Accounting and Finance Foundations

Unit 9

Accounting and Finance Foundations Unit 9: Taxes 705

Taxes

Chapter 21

Student Guide

Gross Income: The total income in a year, including income from wages, salaries, commissions, tips, and

interest

Adjusted Gross Income (AGI): You may be eligible to subtract certain adjustments from your gross in-

come. These adjustments can include business losses, retirement plan contributions, alimony payments,

and certain penalties.

Tax Base: Maximum level of earnings on which a tax is calculated

Taxable Income: You subtract the deductions and exemptions for which you qualify from your adjusted

gross income. The amount that remains is the amount on which your taxes are calculated.

Deductions: Expenses that reduce the amount of your taxable income; examples include interest paid on a

home mortgage, dental expenses, property taxes, and state and local income tax. Taxpayers have the op-

tion of claiming a fixed amount called a standard deduction (in 2013, $6,100 for individual taxpayers and

$12,200 for married taxpayers filing jointly). A taxpayer only claims a standard deduction if the amount of

itemized deductions is less than the standard amount. The standard deduction tends to change every year.

Exemption: Amount of income, per person, free from tax. You may claim one exemption for yourself,

unless someone else claims you as a dependent on his/her tax return. You can claim an exemption for

a spouse and any dependents who qualify (in 2013, $3,900 per exemption).

Examples

1. Heather is single and has a gross income of $33,200. She pays $2,100 into an approved retirement
   plan and has deductions totaling $6,800. She has one exemption. What is her taxable income?


2. Caitlyn and her husband Michael have a gross income of $34,000. They file one tax return. They pay
   $3,500 into a retirement plan. Their itemized deductions are $2,000. They claim two exemptions.
   What is their taxable income?

Solution

1. Heather 2. Caitlyn and
   Michael

Gross Income $33,200 $34,000

Adjustment to Gross Income - 2,100 - 3,500

Adjusted Gross Income 31,100 30,500

Deductions - 6,800 - 12,200

24,300 18,300

Exemptions - 3,900 - 7,800

Taxable Income $20,400 $10,500