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10 THE TAX SYSTEM - SECTION 10 THE TAX SYSTEM INDIVIDUAL...

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SECTION 10: THE TAX SYSTEM
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INDIVIDUAL INCOME TAX SYSTEM CALCULATE GROSS INCOME 1. WAGES AND TIPS 2. SALARY 3. SOLE PROPRIETOR PROFITS 4. PARTNERSHIP PROFITS 5. TAXABLE INTEREST 6. DIVIDENDS 7. ROYALTIES 8. RENT PROFITS 9. CAPITAL GAINS 10. SOCIAL SECURITY INCOME (partial) 11. UNEMPLOYMENT COMPENSATION
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INCOME TAXES ARE PAID ON TAXABLE INCOME, NOT GROSS INCOME TO DETERMINE TAXABLE INCOME, VARIOUS ITEMS ARE SUBTRACTED FROM GROSS INCOME
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THE MOST IMPORTANT SUBTRACTIONS ARE: 1. PERSONAL EXEMPTIONS 2. STANDARD DEDUCTION OR ITEMIZED DEDUCTION 3. CONTRIBUTIONS TO IRA’S
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PERSONAL EXEMPTIONS BASED ON NUMBER OF PERSONS IN THE HOUSEHOLD $3,200 PER PERSON (2005) EXAMPLE: FAMILY OF 4 $3,200 X 4 = $12,800 SUBTRACT $12,800 FROM GROSS INCOME BEFORE PAYING TAXES
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SUBTRACT FOR STANDARD DEDUCTION OR ITEMIZED DEDUCTION STANDARD DEDUCTION: SINGLE = $5,000 (2005) MARRIED = $10,000 OR B. LIST ITEMIZED DEDUCTIONS SUBTRACT FOR SOME MEDICAL EXPENSES STATE AND LOCAL TAXES REAL ESTATE TAXES HOME MORTGAGE INTEREST CONTRIBUTIONS TO CHARITY SOME WORK EXPENSES (UNION DUES) THEFT LOSSES AND CASUALTY LOSSES
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GROSS INCOME – EXEMPTIONS – DEDUCTIONS = TAXABLE INCOME FEDERAL INCOME TAXES ARE BASED ON TAXABLE INCOME
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CAPITAL GAINS AND DIVIDENDS ARE TAXED AT SLIGHTLY LOWER RATES THAN OTHER SOURCES OF INCOME UNDER CURRENT LAW MAX TAX RATE = 15% FOR CAPITAL GAINS AND DIVIDENDS
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2005 TAX TABLES MARGINAL TAX RATES RATE SINGLE MARRIED 10% 0 - $7,300 0 - $14,600 15% $7,301 - $29,700 $14,601 - $59,400 25% $29,701 - $71,950 $59,401 - $119,950 28% $71,951 - $150,150 $119,951 – 182,800 33% $150,151 - $326,450 $182,801 - $326,450 35 OVER $326,450 OVER $326,451
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