About Me
CPA
1 Regulation (REG)
1.1 Ethics, Professional Responsibilities, and Federal Tax Procedures
1.1 1 Professional ethics and responsibilities
1.1 2 Federal tax procedures and practices
1.1 3 Circular 230
1.2 Business Law
1.2 1 Legal rights, duties, and liabilities of entities
1.2 2 Contracts and sales
1.2 3 Property and bailments
1.2 4 Agency and employment
1.2 5 Business organizations
1.2 6 Bankruptcy
1.2 7 Secured transactions
1.3 Federal Taxation of Property Transactions
1.3 1 Basis determination and adjustments
1.3 2 Gains and losses from property transactions
1.3 3 Like-kind exchanges
1.3 4 Depreciation, amortization, and depletion
1.3 5 Installment sales
1.3 6 Capital gains and losses
1.3 7 Nontaxable exchanges
1.4 Federal Taxation of Individuals
1.4 1 Gross income inclusions and exclusions
1.4 2 Adjustments to income
1.4 3 Itemized deductions and standard deduction
1.4 4 Personal and dependency exemptions
1.4 5 Tax credits
1.4 6 Taxation of individuals with multiple jobs
1.4 7 Taxation of nonresident aliens
1.4 8 Alternative minimum tax
1.5 Federal Taxation of Entities
1.5 1 Taxation of C corporations
1.5 2 Taxation of S corporations
1.5 3 Taxation of partnerships
1.5 4 Taxation of trusts and estates
1.5 5 Taxation of international transactions
2 Financial Accounting and Reporting (FAR)
2.1 Conceptual Framework, Standard-Setting, and Financial Reporting
2.1 1 Financial reporting framework
2.1 2 Financial statement elements
2.1 3 Financial statement presentation
2.1 4 Accounting standards and standard-setting
2.2 Select Financial Statement Accounts
2.2 1 Revenue recognition
2.2 2 Inventory
2.2 3 Property, plant, and equipment
2.2 4 Intangible assets
2.2 5 Liabilities
2.2 6 Equity
2.2 7 Compensation and benefits
2.3 Specific Transactions, Events, and Disclosures
2.3 1 Leases
2.3 2 Income taxes
2.3 3 Pensions and other post-retirement benefits
2.3 4 Derivatives and hedging
2.3 5 Business combinations and consolidations
2.3 6 Foreign currency transactions and translations
2.3 7 Interim financial reporting
2.4 Governmental Accounting and Not-for-Profit Accounting
2.4 1 Governmental accounting principles
2.4 2 Governmental financial statements
2.4 3 Not-for-profit accounting principles
2.4 4 Not-for-profit financial statements
3 Auditing and Attestation (AUD)
3.1 Engagement Planning and Risk Assessment
3.1 1 Engagement acceptance and continuance
3.1 2 Understanding the entity and its environment
3.1 3 Risk assessment procedures
3.1 4 Internal control
3.2 Performing Audit Procedures and Evaluating Evidence
3.2 1 Audit evidence
3.2 2 Audit procedures
3.2 3 Analytical procedures
3.2 4 Substantive tests of transactions
3.2 5 Tests of details of balances
3.3 Reporting on Financial Statements
3.3 1 Audit report content
3.3 2 Types of audit reports
3.3 3 Other information in documents containing audited financial statements
3.4 Other Attestation and Assurance Engagements
3.4 1 Types of attestation engagements
3.4 2 Standards for attestation engagements
3.4 3 Reporting on attestation engagements
4 Business Environment and Concepts (BEC)
4.1 Corporate Governance
4.1 1 Internal controls and risk assessment
4.1 2 Code of conduct and ethics
4.1 3 Corporate governance frameworks
4.2 Economic Concepts
4.2 1 Microeconomics
4.2 2 Macroeconomics
4.2 3 Financial risk management
4.3 Financial Management
4.3 1 Capital budgeting
4.3 2 Cost measurement and allocation
4.3 3 Working capital management
4.3 4 Financial statement analysis
4.4 Information Technology
4.4 1 IT controls and security
4.4 2 Data analytics
4.4 3 Enterprise resource planning (ERP) systems
4.5 Operations Management
4.5 1 Strategic planning
4.5 2 Project management
4.5 3 Quality management
4.5 4 Supply chain management
1 4 Federal Taxation of Individuals Explained

4 Federal Taxation of Individuals Explained

Key Concepts

Gross Income

Gross income includes all income from whatever source derived, such as wages, salaries, interest, dividends, and rental income. It is the starting point for calculating an individual's tax liability. For example, if an individual earns $80,000 in wages and $5,000 in interest, their gross income is $85,000.

Adjusted Gross Income (AGI)

Adjusted Gross Income (AGI) is calculated by subtracting certain allowable deductions from gross income. These deductions include contributions to retirement accounts, alimony payments, and certain business expenses. AGI is a critical figure because it determines eligibility for various tax deductions and credits. For instance, if the individual with $85,000 in gross income contributes $10,000 to a retirement account, their AGI would be $75,000.

Taxable Income

Taxable income is the amount of income subject to tax after accounting for deductions and exemptions. It is calculated by subtracting either the standard deduction or itemized deductions from AGI. For example, if the individual with an AGI of $75,000 takes the standard deduction of $12,950, their taxable income would be $62,050.

Income Tax Rates

Income tax rates are applied to taxable income to determine the tax liability. The U.S. tax system uses a progressive tax rate structure, meaning higher income levels are subject to higher tax rates. For example, for the 2023 tax year, the tax rates range from 10% to 37%, with different rates applying to different portions of taxable income. If the individual with $62,050 in taxable income falls into the 22% tax bracket, their tax liability would be calculated based on the applicable rates for each portion of their income.

Deductions and Credits

Deductions reduce taxable income, while credits reduce tax liability directly. Common deductions include mortgage interest, state and local taxes, and charitable contributions. Common credits include the Child Tax Credit, Earned Income Tax Credit, and Education Credits. For example, if the individual with $62,050 in taxable income qualifies for a $2,000 Child Tax Credit, their tax liability would be reduced by $2,000.

Examples and Analogies

Consider gross income as the "total earnings" before any adjustments. AGI is like the "net earnings" after certain deductions. Taxable income is the "final earnings" subject to tax. Income tax rates are like "graduated fees" applied to different levels of earnings. Deductions and credits are like "discounts" that reduce the final tax bill.

For instance, an individual earning $100,000 in gross income might contribute $15,000 to a retirement account, resulting in an AGI of $85,000. If they take the standard deduction of $12,950, their taxable income would be $72,050. Assuming they fall into the 24% tax bracket and qualify for a $2,500 Education Credit, their tax liability would be calculated based on the applicable rates and reduced by the credit.

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