Find the gross income, the adjusted gross income, and the taxable income. Base the taxable income on the greater of a standard deduction or an itemized deduction.

Question

A taxpayer earned wages of $56,400, received $370 in interest from a savings account, and contributed $7100 to a tax-deferred retirement plan. He had itemized deductions totaling $6790, which is less than the standard deduction of $12,550 for his filing status

Answer 1

To calculate the gross income, adjusted gross income, and taxable income, we will follow these steps:

Step 1: Calculate Gross Income

Gross income includes all income received in the form of money, goods, property, and services that are not exempt from tax.

• Wages: $56,400
• Interest: $370

Gross Income = Wages + Interest = $56,400 + $370 = $56,770

Step 2: Calculate Adjusted Gross Income (AGI)

Adjusted Gross Income is calculated by subtracting certain deductions (such as contributions to a tax-deferred retirement plan) from the gross income.

• Gross Income: $56,770
• Tax-deferred retirement plan contribution: $7,100

Adjusted Gross Income (AGI) = Gross Income - Retirement Contribution = $56,770 - $7,100 = $49,670

Step 3: Calculate Taxable Income

Taxable income is calculated by subtracting either the standard deduction or itemized deductions (whichever is greater) from the Adjusted Gross Income.

• Adjusted Gross Income: $49,670
• Itemized Deductions: $6,790
• Standard Deduction: $12,550

Since the standard deduction is greater than the itemized deductions:

Taxable Income = AGI - Standard Deduction = $49,670 - $12,550 = $37,120

Summary

• Gross Income: $56,770
• Adjusted Gross Income (AGI): $49,670
• Taxable Income: $37,120