CPA Exam — REG (Regulation)Federal Taxation of IndividualsMedium
A client, single, age 60, has gross income of $80,000. They have $10,000 in itemized deductions. The standard deduction for a single person in their age group is $15,700. What is their taxable income?
- A$80,000
- B$69,700
- C$70,000
- D$64,300
Show answer & explanationAnswer & explanation
Correct answer: D. $64,300
Taxable income is calculated by starting with gross income, subtracting any above-the-line deductions to arrive at Adjusted Gross Income (AGI), and then subtracting the greater of the standard deduction or itemized deductions. Since there are no above-the-line deductions mentioned, AGI equals gross income. The standard deduction of $15,700 is greater than the itemized deductions of $10,000, so the standard deduction is used.
Why the other options are wrong
- A. This is gross income, not taxable income.
- B. This incorrectly subtracts itemized deductions, which are less than the standard deduction.
- C. This is an arbitrary incorrect amount.
Taxable Income Calculation
Taxable income is the amount of income subject to income tax after all allowable deductions and exemptions (if any) have been subtracted from gross income.
- Starts with Gross Income.
- Subtracts above-the-line deductions to get Adjusted Gross Income (AGI).
- Subtracts the greater of the standard deduction or total itemized deductions from AGI.
- The final amount is then used to calculate the tax liability using tax tables or rate schedules.
Memory trick: Gross to AGI, then choose your deduction, Standard or Itemized, for your final reduction.