MASTER: "Taxable Income" Formula

Annotations:

• -Income includes both taxable & nontaxable income, but NOT a return of capital or borrowed money. Ex) If the TP buys a bond w/ accrued interest, the TP will have to pay for both the bond and the accrued interest. However, when the TP receives the next interest payment from the bond, the amount paid for the accrued interest will be deductible, since that part of the interest payment is simply a return of capital. Likewise, when the bondholder sells or redeems the bond, the bond purchase price can be deducted from the sale proceeds to determine the taxable gain or deductible loss. Similarly, if a taxpayer borrows $10K, that amount does not have to be reported since it is NOT income.

1. - Exclusions

   Annotations:

   • -Types of income that Congress has chosen NOT to tax & thus can be excluded. Referred to as "nontaxable income".
   1. = Gross Income

      Annotations:

      • Gross income includes income earned in the US and from foreign sources. Income earned in foreign territories is typically taxes by the foreign country as well. Therefore, US law tries preventing double taxation by allowing various deductions/credits to offset taxes paid to other countries. -Global vs. Territorial Systems of Taxation
      1. - Deductions 'For' AGI

         Annotations:

         • -Deductions FOR Gross Income -A.k.a. adjustments to gross income, "above-the-line" deductions -These are deductions subtracted from gross income to arrive at AGI
         1. = Adjusted Gross Income (AGI)

            Annotations:

            • = GI - (Adjustments to GI) -AGI is an important intermediate quantity, in that certain personal deductions are available if they are "greater than a % of AGI", establishing a "floor" for deductions, etc. -Only the deduction amounts > the floor are deductible. -Some deductions are limited by a "ceiling", also equal to a certain "% of AGI"
            1. - Deductions 'From' AGI ("Greater of...")

               Annotations:

               • -Deduction "From" AGI: exp's, which are not normally deductible, but for which Congress has made exceptions. -Standard Deduction is typically higher than Itemized Deduction. Standard Deduction depends on TP's filing status. -Standard Deduction was created by Congress to ease tax burden on low-income individuals. -Itemized Deductions: personal expenditures which Congress has allowed to be deducted from GI. -Some itemized deductions allow for the deduction of exp's related to the production or collection of income, such as the management of income-producing property ("non-business expenses"). Allowed because the TP is not directly involved in operating the business (ex - investments)
               1. Itemized Deductions
                  1. Schedule A
               2. Standard Deductions
               3. - Exemptions

                  Annotations:

                  • -Each TX providing > 50% of his own support may claim the Personal Exemption. -TP's can also claim a Dependency Exemption for each dependent if the TP provides > 50% of the dependent's support & the dependent is NOT claimed by anyone else.
                  1. Personal
                  2. Dependency
                  3. = Taxable Income
         2. Form 1040
         3. Schedule C
   2. Form 1040
   3. Schedule C