Tax Outline (Ch. 1-4)
Chapter 1: Overview of the Tax Structure
Section 101 Income Tax Objective pg. 1-3
Tax system raises $ (aka tax revenues) to help cover the government’s annual operating costs.
Section 102 Basic Tax Formula pg 1-3
Basic Tax Formula
Income from all sources
Less: exempt income
___________________________
= Gross Income
Less: Deductions
___________________________
=Taxable Income
Calculation of Taxes Owed (to be refunded)
Taxable Income
X Tax rate
__________________________
= Income tax liability
+Additional taxes
Less: Tax credits and prepayments
__________________________
= Final tax due (refund)
Section 102.01 Deductions versus Credits pg. 1-4
Tax credits; reduce tax liabilities; reduce taxpayers taxes by the amount of the tax credit
Tax deductions; reduce taxable income; reduce the taxpayer’s taxes by the amount of the
deduction times the taxpayer’s tax rate.
Section 103 Individual Taxpayers pg. 1-4
The tax law separates the deductions available to individuals into two categories: deductions
FOR adjusted gross income (AGI) and deductions from AGI.
Tax rates depend on filing status: MFJ, MFS, QW, HOH, Single
Individuals who are required to file an income tax return file one of the following tax returns:
1. Form 1040EZ Income Tax Return for single and joint filers with no dependents
2. Form 1040A, U.S. Individual Income Tax Return
3. 1040 U.S. Individual Income Tax Return
Tax formula for individuals:
Income from all sources
Less: Exempt Income
_____________________
=Gross Income
Less: Deductions for AGI
____________________
=AGI
Less: Deductions from AGI
Itemized deductions or standard deduction
Exemption deduction (personal or dependency)
_____________________
=Taxable Income
x Tax rate
_____________________
= Income tax liability
+ Additional taxes
– Tax credits and payments
______________________
= Final tax due (refund)
Section 104 Gross Income pg. 1-5
The IRS is known as “The Code”
Different gross income sources:
1. Compensation for services, including salary, wages, fees, commissions, fringe benefits,
etc.
2. Gross income from a business
3. Gains from the disposal of property
4. Interest
5. Rents
6. Royalties
7. Dividends
8. Alimony and separate maintenance payments
9. Annuities
10. Income generated from life insurance proceeds
11. Pension
12. Income from forgiveness of debt
13. Share of distributive partnership income and prorata shares of S corporation income
14. Income in respect of a decedent
15. Income from an interest in an interest in an estate or trust
From gross income, taxpayers subtract allowed deductions to arrive at taxable income
Section 104.01 Importance of Gross Income pg. 1-6
When a taxpayer understates gross income by more than 25%, the IRS is given more time to
audit the taxpayer’s return.
Individuals may be allowed or denied a deduction for claiming another person as a dependent
based on the amount of that other person’s gross income
Section 105 Deduction for Individual Taxpayers pg. 1-6
Taxpayers subtract deductions for AGI from gross income to arrive at AGI. Then they subtract
deductions from AGI to arrive at taxable income.
(Corporations, partnerships, estates, and trusts do not compute AGI.)
Section 105.01 Deductions for AGI pg. 1-6
1. Trade and business deductions for business owners
2. Losses on the disposal of business or investment property
3. Deductions related to rental and royalty income
4. Certain contributions to retirement pl
Section 105.02 Deductions from AGI pg. 1-6
Section 106 Standard Deduction pg. 1-7
Section 106.01 Basic Standard Deduction pg. 1-7
MFJ- $12,600
QW- $12,600
