ch14 - Chapter 14 Taxation of Personal Income in the United...

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1 Chapter 14 Taxation of Personal Income in the United States
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2 The Tax Base: Basic Rules for Calculating Taxable Income and Why Much of Income Is Untaxed Taxable Income is the portion of income received by households that is subject to personal income tax. Gross Income is income received during the year from all taxable sources. Adjusted Gross Income (AGI) is Gross Income – allowable adjustments (reimbursed employee business expenses, contributions to special retirement plans, penalties for early withdrawal, and alimony.)
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3 Personal Exemptions Personal Exemptions are pre-set sums of money that taxpayers are allowed to subtract from AGI in the process of calculating taxable income. In 2003, the personal exemption was $3050 for each person per household.
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4 Deductions These are further reductions from AGI. Taxpayers may take the standard deduction or they may itemize. Taxpayers may take whichever amount is greater as they calculate AGI.
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5 The Standard Deduction The Standard Deduction is a fixed dollar amount that may be used to reduce AGI to compute taxable income. It is adjusted for inflation each year and varies with the filing status of the taxpayer. For those filing as singles, the standard deduction in 2003 was $4,750, while for married couples filing jointly it was $9,500.
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6 Itemized Deductions Itemized Deductions are legally deductible expenses from AGI to compute taxable income. The most significant of these are the deductions for: home mortgage interest, major medical expenses, charitable contributions, and state and local income and property taxes.
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7 Sources of Income Subject to Tax Gross Income is the sum of: Wages and Salaries, Interest Income Received, Dividends, Rental Income, Profits from Noncorporate Business Activities, Taxable Pension Benefits, Realized Capital Gains (Special Tax Rates Apply in Many Cases), Unemployment Compensation and a Portion of Other Government Payments to Individuals, Alimony Received, and Miscellaneous Income (e.g., Awards and Prizes).
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8 Adjustments to Gross Income The sum of: Moving Expenses Relating to Start of Work, Contributions to Special Retirement Plans and Medical Savings Accounts, Penalties for Early Withdrawal of Savings, Alimony Paid, A Portion of Self-Employment Tax and Heath Insurance, Miscellaneous Costs for Employees and Businesses, and Miscellaneous Education expenses.
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9 Calculating Taxable Income Adjusted Gross Income = Gross Income – Adjustments to Gross Income Taxable Income = Adjusted Gross Income - Exemptions - Deductions (either Standard or Itemized)
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10 Untaxed Income Less than half of total personal income in the United States is subject to the federal income tax. This can be seen with a simple example. Take a family of four with an income of
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ch14 - Chapter 14 Taxation of Personal Income in the United...

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