On August 23, 2018

Income taxes are complex but logical

By Kevin Theissen

The Internal Revenue Service estimates that taxpayers and businesses spend 6.1 billion hours per year complying with tax-filing requirements. To put this into perspective, if all this work were done by a single company, it would need about 3 million full-time employees and be one of the largest industries in the U.S.

As complex as the details of taxes can be, the income tax process is fairly straightforward. However, the majority of Americans would rather not understand the process, which explains why more than half hire a tax professional to assist in their annual filing.

The tax process starts with income, and generally, most income received is taxable. A taxpayer’s gross income includes income from work, investments, interest, pensions, as well as other sources. The income from all these sources is added together to arrive at the taxpayer’s gross income.

What’s not considered income? Child support payments, gifts, inheritances, worker’s compensation benefits, welfare benefits, or cash rebates from a dealer or manufacturer.

From gross income, adjustments are subtracted. These adjustments may include alimony, retirement plan contributions, half of self-employment, and moving expenses, among other items.

The result is the adjusted gross income, or AGI.

From adjusted gross income, further deductions are subtracted. Taxpayers have two choices: the standard deduction or itemized deductions, whichever is greater. The standard deduction amount varies based on filing status.

Itemized deductions can include state and local taxes, charitable contributions, the interest on a home mortgage, certain unreimbursed job expenses, and even the cost of having your taxes prepared, among other things.

Once deductions have been subtracted, the personal exemption is subtracted. For the 2017 tax year, the personal exemption amount was $4,050, regardless of filing status.

The result is taxable income. Taxable income leads to gross tax liability.

The IRS reports that about 40 percent of taxpayers use tax preparation software.

But it’s not over yet. Any tax credits are then subtracted from the gross tax liability. Taxpayers may receive credits for a variety of items, including energy-saving improvements.The result is the taxpayer’s net tax.

Kevin Theissen is the principal of Skygate Financial Group.

Do you want to submit feedback to the editor?

Send Us An Email!

Related Posts

Lessons abroad, Vermont recharge

June 12, 2024
Building a Killington Dream Lodge, part 17  What a difference a year can make. I was really excited about the changes taking place in our Killington ski lodge while I was away attending Schiller College Paris my sophomore year and Graz Center for the second summer. Meanwhile, in Vermont once the roof was done, Dad…

June: ‘bloom whereyou are planted’

June 12, 2024
June is usually thought of as the beginning of summer. School is out, we open our summer houses and maybe plan a vacation. I was given a book called “The Big Book of 30-Day Challenges” written by Rosanna Casper. It sat on a table for a long time with me just looking at it every…

Summer vacation for students in the 50s

June 12, 2024
Whether it’s 2024 or 1954 kids share the enthusiasm that comes from being on school vacation during the summer months. However, the way that their free time is spent has few similarities. As often happens when my weekly breakfast group gets together we take a “look back” at various things and recently we recalled what…

Secrets of early summer

June 12, 2024
Shhhh. Don’t tell anybody, but this is one of my all time favorite weeks of the year. The one where I make myself so exhausted that I am asleep before my head even hits the pillow. The one where I am up with the sunrise for no reason except that I cannot wait for the…