Chapter 3 NotesI) Structure of the US 1040 (the individual income tax long form) - The individual income tax return isn’t quite arranged exactly like the opening formula in your text, but this is a conceptual framework for the tax formula. The actual tax return is arranged as -Part 1: Add Items in Income SectionRealized income (mostly) that is not specifically excluded from taxation. This section includes income from wages, business, farming, rents and royalties, income credited frompass through entities like partnerships and trusts, investment income, gains and losses from sales of investment and business assets, and other miscellaneous income. Income from business (sole proprietorship), rents and royalties, and farming are reduced to a net amount (revenue minus allowable deductions) that is reported on page 1 of the return. Each of those activities requires a separate attached income statement form.Part 2: Subtract Items in Other Deductions for Adjusted Gross Income SectionThese are special deductions FOR adjusted gross income (listed at the bottom of page 1 of the US 1040) that are either not connected with business/rent/royalties/farming or do not directly offset income from those sources. Part 3: = AGI (Adjusted Gross Income): very important subtotal of the individual income tax return; certain tax benefits like deductions and credits may be limited depending uponthe level of adjusted gross incomePart4: Itemized or Standard DeductionTaxpayer then has a choice of deducting either-----Itemized Deductions(specifically enumerated deductions allowed by Congress; these are mostly of a personal, as opposed to business or investment, nature but some investment and most unreimbursed employment related expenses would be included here). Notethat high-income taxpayers now lose a portion of their itemized deductions.OR Standard Deduction(flat deduction that depends on taxpayer’s filing status)Taxpayer deducts the higher of the two, but married taxpayers filing separately must bothuse either itemized deductions or the standard deduction.Part 5: Subtract Personal and Dependency Exemptions. These are flat dollar deductions for the primary taxpayers (2 in case of a married joint return) and any qualifying dependents. Notethat higher income taxpayers now lose all or a portion of their personaland dependency exemptions.