Wiley CPAexcel Exam Review 2014 Focus Notes: Regulation

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 ...