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Finance - taxable income

Computing taxable income

Thomas Franklin arrived at the following tax information.

Gross salary $46,910

Interest earnings $225

dividend income $80

one personal exemption $3,650

itemized deduction $7,820

adjustments to income $1,150

What amount would Thomas report as taxable income?

Comments for Finance - taxable income

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Aug 04, 2012
Compute taxable income
by: Staff


Part I

Your federal tax is determined based on your taxable income.

To calculate your taxable income, follow these four steps:

       1. Calculate Gross Income
       2. Calculate Adjusted Gross Income
       3. Calculate Deductions
       4. Calculate Taxable Income

   • Calculate GROSS INCOME

     Gross Income = Gross salary + Interest earnings + Dividend income

       Gross salary: + $46,910

       Interest earnings: + $225

       Dividend income: + $80

           Gross Income: $46,910 + $225 + $80 = $47,215


     Adjusted Gross Income = Gross salary - Adjustments to Income

       Total Gross Income (computed above): + $47,215

       Adjustments to Income: - $1,150

           Adjusted Gross Income: $47,215 - $1,150 = $46,065

   • Calculate Deductions

     There are two options: 1) Standard Deduction and exemptions, or 2) Itemized Deductions and examptions.

     The majority of people filing a 1040 use the Standard Deduction. However, for this problem we will use Itemized Deductions because that information is given in the problem statement.

     Deductions = itemized deduction + one personal exemption

       Itemized Deduction: $7,820

       one personal exemption: $3,650

           Deductions: $7,820 + $3,650 = $11,470

   • Calculate Taxable Income

     Taxable Income = Adjusted Gross Income – Deductions

       Adjusted Gross Income (computed above): $46,065

       Deductions (computed above): $11,470

           Taxable Income: $46,065 - $11,470 = $34,595

>>> the final answer: Taxable Income = $34,595


Aug 04, 2012
Compute taxable income
by: Staff


Part II

For your information

GROSS INCOME includes the following:

Wages / Salaries
Income from a profession (such as a medical practice)
Income from a business
Employee Awards
Interest Income (such as interest banks accounts, bonds, loans, etc.)
Investment Gains and losses (on sale of investment)
Income from Property Rental
Pensions (including Social Security)
Tips and Bonuses
Gambling and Prizes

ADJUSTMENTS TO INCOME include the following:

Contributions to an IRA or Keogh retirement plans
Penalties for early withdrawal of savings
Alimony payments.
Certain tax shelters

ITEMIZED DEDUCTIONS include the following:

Interest Payments for a Home Mortgage.

Real estate property tax

A partial deduction Medical and dental expenses (types of deductable medical expenses are the cost of doctors’ services, the cost of prescription medications, hospital expenses, medical insurance premiums, hearing aids, glasses, and medical travel that has not been reimbursed or paid by others.

However, only part of your medical expenses is deductable. The deductable portion of your medical expenses is that portion that exceeds 7.5% of your adjusted gross income.

State and local income tax

State and local personal property tax.

Thanks for writing.


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