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Ch3 - Chapter 3 Computing The Tax 3.1 Tax Formula 1...

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Chapter 3 Computing The Tax 3.1 Tax Formula 1) Income -Broadly Conceived Includes all the taxpayer’s income, both taxable and nontaxable ---Essentially equivalent to gross receipts It does not include a return of capital or receipt of borrowed funds 2) Exclusions 3) Gross Income The Internal Revenue Code defines gross income broadly as"except as otherwise provided . . . , all income from whatever source derived" Gross income does not include unrealized gains
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Deductions - Individual Taxpayers ----Individual taxpayers have two categories of deductions: Deductions for adjusted gross income (AGI) Deductions from adjusted gross income 4) Deductions For AGI -----Sometimes known as above-the-line deductions On the tax return, they are taken before the ''line'' designating AGI Deductions for AGI include: ----Ordinary and necessary expenses incurred in a trade or business ----One-half of self-employment tax paid ----Alimony paid ----Certain payments to an IRA and Health Savings Accounts ----Moving expenses ----Fees for college tuition and related expenses ----Interest on student loans ----The capital loss deduction, and ----Others 5) Adjusted Gross Income (AGI) AGI is an important subtotal ----Serves as the basis for computing percentage limitations on certain itemized deductions such as Medical expenses Charitable contributions Certain casualty losses ----e.g., Medical expenses are deductible only to the extent they exceed 7.5% of AGI This limitation might be described as a 7.5% ''floor'' under the medical expense deduction 6) Deductions From AGI Deductions from AGI include: ---- The greater of: Itemized deductions, or
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The standard deduction ---- Personal and dependency exemptions A partial list of itemized deductions includes: ---Medical expenses (in excess of 7.5% of AGI) ---Certain taxes and interest ---Charitable contributions ----Casualty Losses (in excess of 10% of AGI) ----Deductions for expenses related to The production or collection of income, and The management of property held for the production of income ----Certain miscellaneous itemized deductions (in excess of 2% of AGI) The standard deduction is the sum of two components: ----- Basic standard deduction Amount allowed is based on taxpayer's filing status ----- Additional standard deductions Available for taxpayers who are ----Age 65 or over, and/or ----Blind ●Two additional standard deductions are allowed for a taxpayer who is age 65 or over and blind Amount allowed depends on filing status BSD ASD--- For taxpayers age 65 or older and/or legally blind Filing status 2009 2010 . Filing Status 2009 2010 . Single $5,700 $5,700 Single $1,400 $1,400 MFJ, SS 11,400 11,400 MFJ, SS 1,100 1,100 HH 8,350 8,350 HH 1,400 1,400 MFS 5,700 5,700 MFS 1,100 1,100 ARRTA of 2009 - Two New Standard Deductions ARRTA of 2009 provides two new, temporary, tax incentives to stimulate home ownership and the sale of autos ---Provisions allow nonitemizers to deduct real property taxes and sales tax paid on purchase of autos as special standard deduction ---Property taxes on a personal residence and sales taxes on a personal auto normally are deductions from AGI
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