Answer
The solution is that gross income is \[\$87,490\], adjusted gross income is \[\$85,290\] and taxable income is \[\$68,465\].
Work Step by Step
Gross income is the income from wages, tips, interest or dividends from investments, unemployment compensation, profits from a business, rental income and even game show winnings.
To compute Gross income, the following formula can be used:
\[\begin{align}
& \text{Gross}\ \text{Income}=\ \text{Wages}+\text{Interest} \\
& =\ \$86,250+\$1,240\\&=\$87,490\end{align}\]
For calculating the gross income, wages and interest have been added.
Adjusted gross income is figured by taking gross income and subtracting certain allowable amounts, known as adjustments. These untaxed portions of gross income include contribution to certain retirement accounts and tax-deferred savings plans, interest paid on student loans and alimony payments.
To compute adjusted gross income, the following formula can be used:
\[\begin{align}
& \text{Adjusted}\ \text{Gross}\ \text{Income}=\ \text{Gross}\ \text{Income}-\text{Adjustments} \\
& =\ \$87,490-\$2,200\\&=\$85,290\end{align}\]
Adjustable gross income is figured by subtracting adjustments from gross income.
Taxable income is the amount of income used to calculate how much tax an individual owes to the government in a given tax year.
Working Note:
The question requires to compute taxable income on the greater among the standard deduction or the itemized deduction or an itemized deduction. In the above case, the standard deduction is \[\$5,950\]. The following formula can be used for itemized deduction:
\[\begin{align}
& \text{Itemized}\ \text{Deduction}=\text{Interest}\ \text{on}\ \text{Home}\ \text{Mortgage}+ \\
& \text{Contribution}\ \text{to}\ \text{Charity}+\text{State}\ \text{Taxes} \\
& =\$8,900+\$2,400+\$1,725\\&=\$13,025\end{align}\]
To compute taxable income, the following formula can be used:
\[\begin{align}
& \text{Taxable}\ \text{Income}=\ \text{Adjusted}\ \text{Gross}\ \text{Income}-\left( \text{Exemptions}+\text{Deductions} \right) \\
& =\$85,290-\left(3,800+13,025\left(\text{Working Note}\right)\right)\\&=\$68,465\end{align}\]
Taxable income is figured by subtracting adjustments and deductions from adjusted gross income.
Itemized deduction is figured by adding interest on home mortgages, contribution to charity and state taxes.
The solution is that gross income is \[\$87,490\], adjusted gross income is \[\$85,290\] and taxable income is \[\$68,465\].
