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111% Table Layout Charts SmartArt Review Paragraph Styles AaBbcDdEe AaBbCcDd Aa8bCcDdEe AaBbCcDc AaB TitleNo Spacing Heading 1 He Normal 425 Time Value of Money, Opportunity Cost, and | 4 Income Taxes Worksheet FP/100 Version 1 Income Taxes Each year you will need to file a federal income tax return by April 15h While you may use software or a tax preparation professional to help you complete your return, there are still some terms of which you should have a basic understanding. Respond to the following to demonstrate your understanding. Each response should be at least 50 words. 8. Explain the differences between taxable income and adjusted gross income. Write response here.> In your own words, define tax deduction, exemption, and tax credit. 9.Explanation / Answer
1) The adjusted gross income is the Gross income minus specific deductions applicable such as pension payments and premium paid for health insurance . Further when the itemized deductions and certain exemptions are deducted from the adjusted gross income, the taxable income is calculated. This is the income value on which tax liability to be paid is calculated.
2) Tax deductions are certain specific deductions which are allowed to be deducted from the gross income to arrive at the taxable income. For example a standard deduction is a deduction which reduces tax liability. On the other tax exemptions are certain incomes such as interest from certain bonds floated by government on which tax need not be paid as the income is tax exempt, so such incomes are tax exempted.
Tax credits work differently and are like extra points which can be used to set off current tax liability. For example if a person has paid more income tax than due in a certain year, he earns a tax credit which he can carry forward and set off the next year’s liability against the carried forward tax credit.
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