 Hello and welcome to the session. This is Professor Farhad. In this session, we would look at computing AGI and this will be a quasi CPA simulation. So on the CPA exam, you might see an exercise like the one I'm going to be working. Mine will be more comprehensive, but you might have a piece of it, but this is a good practice if you are practicing for the exam. Also, this exercise will be helpful if you're taking an income tax course and obviously if you're sending for your CPA exam. As always, please link in with me on LinkedIn. If you haven't done so, YouTube is where I house 1,500 plus accounting, auditing, tax, finance. I cover all these courses. If you haven't subscribed to my channel, please subscribe. On my website, I do have, in addition to my lectures, I do have additional resources. For example, the Excel sheet I'll be using today will be available there. You can download it as well as other information, multiple choice, true, false exercises, 2,000 CPA questions. Please check out my website. StudyPal.co is an artificial intelligence driven study platform that matches you with someone studying for the CPA, CFA or any other exam. They have 80 users in 85 countries and 2,800 cities. So to illustrate the concept of adjusted gross income, we're going to work this example that's going to involve rental vacation income as well as other deductions and income. So the best way to do this is to look at it from an Excel sheet. So I'm going to copy this exercise and take it to an Excel sheet and work it from the Excel sheet. This way we can, there's a lot of computation involved. So let's go ahead and transfer this to an Excel sheet and let's compute adjusted gross income. So that's the individual. She is a single, 40 years old, and they have the following income. So we're going to go through it step by step, starting with salary. Okay, starting with salary. Is salary taxable? Of course salary is taxable. Let's start with that. So we have salary and salary equal to 43,000. So let's first count all the income. Rental of vacation home, $4,000. The home was rented 60 days for 60 days and was used personal days for 60 days and was vacant 245 days. Here we have to determine whether this rental vacation is primarily personal, primarily business, because it makes a difference, or personal slash business. Well, if you don't know the rules for this, please go to my, go to my YouTube or my website where I have a lecture for each one of them. But I can tell you the rules here is in this situation, it's going to be personal slash rental. And the reason is because it was rented more than 15 days. But also the personal use was the greater of 14 days or 10% of the rental days, which is 60 days is more than 14 days. And it more than 10% of six days. Therefore the situation here, the property is personal slash rental. Because it's personal slash rental, there are specific rules we have to follow in determining the income from the taxable income from this property. So simply put, we're going to have a schedule kind of think about we're preparing a schedule schedule for this rental property. And we're going to start with 4,000 of income. Now we're going to determine what expenses do we have for this property? Well, interest on mortgage on home mortgage. That's, that's not interest on vacation home. So here we go. Here's we have interest on vacation home. We have taxes paid on the vacation home. We have utilities and maintenance on the vacation home. And we have depreciation on the vacation home. So those are our 4 expenses. Now we need to know how to compute the expenses because the expenses reduces your income. Now, bear in mind, not bear in mind personal slash rental. It's like a hobby. And when you have a hobby, remember in a hobby, the maximum you can have the maximum losses you can have is zero. So you cannot have losses, but you can report zero zero of nothing because basically you don't have to report any income if you have enough expenses. But if you have more expenses than revenues, well, then you have zero. If you have more revenues and expenses, then you have taxable income. So let's see what we have here under those circumstances. So either we're going to have either income from this rental property. So some of the 4,000 will be taxable or we're going to have zero. We cannot have a negative. We cannot have a loss. Okay, any remaining expenses will be carried for future years. Now also we have to know the ordering of the deduction. First, we start with the interest and the taxes. And the reason why we start with the interest and the taxes is because those are deductibles anyway. Now, how much do we deduct of interest and taxes? There are two ways. There's the IRS method and the court method. I'm going to be using the court method in case you're wondering the other method. How does it work? Well, look at my recordings. Okay, so let me go ahead and say MGT mortgage interest and taxes. How much do we have of those? So I'm going to put the