Ask a New Question
Menu

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.

A taxpayer earned wages of $43,750, received $160 in interest from a savings account, and contributed $2400 to a tax-deferred retirement plan. He is entitled to a standard deduction of $12,550. The interest on his home mortgage was $2600, he contributed $500 to charity, and he paid $1475 in state taxes.

1 answer

Let's break everything down step by step to calculate the gross income, adjusted gross income, and taxable income for the taxpayer.

Step 1: Calculate Gross Income

Gross income includes all income received, which in this case consists of wages and interest.

  1. Wages: $43,750
  2. Interest from savings account: $160

Gross Income: \[ \text{Gross Income} = \text{Wages} + \text{Interest} = 43,750 + 160 = 43,910 \]

Step 2: Calculate Adjusted Gross Income (AGI)

Adjusted Gross Income is calculated by deducting any contributions to tax-deferred accounts or other adjustments from the gross income.

Contribution to a tax-deferred retirement plan: $2,400

Adjusted Gross Income: \[ \text{AGI} = \text{Gross Income} - \text{Retirement Contribution} = 43,910 - 2,400 = 41,510 \]

Step 3: Calculate Itemized Deductions

To determine whether to use the standard deduction or itemized deductions, we first need to calculate the total itemized deductions:

  1. Home mortgage interest: $2,600
  2. Charitable contributions: $500
  3. State taxes paid: $1,475

Total Itemized Deductions: \[ \text{Total Itemized Deductions} = 2,600 + 500 + 1,475 = 4,575 \]

Step 4: Determine the Deduction to Use

The taxpayer can either take the standard deduction of $12,550 or use the itemized deductions calculated above.

  • Standard Deduction: $12,550
  • Itemized Deductions: $4,575

Since the standard deduction is greater, the taxpayer will use the standard deduction.

Step 5: Calculate Taxable Income

Taxable Income is calculated by subtracting the deduction from the Adjusted Gross Income.

Taxable Income: \[ \text{Taxable Income} = \text{AGI} - \text{Standard Deduction} = 41,510 - 12,550 = 28,960 \]

Summary

  • Gross Income: $43,910
  • Adjusted Gross Income (AGI): $41,510
  • Taxable Income: $28,960

These calculations reveal the taxpayer's gross income, adjusted gross income, and taxable income based on the provided information.