Question

Please answer the following questions. Post your answers to the Discussions area of the course.

What factors affect taxable income or the difference between gross and taxable income?

What are the primary types of taxable income, as defined by the IRS?

In addition to random selections, what are the four most common signals the IRS look for when selecting taxpayers for audits?

What are the five general tax reduction strategies? Give a brief synopsis of each.

Answer 1

Ans:

Factors affect taxable income:-

The federal tax system is progressive, meaning that generally your tax rate increases as your income increases. The amount of taxable income you have determines what your tax bill will be.

Marginal tax rates determine how taxable income is taxed and those who pay income taxes are divided up into different ranges known as tax brackets. Income in each bracket is then taxed at a specific rate.

The difference between gross and taxable income:-

Gross income includes all of the income a person receives during a year that is not explicitly exempt from taxation.

Whereas taxable income is the amount of income that is actually subject to taxation, after all allowable deductions or exemptions have been subtracted from the gross income.

The primary types of taxable income, as defined by the IRS are 3 types:-

1. Earned income – is generated from either employment or self-employment income;
2. Passive income – is generated via investments;
3. Portfolio income- is generated via investments.

In addition to random selections, what are the four most common signals the IRS look for when selecting taxpayers for audits:-

1. Falling to Report Income;
2. Claiming Too Many Business Expenses;
3. Claiming the EITC(Earned income Tax Credit);
4. Mathematical Errors.

The five general tax reduction strategies are:-

1. Charitable deductions;
2. Earned income tax credit;
3. Contribute to a health savings account;
4. Deductible state and local taxes;
5. Feed the IRA, lower your taxes.