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CFP® Exam Prep: Calculating Taxable Income

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One of the many areas that trips up students on the CFP® exam is calculating things such as AGI and taxable income. The following steps simply provide a framework for you to refer to as you study for the Certified Financial Planner™ exam. Of course, there are many items that you will have to memorize to arrive at things such as AGI and taxable income, but the framework should give you a good foundation.

How to Calculate AGI (Long Version)

1. Add up all sources of income (Gross Income)

2. Subtract all exclusions and deductions from income

3. Arrive at Total Income

4. Subtract adjustments FOR AGI

  • Educator expenses for classroom supplies, up to $250
    • Business expenses for government officials who work on a fee basis, performing artists, and members of the military reserve forces (reservists) who travelled more than 100 miles to perform reserve services
    • Health savings account (HSA) contributions you made with post-tax money
    • Moving expenses for active-duty members of the U.S. Armed Forces
    • The employer portion of the self-employment tax
    • Retirement account contributions for self-employed individuals and small business owners
    • The cost of health insurance premiums for self-employed workers, including dental and long-term care insurance
    • Early withdrawal penalties of savings accounts, like a certificate of deposit (CD)
    • Alimony payments for agreements that took effect before 2019 (the deduction for alimony payments was ended in 2018)
    • Contributions to a traditional IRA, as long as it’s money you already paid income tax on (learn more about how to contribute to traditional IRA)
    • The student loan interest deduction is for up to $2,500 of interest you paid on student loans
    • Tuition and fees for you, your spouse, or a dependent

5. Arrive at AGI

6. Subtract the greater of the Standard Deduction or Itemized Deductions

7. Arrive at Taxable Income

8. Calculate tax due

9. Add any other taxes due

10. Subtracts any credits available

11. Arrive at total tax liability

How to Calculate AGI (Simplified Version)

1. Calculate gross income

2. Subtract exclusions from gross income

3. Subtract adjustments FOR AGI

4. Subtract greater of Standard Deduction or Itemized Deductions

5. Subtract tax credits

6. Arrive at taxable income

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