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Individual Taxation


Submitted By vpartman
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Individual Taxation—An Overview[->0]
After completing Chapter 3, you should be able to:
1. Understand the components of the tax formula.
2. Apply the standard deduction to each filing status.
3. Determine whether an individual qualifies as a personal exemption.
4. Distinguish among the five different filing statuses.
5. Apply the tax tables and the tax rate schedules to taxable income.
This chapter discusses the components of the tax formula and studies the implications of the standard deduction to the taxpayer. Additionally, the qualifications for the personal exemption are analyzed. Finally, the basic filing statuses are examined as well as the role of the tax tables and the tax rate schedules.
Taxable income is computed using one of the two overall accounting methods, the cash method or the accrual method. It is also possible to use a combination of the two overall methods. Under the cash method, income is reported when it is received and deductions are taken when the expense is paid. The accrual method requires income to be reported when all the events necessary to fix the right to receive payment have occurred and there is reasonable certainty regarding the amount. Likewise, accrual basis taxpayers usually claim a deduction in the year in which all events that fix the liability have occurred, provided the amount of the liability is reasonably determinable.
A basic understanding of the method used to calculate the tax liability is a necessity in the study of federal income taxation. That method is as follows:
|Gross Income|
– |Deductions for Adjusted Gross Income |
=|Adjusted Gross Income|
– |Greater of Itemized Deductions or Standard Deduction|
– |Personal Exemptions |
=|Taxable Income|
×|Tax Rate |
=|Tax Liability|
–|Tax Credits and Prepayments |

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