Apply The Rules For Inclusions And Exclusions

Apply The Rules Associated With Inclusions And Exclusions To An Indivi

Apply the rules associated with inclusions and exclusions to an individual's gross income and apply another set of code rules to determine a taxpayer's AGI. Note: Completing a tax form requires specific steps that need to be executed in a sequence. The assessments in this course are presented in a sequence and must be completed in order. Incorrect entries in previous assessments will result in incorrect entries in future assessments. Do not complete Assessment 3 until you have submitted and received faculty feedback for Assessment 2.

Paper For Above instruction

The Internal Revenue Service (IRS) code provides a complex framework of rules regarding the inclusions and exclusions of income, which are fundamental to determining a taxpayer's gross income and, subsequently, the Adjusted Gross Income (AGI). Understanding these rules is essential for accurate tax reporting and compliance with federal law. This paper critically analyzes the application of these rules, exemplified by a detailed scenario involving the Weavers, a married couple, to illustrate their practical implementation within the context of individual income tax return preparation.

First, it is important to understand the distinction between gross income and taxable income. Gross income encompasses all income received by an individual—wages, interest, dividends, capital gains, and other sources—before any deductions or exclusions. The Internal Revenue Code (IRC) specifies certain income types that are explicitly excluded from gross income, such as municipal bond interest, gifts, inheritances, and certain fringe benefits, which are integral to the calculation of taxable income (IRS, 2022). Conversely, income inclusions are straightforward: wages earned, interest received, and other taxable income are listed accordingly on the tax return forms.

In the provided scenario, Jacob and Taylor Weaver’s gross income includes Taylor’s part-time earnings of $31,000 and interest income of $6,575 from a local bank. Their income is subjected to IRS rules which specify that certain income, despite being received, may be excluded from gross income based on its nature; for example, life insurance proceeds are excluded. For the Weavers, the primary inclusions are straightforward, but attention must be paid to specific deductions and exclusions that impact their AGI calculation.

Next, the application of exclusion rules is pivotal. For example, scholarships, certain employment benefits, or gifts might be excluded, but in the scenario, the relevant exclusions are mostly associated with deductions or credits rather than explicit income exclusions. The mortgage interest of $12,246 and property taxes of $12,230 are deductible expenses that reduce taxable income but do not directly affect the gross income calculation—though they are crucial for itemized deductions.

The IRS stipulates that income must be correctly classified and reported to ensure compliance. For example, the Weavers’ charitable donations of $4,500 are deductible as itemized deductions, as are the mortgage interest and property tax payments, which are deductible under Schedule A. These deductions, however, do not alter the gross income but are used to calculate total itemized deductions, thereby affecting taxable income and ultimately, the tax liability.

Furthermore, education expenses, such as Taylor’s tuition and fees of $6,011 reported on Form 1098-T, are subject to specific rules for deductions or credits (American Opportunity Credit or Lifetime Learning Credit). These credits are claimed subsequently on the tax form, reducing the overall tax liability, but they do not directly influence the AGI calculation unless certain adjustments are made.

The scenario also involves deductible expenses related to moving, child care, and health insurance. The $435 for moving truck rental and $8,000 for new siding are capital expenses or improvements that may influence itemized deductions or capital gains calculations but do not directly impact gross income. The family’s health insurance premium payments of $7,500, combined with deductibles and co-payments of $2,550, may be deductible if the expenses qualify as itemized deductions, but are not included in gross income calculations directly.

After establishing the classification of income and allowable exclusions, taxpayers can proceed with the calculation of AGI. The AGI is computed by taking gross income and subtracting specific adjustments detailed in the IRS instructions, such as educator expenses, student loan interest, alimony paid, and health savings account deductions (IRS, 2022). For the Weavers, pertinent adjustments might include the tuition and fees deduction or education-related credits, which are often taken as adjustments or credits in the tax calculation.

Applying these rules, the calculation of the Weavers’ AGI involves summing the income sources: wages and interest, then subtracting qualified adjustments. For example, if the family qualifies for an education deduction or credit, these are factored in. Their total income before adjustments totals $37,575 ($31,000 wages + $6,575 interest). If they qualify for a tuition and fees deduction of up to $4,000, it would reduce their gross income to an adjusted figure, which then serves as the basis for further calculations.

The final step involves correctly entering all these details into the IRS Form 1040, following the prescribed sequence: reporting income, applying exclusions and adjustments, calculating AGI, and then determining tax liability. Precision is essential, as errors in initial entries affect subsequent calculations. The process involves interpreting the IRS instructions, understanding the connection between income, deductions, exclusions, and adjustments, and careful form completion.

In conclusion, applying the IRS rules for inclusions and exclusions accurately is fundamental in determining a taxpayer’s gross income and AGI. This process requires understanding the nature of income, excludable items, deductible expenses, and allowable adjustments. The scenario of the Weavers illustrates this complexity but also demonstrates that meticulous application of IRS rules ensures correct tax calculation and compliance. As tax laws evolve, continual learning and attention to IRS guidance are necessary for accurate tax practice.

References

  • Internal Revenue Service. (2022). Publication 17: Your Federal Income Tax for Individuals. IRS.
  • Internal Revenue Service. (2022). Publication 526: Charitable Contributions. IRS.
  • Internal Revenue Service. (2022). Publication 502: Medical and Dental Expenses. IRS.
  • Internal Revenue Service. (2022). Publication 970: Tax Benefits for Education. IRS.
  • IRS.gov. (2023). Instructions for Schedule A (Form 1040): Itemized Deductions. Retrieved from https://www.irs.gov/forms-pubs/about-schedule-a
  • American Institute of CPAs. (2021). Tax Practice Series: Understanding AGI. AICPA.
  • National Society of Accountants. (2022). Basics of Individual Income Tax Preparation. NSA Publications.
  • Tax Foundation. (2022). How the U.S. Tax System Works: A Guide for Beginners. Tax Foundation Reports.
  • Congressional Research Service. (2021). The Tax Gap and Compliance Strategies. CRS Reports.
  • U.S. Department of the Treasury. (2023). Tax Policy and IRS Guidance. Treasury.gov.

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