MGMT 127A Lecture Notes - Lecture 4: Itemized Deduction, Net Income, Gross Income

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8 May 2016
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1. Lecture 4: continuation of section 1
The individual tax equation (started at the first lecture, all here)
Income broadly conceived
<exclusions>
Gross income
<for AGI deductions>
Adjusted Gross income (AGI)
<greater of standard deduction or net itemized deductions>
< Net exemptions>
Taxable Income
Then you determine the tax liability based on taxable income and filing status
Tax liability
<credits/prepayments>
Other tax
Tax due/ <refund>
Types of deductions
oDeductions can be for AGI or itemized
oEverything you spend money on will fall into one of these four categories:
1. Business (usually for AGI)
2. Investment (usually for AGI)
3. Employee (EE)- when you are paying money in the capacity of an employee (like
the costs to keep your CPA current)
Usually itemized
4. Personal (everything else)- usually itemized
oTwo general rules that can be made about the four categories of expenses with regards
to deductions:
1. Business and investment expenses are usually for AGI deductions and EE and
personal are usually itemized
2. Business, investment, and EE are deductible unless the tax law says they are
not, personal is not deductible unless the tax law says it is
oAll deductions will either be for AGI or itemized
oIt is better to have deductions be for AGI because the lower AGI is, the more tax
benefits
oGov is much more concerned with stimulating the econ through business and
investment payments which is why they are above the line deductions meaning they are for
AGI
oItemized deductions might also be called "from AGI deductions"
oMeals and entertainment- you can deduct half
You can pay medical insurance on a pretax basis (have it come out of your income so then your
income is lower)
For AGI Deductions: (EMBRACES)
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