CH3 Resumen - COMPONENTS OF THE TAX FORMULA 1. Taxable...

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COMPONENTS OF THE TAX FORMULA 1. Taxable income computed using a. Cash method a.i. Income is reported when it is received and deductions are taken when the expense is paid b. Accrual method b.i. Income is reported when all the events necessary to fix the right to receive payment have occurred and there is reasonable certainty regarding the amount b.ii. Claim a deduction in the year in which all events that fix the liability have occurred, the liability is reasonably determinable c. Combination of the two GROSS INCOME 1. Gross income a. all items of income from whatever source unless specifically excluded a.i. (compensation for services, interest, rents, royalties, dividends, and annuities), cash, property, services, or even a forgiveness of an indebtedness b. income from business is included after deducting the cost of goods sold c. income is not reported until realized DEDUCTIONS FOR ADJUSTED GROSS INCOME 1. deductions ([deductions from gross income] or [business deductions]) specifically allowed by law like: a. Trade or business expenses, such as advertising, depreciation, and utilities. b. Certain reimbursed employee expenses, such as travel, transportation, and entertainment expenses. c. Moving expenses. d. Losses from sale or exchange of property. ADJUSTED GROSS INCOME 1. Adjusted Gross Income a. The credit for child and dependent care expenses along with itemized deductions for medical expenses, charitable contributions, personal casualty losses, and miscellaneous expenses are all based on adjusted gross income ITEMIZING v. STANDARD DEDUCTION 1. Itemized deductions a. certain expenses of a personal nature that are specifically allowed as a deduction a.i. (medical expenses, state and local income taxes, property taxes, home mortgage interest, charitable contributions, personal casualty losses, and miscellaneous employee expenses) b. For 2011 and 2012, there is no reduction in itemized deductions c. Taxpayers receive a minimum amount of itemized deductions called: c.i. standard deduction (sd)
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c.i.1. (sd) = basic(sd) + additional(sd) c.i.2. Based on the status (married single) c.i.3. fixed amount that simplifies the computation of the tax liability c.i.4. principal benefit to moderate and low income taxpayers since the amount is usually more than the total itemized deductions (they need not report their (id)) c.i.5. the need to audit by the IRS is substantially reduced c.i.6. eliminate lower-income individuals from the tax rolls c.i.7. adjusted annually for inflation Filing Status Basic Standard Deduction 201 Single . .......................................................................................................................... $5,800 Married Filing Jointly . ................................................................................................. 11,600 Married Filing Separately. ............................................................................................ 5,800 Head of Household. ...................................................................................................... 8,500
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CH3 Resumen - COMPONENTS OF THE TAX FORMULA 1. Taxable...

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