3360accrued tax =3360

1000010000 * *8%8% = =800800

60006000**12%12%= = 720720

1150011500**16%16% = = 18401840

99 - -tax value to be paid or refund = 3360-1200 = tax value to be paid or refund = 3360-1200 = 2160$ to be paid2160$ to be paid

1010 - -Not accepted deductions or exemptions = 10400$Not accepted deductions or exemptions = 10400$

3000$3000$ + +1000$1000$ + +1400$1400$ + +5000$5000$

1111 - -31/12/200831/12/2008 Income tax expense …………… 2160Income tax expense …………… 2160

Income tax payable …………………..2160Income tax payable …………………..2160

( ( record income tax for 2008record income tax for 2008))

1212 - -20/1/200920/1/2009 Income Tax payable ………………..2160Income Tax payable ………………..2160

Cash ……………………………………2160 Cash ……………………………………2160 (record paid off tax for (record paid off tax for

2008)2008)