Before a taxpayer can determine the income dollar amount (“taxable income”) upon which to apply his applicable tax rate, he must calculate his initial income level (“gross income”). Additionally, he must verify which deductions he is entitled to take. The Internal Revenue Code provides guidance in making such determinations by intrinsically outlining the following formula:
Gross Income (Code Section 61)
-(Deductions)
=Adjusted Gross Income (Section 62)
-(Standard Deduction OR Itemized Deductions)
-(Personal and Dependency Exemptions)
=Taxable Income (Section 63)
The taxpaying process begins with a taxpayer’s gross income. From this value, a taxpayer can claim any number of deductions, depending on the taxpayer’s fiscal decision-making, number of dependents, types of expenses, etc. Once all allowable deductions are made, a taxpayer is left with his taxable income. This is the value that is taxed at rates found in the Code’s tax rate schedules. While this formula appears simple, the process of determining one’s taxable income can be time-consuming if the taxpayer has many sources of income or chooses to make itemized deductions. As a result, it is suggested that taxpayers seek professional aid in filing relatively detailed returns.
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