Formula for Determining Federal Income Tax Due

There is a uniform formula for determining individual federal income tax liability. The more complex an accounting issue, the more beneficial it is to analyze the problem using the basic accounting equation. The same approach applies to tax planning. The best way to begin analyzing a tax issue is to draw a mental picture of the income tax formula that every individual taxpayer uses:
Gross Income
– Above-the-Line Deductions
= Adjusted Gross Income
– Standard or Itemized Deductions
– Exemptions
= Taxable Income
x Rate (Ordinary, Capital, AMT)
= Gross Tax
– Tax Credits
- Prepayments
= Net Tax

Tax Formula for Computing Taxable Income

Form 1040 - Page 1

Different types of income receive different tax treatment. Not all income is taxed. To understand how and when income is taxed, one must be familiar with the terms “realized income” and “recognized income.” For income to be realized, there must be some measurable transaction. Under the widely acknowledged all-inclusive rule, once income is realized, it is recognized on Form 1040, unless it is specifically excluded from taxation by action of Congress or the courts. However, knowing that income is taxable does not address the issue of how it will be taxed.
Different types of taxpayer expenditures receive different tax treatment. As evidenced by the tax formula, many taxpayer expenditures reduce taxable income. In contrast to the “all-inclusive” rule for recognizing income, tax deductions for amounts spent by taxpayers are considered excluded from income absent specific legislative action. This is sometimes known as the “legislative grace doctrine.”
Tax planning generally involves reducing taxable income or reducing the effective tax rate. Reducing what a taxpayer owes can be accomplished by reducing taxable income through the exclusion or deferment of income or inclusion or acceleration of deductions; or by reducing the effective tax rate through splitting income into other years, converting it to more favorably treated forms of income, or generating tax credits
Tax Planning Tips

Key Tax Numbers for 2015

Last Updated May 2, 2015