2011 CCH. All Rights Reserved.
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:
Deductions for Adjusted Gross Income
= Adjusted Gross Income
Greater of Itemized Deductions or Standard Deduction
= 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 speci
cally 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 speci
cally 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
xed amount based on the
ling status of the taxpayer and is adjusted annually for
ation. Taxpayers subtract the larger of their itemized deductions or the standard deduction. For 2011, the standard
deduction amounts are $11,600 for married taxpayers
ling jointly and surviving spouses, $5,800 for single taxpayers,
$8,500 for heads of households, and $5,800 for married taxpayers
¶3045 Personal Exemptions
Individual taxpayers can reduce their income tax liability by properly claiming exemptions for themselves, their
spouses, and their dependents. For 2011, taxpayers are allowed a $3,700 deduction for each personal exemption.