The framework for the application of the Federal income tax to individuals is the tax formula.
Before determining taxable income, you must consider what items are included as taxable income
and what items are allowable deductions. Once you determine the deductions, you need to decide
if any are subject to statutory limitations.
A major component of the tax formula is the standard deduction. The effect of the standard
deduction is to exempt part of a taxpayer's income from Federal income tax liability. In lieu of
claiming itemized deductions, taxpayers will use the standard deduction. The standard deduction
for a taxpayer filing single is $12,000 for 2018.
. Compensation for services provided as an employee is taxable.
Gift from parents
Gifts are excluded from gross income. Therefore, the gift from Emily's
parents is nontaxable.
For payments required under divorce or separation instruments that are
executed prior to January 1, 2019, the deduction for alimony payments is still allowed.
As result, recipients of these alimony payments will include them in taxable income.
Capital gain from
held for 7 months
In general, realized gains from the sale of investments are included in gross
income. Therefore, the short-term gain is taxable.
Interest income from
bonds issued by Xerox
Except for state and local bonds, interest earned on bonds is included in
gross income. Therefore, the interest is taxable.
Amount lost in football
office betting pool
Gambling losses is an itemized deduction and only deductible to
the extent of gambling winnings. Emily's gambling losses are not deductible
because she does not have any gambling winnings.
Contribution to a
The contribution to the IRA is fully deductible. Note: Based on her age,
Emily may deduct up to $5,500 for her IRA contribution (assuming she is not subject
to the IRA contribution limitation).
The following information applies to Emily for 2018.
Interest on bonds