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Tax base* Tax rates= Tax a. Tax base i. Calculate Gross Income
1. Gross income is defined in section 61as all income from whatever source derived, except otherwise provided by the statute
2. Exceptions to gross income defined in section 61 are exclusions ii. Calculate AGI (SS62): AGI = GI - SS62(a) deductions/
1. Subtract any deductions referenced in SS62
2. Don't compete with standard or other itemized deductions Efficiency
iii. Calculate taxable income (SS63): below-the-line deductions
1. TI = AGI - personal/dependency exemptions itemized OR standard deduction(s)
2. TI = GI - SS62 deductions - personal/dependency exemptions - itemized OR standard deduction(s) iv. Use taxable income to calculate tax liability (SS1 progressive marginal tax rate) b. Exclusion, Deduction, Credit i. A tax allowance takes the form of an exclusion if it depends on the source of an economic benefit ii. A tax allowance takes the form of deduction if it depends on the use of the fund iii. A tax credit directly reduces tax liability Deductions/ exclusions
Tax liability reduced by value-stated amount
Stated amount * marginal tax rate
Maybe refundable (if credits > tax liability)
Don't have to itemize
May have to itemize (deductions only)
Tax rate a. Average tax rate: tax liability as a percentage of taxable income b. Marginal tax rate: tax rate applied to the last dollars of income Amount realized - adjusted basis = gain realized a. The tax system ignores unrealized gain. It taxes only realized tax.
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