Question

Suppose your neighbor earned wages of $63,500, received $1850 in interest from a savings account, received $15,000 in winnings on a television game show, and contributed $7800 to a tax-deferred retirement plan. He is also entitled to a standard deduction of $12,500. The interest on his home mortgage was $6500, he contributed $3000 to charity, and he paid $2100 in state taxes.

Find the gross income, the adjusted gross income, and the taxable income.

Answer 1

The gross income is $80,350, the adjusted gross income is $72,550, and after using the higher standard deduction of $12,500, the taxable income is $60,050.

Step-by-step explanation:

Calculating Gross Income, Adjusted Gross Income, and Taxable Income

To find the gross income, we sum up all the incomes received such as wages, interest from savings accounts, and other earnings like winnings from a game show. Here, the gross income will be:

$63,500 (wages) + $1,850 (interest) + $15,000 (game show winnings) = $80,350.

The adjusted gross income (AGI) is calculated by subtracting any deductions that reduce gross income. In this scenario, that is the contribution to a tax-deferred retirement plan:

$80,350 (gross income) - $7,800 (retirement plan contribution) = $72,550 as the AGI.

To find the taxable income, we must determine if itemizing deductions is more beneficial than taking the standard deduction. The itemized deductions would be the sum of mortgage interest, charitable contributions, and state taxes:
$6,500 (mortgage interest) + $3,000 (charity) + $2,100 (state taxes) = $11,600.
Since the standard deduction of $12,500 is higher than the itemized deductions of $11,600, the standard deduction should be used. Therefore, the taxable income is:

$72,550 (adjusted gross income) - $12,500 (standard deduction) = $60,050 as the taxable income.