Inclusions, Exclusions, and Adjusted Gross Income Assessment
Determining a taxpayer’s taxable income is a complex process. A tax paper is required to deduct specific deductions from their gross income to determine the adjusted gross income (AGI). The adjusted gross income thus determined is then deducted allowances for personal exemptions and deductions that have been itemized to arrive at the taxable income for the period (Salisbury, 2016).
A person’s gross income includes one, some or all income earned from business, rental properties, interest, dividends, wages and alimony payments received from a former spouse, capital gains from assets owned and income earned from self-employment among others . Tax payers are permitted by the United States of America Congress to make certain deductions from their gross income to determine their adjusted gross income (AGI). The specific deductions have been identified in Form 1040 issued by the Internal Revenue Service (IRA) (Klemens, 2006).
Adjusted gross Income (AGI) Legislation
The US Congress has permitted various deductions from a taxpayer’s gross income to determine the adjusted gross income (AGI) in a bid to make taxation fair and equitable throughout the country. These deductions are referred to as “adjustments to income” or “above-the –line deductions” and are subject to change every year by the US Congress.
If trade or business carried out by a company does not constitute performance by a taxpayer as an employee, the Internal Revenue Service allows above-the-line-deductions for related expenses that are ordinary and necessary(Salisbury, 2016). These include allowance for salaries for personal services rendered to the company, travelling expenses while looking for new business and rental payments made by a taxpayer for a property for which he has not taken a title or has no equity and is done for purposes of ensuring that the business continued operating (Klemens, 2006).
One of the deductions that have been allowed is educator expenses. Educator expenses is one of the adjustments to income also known as “above-the-line deduction” allowable by the Internal Revenue Service for purposes of computing a taxpayer’s adjustable gross income (AGI) for tax purposes (Salisbury, 2016).
Educational expenses are expenses incurred by eligible educators for participation in professional development courses and materials used in a class room such as computer equipment both hardware and software, books, supplies and other supplemental materials for use in a class room setting. Grade 12 teachers, instructors, counsellors, principals and their aides are some of the professionals classified as educators for tax purposes.
The next above –the –line deductions for determining a taxpayer’s AGI is contributions made to a traditional individual retirement account (IRA). Tax payers do not have to pay tax on IRA accounts because they are tax-deferred. Interest or any other gain made from such accounts is exempt from tax purposes (Salisbury, 2016).
The next item allowable for above-the –line deduction is interest paid on loans taken by students. The next above-the – line deduction are costs incurred by a tax payer to move to take a new job in a different location. This is allowable only if the move from the previous job is more than 50 miles away.
The next above-the-line deduction is alimony payments to a former spouse. Alimony payments are only allowable when they are made under a divorce or separation instructed pursuant to a court judgement (Chodorow, 2011). The recipient of the alimony payment is required to include the amount in their income for tax purposes. Other above-the-line deductions include business expenses incurred by teachers, fee-basis government officials, performing artists and reservists, deductions made on health savings accounts, one half of tax on self-employment, domestic production activities deductions and jury duty pay that is paid to the employer of the juror among others (Ruff, 2007). Adjusted Gross Income.
Justification for the exemptions to taxpayers by the US Congress
There are various reasons which could have informed the decision by the US Congress to grant these exemptions to taxpayers. The first reason is that the US Congress ensured that there is equity and fairness in tax payments to the Internal Revenue Service. Exemption on alimony payment protects the recipient from having to pay taxes twice on the same income (Salisbury, 2016).
This is because the recipient is taxed on the amount received as alimony income and so if the payer is also taxed then that would be tantamount to double taxation on the same income. The US Congress by granting the exemptions ensured taxes are broad based as to include as many people as possible. This was aimed at ensuring the government generates adequate revenues to meet its financial obligations. The exemptions were also aimed at minimising tax burden on the individual tax payer (Reichert, 2016).
By exempting one half of tax on self-employment, the US Congress ensured that self-employed people are not overtaxed sine their employed counterparts get part of their tax revenues met by their employers. By granting the exemptions, the Congress ensured taxes are enforced in a manner that facilitates voluntary compliance by a wide range of taxpayers.
The exemptions are meant to communicate the message that the government is fair in its tax collection and that no one is unfairly treated in tax payment (Koch, 2011). This encourages tax payers to pay taxes willingly without compulsion or coercion from the tax authorities. The exemptions were also made to ensure tax collection was efficient and hence achieved its overall objectives.
