CPA Exam — REG (Regulation)Federal Taxation of IndividualsMedium
A taxpayer, single, age 45, is preparing their tax return for the current year. They earned $75,000 in W-2 wages and had $2,000 in unreimbursed employee business expenses. They also contributed $6,000 to a traditional IRA and paid $1,500 in state income taxes. What is their Adjusted Gross Income (AGI)?
- A$67,500
- B$69,000
- C$75,000
- D$65,500
Show answer & explanationAnswer & explanation
Correct answer: B. $69,000
Adjusted Gross Income (AGI) is calculated by taking gross income and subtracting above-the-line deductions. Unreimbursed employee business expenses and state income taxes are generally itemized deductions, not above-the-line deductions for most taxpayers.
Why the other options are wrong
- A. This incorrectly subtracts state income taxes, which are generally an itemized deduction.
- C. This is the gross income before any deductions.
- D. This incorrectly subtracts both unreimbursed employee business expenses and state income taxes, which are generally itemized deductions.
Adjusted Gross Income (AGI)
AGI is an intermediate calculation of income used to determine eligibility for various tax credits and deductions. It is calculated by taking gross income and subtracting 'above-the-line' deductions.
- AGI is a crucial figure on the tax return.
- Above-the-line deductions reduce AGI directly.
- Many deductions and credits are limited or phased out based on AGI.
Memory trick: Gross Income Minus Above-the-Line, AGI's the Tax Line.