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Lecture 14

ACCT40610 Lecture Notes - Lecture 14: Adjusted Gross Income, Filing Status, Itemized Deduction

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O' Brien

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Chapter 14
Filing status:
o Reflects marital and family situation.
o Affects calculation of taxable income.
o Determines rates at which income is taxed.
MFJ or MFS if married on the last day of the year.
MFJ (married filing jointly) rates:
o If spouse incomes are similar, single rates generate lower overall tax
marriage penalty.
o If spouse incomes are dissimilar, married rates generate lower overall
tax marriage bonus.
o MFJ rates also apply to Surviving Spouse status
o A widow/widower with a dependent child for two years after death of
MFS (married filing separately) rates
o Less favorable than single rates.
Head of Household filing status.
o Used if the taxpayer maintains a home for either a child (need not be
dependent) or dependent relative.
Single filing status.
o Default filing status for unmarried individuals.
Taxable Income Computation
o Step 1: Calculate total income.
Total income includes:
Salary, wages, fringe benefits.
Net business income.
o Income from sole proprietorship.
o Income from partnership or S corporation.
Investment income.
o Interest.
o Dividends.
o Capital gains.
o Rental income.
o Step 2: Calculate adjusted gross income (AGI).
Adjusted gross income (AGI) equals total income less specific
above-the-line deductions.
AGI is an important number because many deductions and
credits are limited by reference
to AGI.
o Step 3: Subtract itemized deductions or standard deduction.
Subtract the greater of:
Allowable itemized deductions.
Standard deduction.
Itemized Deductions
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