Engineering Economic Analysis

Calculationof Taxable Income 373

From gross income, wesubtract any allowable retirement plan contributions and other

,adjustments. The result is adjusted gross income (AGI). From adjusted gross income,

individuals may deduct the following items:2

1. Personal Exemptions. One exemption ($3050 for 2003) is provided for each per-
   son who depends on the gross income for his or her living.3


2. Itemized Deductions. Some of these are:
   (a) Excessive medical and dental expenses (exceeding 71/2%of adjusted gross
   income)
   (b) State and local income, property and personal property tax
   (c) Home mortgage interest
   (d) Charitable contributions
   (e) Casualty and theft losses (exceeding $100 + 10% of adjusted gross income)
   (I) Miscellaneous deductions (some categories must exceed 2% of adjusted gross
   income)
   (g) Car and other business expenses
   (h) Tax benefits for work-related education


3. Standard Deduction. Each taxpayer may either itemize his or her deductions, or
   instead take a standard deduction as follows:..
   (a) Single taxpayers, $4750 (for 2003)
   (b) Married taxpayers filing a joint return, $7950 (for 2003)

The result is taxable income.

For individuals, taxable income is computed as follows:

Adjusted gross income =Gross income - Adjustments

Taxable income=Adjusted gross income

• Personal exemption(s)


• Itemized deductions or Standard deduction (12-1)

Classificatio~ of Business Expenditures

When an individual or a firm operates a business, there are three distinct types of business

expenditure:

1. For depreciable assets.


2. For nondepreciable assets.


3. All other business expenditures.

2The 2003 itemized deduction are limited if adjusted gross income is more than $139,500 ($69,750

if married filing separately.)

3Personal exemptions for high-income taxpayers are being phased out. In 2003, for taxpayers who

are married, filing jointly, the personal exemption is phased out beginning at an AGI of $209,250.

The phaseout is complete at an AGI of $331,750. For single taxpayers, the beginning and complete

phaseout numbers are $139,500 and $262,000, respectively. ..

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