Tax Formula - Income (broadly defined)
- Exclusions
_____________________
Gross Income
- Deductions (for AGI)
______________________
Adjusted Gross Income
- Deductions (from AGI)
(greater of either Total Itemized
or Standard Deduction !and!
- Personal Exemptions
- Dependency Exemptions
______________________
Taxable Income
[Tax Calculation]
__________________________
Tax on Taxable Income
- Tax Credits
______________________
Tax Due / (Tax Refund)
Income (Broadly Defined) - Includes all taxpayer's income, both taxable and nontaxable
= gross receipts
does not include return of capital (return of original investment but excess returns aka
profit are included, get to this later)
nor does it include receipt of borrowed funds (for when you take out a loan)
Exclusions - Income that Congress excludes from income tax base (income tax base is
Gross Income)
Gross Income ; realized vs unrealized gains? - Gross Income = Income - Exclusions
Unrealized gains are NOT income
Realized Gains ARE income
Categories of Deductions - Deductions for AGI
Deductions from AGI
Deductions for AGI
what do they include? - above the line deductions
business expenses
ordinary and necessary expenses incurred in a trade or business
,one half of self-employment tax paid
alimony paid
certain payments to an IRA and Health Savings Accounts
CAPITAL LOSS DEDUCTIONS
unreimbursed moving expenses
fees for college tuition and related expenses
interest on student loans
Adjusted Gross Income - Basis for computing % limitations on certain itemized
deductions like
medical expenses
charitable contributions
certain casualty losses
(ex. medical expenses are deductible only to the extent that they exceed 10% of AGI)
(this is a 10% "floor" under the medical expense deduction, so you can only (itemized)
deduct the medical expenses that you incur in a year that exceed 10% of your AGI, so
the total medical expense you can itemize deduct = [medical expenses - 10%(AGI)],
and if this value is 0 or negative then you can't itemize deduct any medical expense
Deductions from AGI - Below the line deductions
Include everything deducted from AGI to get to taxable income:
1) The greater of either:
Total Itemized Deductions -or-
The Standard Deduction
2) Personal Exemptions
3) Dependency Exemptions
Partial list of itemized deductions - Medical expenses (in excess of 10% of AGI)
Certain taxes and interest
Charitable contributions (may not exceed 50% of AGI) - [50% of AGI] ceiling on
charitable contributions
Casualty Losses (in excess of 10% of AGI)
Deductions for expenses related to:
production/collection of income and
management of property held for the production of income
itemized deductions are nonbusiness expenses, as opposed to deductions for AGI,
which are trade or business expenses
Certain miscellaneous itemized deductions (in excess of 2% of AGI)
Standard Deduction - Sum of 2 components:
1) Basic standard deduction
based on payer's filing status
2) Additional standard deductions
available for taxpayers who are
Age 65+ -or-
Blind
, someone 65+ and blind can get 2 additional standard deductions
People who cannot use Standard Deduction - Married, filing separately, and either
spouse itemizes deductions, then both must itemize deductions
Nonresident aliens must itemize
Individual filing return for tax year or less than 12 months because of change in annual
accounting period
BSD Limit for Person Claimed as Dependent - Dependent of someone has a Basic
Standard Deduction limited to greater of:
1050 -or-
350 + earned income (but not exceeding normal Basic Standard Deduction)
normal ASD amount(s) still available for Dependents
Personal and Dependency Exemptions - Personal Exemption Amount = Dependency
Exemption Amount
One per taxpayer (two personal exemptions when married filing jointly)
Exception: individual claimed as dependent by another taxpayer does not receive
personal exemption of their own
Personal Exemption - Taken by taxpayer
Dependency Exemption - Taken by taxpayer by claiming a child/someone you are
responsible for as a Dependent
Personal Exemptions in year of death for joint return - 2 Personal Exemptions allowed
on joint return where one of the spouses died that same year (like any other normal
year for married filing joint return)
Dependency Exemption available for either - Qualifying Child
Qualifying Relative
Qualifying Child tests - Relationship
Residence
Age
Support
Relationship Test (child) - Child must be taxpayer's:
(step)son / (step)daughter
(step)brother / (step)sister
half-brother / half-sister
descendant of such individual (grandchildren, nephews, nieces) -or-
A child who has been adopted, or whose adoption is pending -or-
A foster child
Residence Test (child) - Must live with taxpayer for more than 1/2 the year
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