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CHAPTER 3 TAX DETERMINATION; PERSONAL AND DEPENDENCY EXEMPTIONS; AN OVERVIEW OF PROPERTY TRANSACTIONS LECTURE NOTES TAX FORMULA COMPONENTS OF THE TAX FORMULA 1. The following formula is used to compute taxable income for individual taxpayers (see Figure 3-1 in the text ): Income (broadly conceived) Exclusions = Gross income Deductions for adjusted gross income (AGI) = AGI Deductions: Greater of standard deduction or itemized deductions and Personal and dependency exemptions = Taxable income a. Computation of tax . Once taxable income has been computed, the additional tax due to the government or the refund due to the taxpayer can be computed. Tax on taxable income (from Tax Table or Tax Rate Schedules) Credits and prepayments = Amount owed (or refund due) b. Most individuals use the Tax Table for computation of the tax. 2. Income (broadly conceived ). This includes all income of the taxpayer, both taxable and nontaxable. a. This concept of income is essentially equivalent to gross receipts, but does not include a return of capital or a receipt of borrowed funds. 3-1
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3-2 2009 Comprehensive Volume/Instructor’s Guide with Lecture Notes b. Many receipts (e.g., borrowed funds) are not reported on the tax return at all. 3. Exclusions . Congress has chosen to allow taxpayers to exclude certain items of income for various reasons (see Chapters 4 and 5 for details). Some examples are listed below. See Exhibit 3-1 in the text (Partial List of Exclusions from Gross Income) for other examples. Accident insurance proceeds Child support payments Gifts Inheritances Life insurance paid on death of insured Welfare payments 4. Gross Income . Section 61(a) of the Code defines gross income broadly as “all income from whatever source derived.” Some examples of gross income items are listed below. See Exhibit 3-2 in the text (Partial List of Gross Income Items) for other examples. Alimony Compensation for services Dividends Embezzled funds Gains from illegal activities Prizes Salaries Tips and gratuities 5. Deductions for Adjusted Gross Income . Included are trade or business expenses, reimbursed employee business expenses, one-half of self-employment tax paid, alimony paid, traditional IRA and Keogh contributions, forfeited interest penalty, moving expenses, capital losses, qualified interest on education loans, and other items. a. Deductions for AGI are deductible whether the taxpayer itemizes or not , while itemized deductions will benefit the taxpayer only if total itemized deductions exceed the standard deduction. b. Deductions for AGI are also designated as “above-the-line” deductions. This reflects that the deductions are claimed before (“above-”) AGI (“-the-line”) is reached. They are also referred to as “page 1 expenses” since they are reported on page 1 of Form 1040. 6.
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This note was uploaded on 03/17/2009 for the course ACC 483 taught by Professor Susankuniyoshi during the Spring '08 term at University of Phoenix.

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