The exemptions was aimed at minimizing the cost of tax collection as the exemptions are easy to understand and apply in determining the adjustable gross income. The exemptions were also aimed at ensuring equity in tax application such that no particular citizen or group of citizens could perceive themselves as bearing an unequal burden of paying taxes as compared to other groups of citizens in the USA (Chodorow, 2011).
The US Congress was also motivated by the desire to ensure taxes were administered in a neutral manner. The exemptions were meant to ensure that no race, group or sector was favoured by taxes over another and that no group, sector or race could use taxes as the basis for collective or individual decision making in either investment, social life or any other matter.
The exemptions were also aimed at ensuring taxes were predictable and inevitable to ensure tax payers have information before hand to enable they pay taxes on time and without coercion from the Internal Revenue Service (Klemens, 2006). The Exemptions could also have been undertaken with the aim of achieving certain objectives. For instances, exempting interest on student loans could have been motivated by the aim of encouraging young people to pursue higher education without the fear of incurring huge debts by the time they finish their studies.
Educational expenses exemption on eligible educators for participation in professional development courses and purchase of materials used in class rooms such as computer equipment both hardware and software, books, supplies and other supplemental materials could have been motivated by the desire to grow investment in education. By giving exemptions for educator expenses, the congress encouraged investment in schools and colleges to improve accessibility and quality of education in the sector (Klemens, 2006).
The exemptions could have been motivated by a desire to ensure tax administration was simple foe every tax payer to understand. Adjusted gross income to be considered. This encouraged compliance and improved willingness of taxpayers to pay taxes on time and reduce tax evasion. The exemptions were also aimed at fostering fair and equitable distribution of wealth in the country. By ensuring no tax payer was billed for more than their fair share of taxes, the congress ensured that people retained their fair share of gross income. This ensured income will be distributed equitably with the country (Klemens, 2006).
Additional exemptions that can be challenged easily
Even though the US Congress has granted various exemptions, there are various exemptions that can easily be challenged. One of the exemptions that can be challenged is exemptions on educator expenses. Educator expenses that can be challenged include participation in professional development courses, books, supplies and supplemental materials. Schools, colleges and universities charge students fees at market rates and even where they are given grants and donations, they are given on budgets which have been prepared beforehand.
By granting exemptions, the congress is favoring one sector over others. This is because these expenses are factored in the financial statements of the schools they work for. Most educational institutions that employ educators are also for profit making and hence giving exemptions will only increase their revenues (Chodorow, 2011).
On the other hand, costs that educators incur on attending personal development courses are ideally aimed at enhancing their knowledge, skills and competencies. The educators henceforth are able to assume bigger responsibilities and earn higher incomes. By exempting educator fees, the revenue service is ideally granting educators in one profession better terms that their counterparts in other sectors.
Exemptions in alimony payment to a former spouse is another exemptions that can be challenged (KATZEFF, 2011). This is mainly because alimony payments occur as a consequence of breakup of the family unit. This exemption encourages couples to break up to earn alimony income from a former spouse. It common in the country to find one spouse earning alimony income from multiple former spouses. This is likely to lead to laziness as many people will opt for his revenue source instead of working hard to generate their own income. This exemption encourages families to break up and take their marriages to court to have the divorces registered for alimony payment (KATZEFF, 2011).
Exemptions on interest on student loans is also another ill-advised exemption. Exempting interest on student loans ignores the effect of passage of time on the value of money. Money lend to students loses value due to passage of time due to inflation and other factors. The interest is supposed to compensate for the effects of inflation on the time value of money. Giving exemptions to performing artists is unfair as what they earn inform of income is similar to what other professional also earn from their professions (Koch, 2011).
Additional exemptions that are agreeable
There are various additional exemptions that US Congress has granted that are agreeable. One of the more agreeable exemptions is deductions on medical and dental expenses more than 7.5% of a taxpayer’s adjusted gross income. This expenditure is agreeable because it promotes the health of tax payers and it is classified as below-the –line deduction.
Health saving account deductions are agreeable because the funds saved will improve accessibility of healthcare services to all Americans and especially the most vulnerable members. Moving expenses are agreeable because they reduce the living standard of the tax payer at the time of moving without increasing their disposable income. This exemption is therefore agreeable (KATZEFF, 2011).
Deductible part of self-employment income is agreeable because this exemption goes a long way in promoting entrepreneurship in the country. With the rising numbers of unemployed people who are employable, any efforts to promote self-employment would assist in reversing unemployment in the country. The exemption on penalty for early withdrawal of savings is also an agreeable deduction. This is mainly because the penalty levied is punitive to the taxpayer and taxing him again would be being unfair on the part of the internal revenue service (Chodorow, 2011).
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