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Unformatted text preview: Chapter 3 Notes COMPONENTS OF THE TAX FORMULA Income Less: Exclusions Gross Income Less: Deductions FOR AGI Adjusted Gross Income Less: (the greater of) Total Standard Deduction OR Total Itemized Deductions Less: Personal and dependency exemptions Taxable Income Tax on Taxable Income Less: Tax Credits Tax Due (or Refund) “Income” includes all of the taxpayer’s income (taxable and nontaxable), but does NOT include a return of capital or receipt of borrowed funds. Example : Dan receives a deposit back from his landlord when he moves out of his apartment in the amount of $600. He then sells stock for $20,000 that originally cost him $8,000. He receives a loan from the bank in the amount of $50,000 to buy a new house. *The only thing that Dan can count as income is the $12,000 gain on the sale of his stock. The $600 deposit and the $8,000 cost of the stock are a RETURN OF CAPITAL. The $50,000 loan is not income as Dan has an obligation to pay it back. Exclusions are certain items that are excluded as income from the income tax base. Examples : child support payments, cost-of-living allowance (military), damages for personal injury or sickness, gifts received, group term life insurance (premium paid by employer, for coverage UP TO $50,000), inheritances, interest from state and local bonds, life insurance paid on death, scholarship grants, social security benefits, veterans’ benefits, welfare payments, workers’ compensation payments Gross Income is all income other than exclusions & does not include unrealized gains. Deductions FOR AGI – deductions to arrive at Adjusted Gross Income. Examples : Expenses incurred in a trade or business, ½ of self-employment tax, unreimbursed moving expenses, contributions to traditional IRAs and certain other retirement plans, Fees for college tuition and related expenses, contributions to Health Savings Accounts (HSAs), Penalty for early withdrawal from savings, interest on student loans, excess capital losses, alimony payments. Itemized Deductions – also referred to as deductions FROM AGI , includes some personal expenditures that are usually not allowed as deductions for taxable income such as medical expenses ( in excess of 7.5% of AGI) , state and local income or sales taxes, real estate taxes, personal property taxes, interest on home mortgage, investment interest, charitable contributions ( may not exceed 50% of AGI ), casualty theft and losses ( in excess of 10% of AGI ), and many others. In addition, expenses related to the production or collection of income and the management of property held for the production of income (known as nonbusiness expenses) that are not connected with an income- producing activity that does not qualify as a trade or business....
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This note was uploaded on 04/10/2011 for the course ACC 330 taught by Professor Sign during the Spring '11 term at S. Alabama.
- Spring '11