Question

1. What is the difference between adjusted gross income and taxable income?

2. How is taxable business income calculated?

3. What is the combined incremental tax rate?

Answer 1

(1) In the United States income tax system, adjusted gross income(AGI) is an individual's total gross income, which includes wages, dividends alimony, capital gains, business income, retirement distributions and other income minus certain adjustment/payment you have made during the year, such as moving expenses student loan interest  or contributions to a traditional individual retirement account or a health saving account.

AGI is often the starting point for calculating tax bill.

AGI is the basis on which you might qualify for many deductions and credits.

While taxable income refers to the base upon which an income tax system imposes tax.

Taxable income is the amount of income used to calculate how much tax an individual or a company owes to the government in a given tax year.

Taxable income includes wages salaries, bnuses, and tips, as well as investment income and unearned income

It is generally described as AGI less standard deduction or itemized deductions and personal exemption.

(2) Businesses subtract their expenses from their revenue to determine business income, then take deduction to arrive at their taxable income.

First step in calculating taxable business income for a business is to determine gross revenues.This figures includes gross sales, factoring in allowances for items like discount and returns. To this figure you need to add other revenue such as interest received and profits from the sale of assets or investment.

Second step is- subtract cost of goods sold for retailers and wholsalers, sales are derived from the resale of goods  purchased from suppliers. Whereas some businesses provide services.

Final step in calculating business taxable income is to deduct allwable expenses from the amount remaining after the cost of goods sold is subtracted from gross revenues.These expenses include rent, interest on borrowed money, utilities, repairs and fees for services such as accounting and payroll processing . Other expennses are wages, payroll taxes and the cost of retirement plans and other employees benefits. companies can also take a deduction for the depreciation of assets.

Keep in mind that taxable income can be negative if the firm fails to generate enough revenue to offset all expenditure and so suffers a loss.

(3) Incremental tax describes a tax system in which the tax percentage that a person pays increases based on their income level.This is also called a progressive income tax or a marginal rate tax.

In an incremental tax system, income levels are sorted into tax brackets.Each bracket pays a different percentage of their gross income to the government.

The combined incremental  tax rate is that applies to an additional amount of taxable income.