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Unformatted text preview: 29 Chapter 3 Individual Taxation — An Overview SUMMARY OF CHAPTER A basic understanding of the method used to calculate the tax liability is a necessity in the study of federal income taxation. The basic tax formula for individuals is as follows: Gross Income − Deductions for Adjusted Gross Income = Adjusted Gross Income − Greater of Itemized Deductions or Standard Deduction − Personal Exemptions = Taxable Income × Tax Rate = Taxable Liability − Tax Credits and Prepayments = Net Tax Due or Refund Components of the Tax Formula ¶3001 Gross Income Gross income includes all items of income from whatever source unless specifically excluded. Examples of gross income include compensation for services, interest, rents, royalties, dividends, and annuities. An individual’s income from business is included in gross income after deducting the cost of goods sold. ¶3015 Deductions for Adjusted Gross Income To arrive at adjusted gross income, all deductions specifically allowed by law are subtracted from gross income. Some of the items allowed as deductions for adjusted gross income include (1) trade or business expenses, such as advertising, depreciation, and utilities, (2) moving expenses, (3) reimbursed employee expenses, such as travel, transportation, and entertainment expenses, and (4) losses from the sale or exchange of property. ¶3025 Adjusted Gross Income In the tax formula there are deductions for adjusted gross income and then deductions from adjusted gross income. It is important to take these deductions in the proper categories. Adjusted gross income is an important subtotal because certain other items are based on the amount of adjusted gross income. ¶3035 Itemizing v. Standard Deduction Itemized deductions allowed as a deduction include: medical expenses, state and local income taxes, property taxes, mortgage interest, charitable contributions, personal casualty losses, and miscellaneous employee expenses. The standard deduction is a fixed amount based on the filing status of the taxpayer and is adjusted annually for inflation. Taxpayers subtract the larger of their itemized deductions or the standard deduction. For 2008, the standard deduction amounts are $10,900 for married taxpayers filing jointly and surviving spouses, $5,450 for single taxpayers, $8,000 for heads of households, and $5,450 for married taxpayers filing separately. Chapter 3 30 CCH Federal Taxation — Comprehensive Topics ¶3045 Personal Exemptions Individual taxpayers can reduce their income tax liability by properly claiming exemptions for themselves, their spouses, and their dependents. For 2008, taxpayers are allowed a $3,500 deduction for each personal exemption....
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- Spring '10
- Taxation in the United States