Module 35: Individual Taxation

INDIVIDUAL INCOME TAX

Computing Individual Income Tax

Gross income

Adjustments
= Adjusted gross income (AGI)
Standard deduction or itemized deductions
Exemptions
= Taxable income
× Tax rate
= Tentative tax amount
Credits
+ Self-employment tax
+ Alternative minimum tax
= Total tax
Prepayments
= Tax due or refund amount

Accounting Method

Individuals generally use the cash method—Not allowed for

  • Accounting for purchase & sales of inventory
  • C corporations or partnerships with a C corporation partner
  • Tax shelters
  • Business with average gross receipts > $5,000,000

Income is reported when

  • Cash is received
  • Property is received
  • Taxpayer receives an unrestricted right to cash or property (constructive receipt)

Expenses are deducted when

  • Cash is paid
  • A check is disbursed
  • An expense is charged to a credit card

Gross Income

Compensation for Services

Included

  • Wages, salaries, and tips
  • Bonuses and commissions
  • Fees for jury duty
  • Discounts on purchases of employer's merchandise to the extent in excess of gross profit percentage
  • Taxable fringe benefits such as use of company vehicle for personal purposes

Excluded

  • Health insurance paid by employer
  • Cost of group term life insurance up to $50,000 in coverage
  • Employer-provided educational assistance (limited to $5,250)
  • Fringe benefits incurred for employer's benefit, such as housing provided to on-site hotel manager

Prizes and Awards

Generally taxable

Excluded from income ...

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