formula here. Mortgage interest and taxes, we have $4,758 for the mortgage plus $1,098 for taxes. Okay, now again, what's going to happen? We have to multiply this by the number of the days we rented this property. We're going to be using relative to the whole year. We only rented the property 60 days. Therefore, we're going to multiply this figure by 60. We're going to assume 365 days, 365 days. So simply put, from the mortgage and the taxes, we are going to deduct 600 and, let me round this, 600 and, oops, sorry. We're going to be 962, let me just do it, $963. I'm going to put a negative sign here this way to indicate its deduction. Okay, now how much of the profit remained? So we're going to be 4,000 minus 963. Well, we still have profit. Now, okay, since we still have profit, we can deduct more. But I just want to let you know that any mortgage, any interest, any interest, any taxes that's not used, because we only used 963, any amount that's not used, we can deduct somewhere else. You're going to see in a moment. Okay, so this is the income remained, income remainder. It means we can still deduct more. After you deduct mortgage and taxes, if you have any utilities, maintenance, then you can deduct those. Well, we have 2,600. Can you deduct the whole thing? No, you cannot, because it's not primarily rental, it's personal slash rental. And simply put, use that 50-50. Therefore, from the utilities and maintenance, you can only deduct half of the amount. And what's half of 2,600? Well, 2,600 times .5. I'm going to put a negative sign this way. It's a deduction. It's 1,300. I have to put a plus sign here, sorry. Okay, there we go. Remainder is 3,300. Now, what's the remainder? So if there's any income remainder, because as long as we have income, if there's any deduction, we can take them. We take this, net it to the utilities and expenses. We still have 1,737. Now, the last thing we deduct is the last thing we deduct. So we took care of the maintenance. The last thing we deduct is depreciation. We have 3,500 of depreciation. How much depreciation we can take? Well, guess what? We can only take up to whatever we have left. So all that we have left is 1,737. So after we take 1,737 minus 1,737, the answer is zero. So simply put, income from the vacation home, income from vacation is zero. Now, if we were able to deduct everything, we would have a loss and we'll be able to deduct the loss. But simply put, since this is personal slash rental income, zero. I'm going to put zero here just to remind you. So it's basically treated as if it's a hobby, because it's a rental slash vacation. So we're done with the rental. Let me just clear this up. So we're done with the salaries, done with the rental. Municipal bond interest, 2,000. Now, remember, municipal bond interest is not taxable. Municipal bond interest is not taxable, so that's really out. It's not taxable. And any interest related to that, because I think we have interest on loan used to buy municipal bond, and this is not deductible. So this is not taxable. That's good. Not deductible. If we're not going to tax you, we're not going to give you the deduction. So those two kind of basically, they're silent in a sense. They are not taxable, not deductible. A dividend from GE 400? Yes, dividend is taxable. So dividend is taxable. 400. I believe this is our total income. Total taxable income. Total income. We're going to get to the taxable income. So we're going to take 30,000, 43,000, the salary plus the dividend, plus zero. Just kind of remind you it's a zero. So this is our think of it as, you can think of this as, since we don't have any adjustments, think of it as adjusted gross income. Adjusted gross income. Now, we do have other deductions. For example, we have interest on the home mortgage. Well, guess what? Can we deduct interest on the home mortgage? Sure we can. On schedule A, we can deduct this. Now, so interest on home. Let me just make this little bigger here. Interest on. Remember, we have interest on home mortgage and we have interest on rental property. So interest on the home mortgage, that's deductible. So that's, I'm going to put it negative just to indicate it's deductible, 8,400. That's minus. We can deduct this. So we're done with interest on the home mortgage. Let's skip the vacation for now. We'll come back and do the vacation with remainder of the vacation. We said interest on the loan is out. Property tax on the home. Yes, property tax on the main home is, that's also deductible on schedule A. I'm going to put main home to differentiate this from, to differentiate this from the rental property, 2,200. We're done with that. Property tax on vacation home. We'll come back to that. State income tax, 3,300. Sales tax, 900. Well, you have to choose between the lower of the two, obviously. So the state sales tax is out. What we have is state income tax. State income tax. And that is 3,300. We're done with that. Cheerable contribution. Okay. That's deductible. That's 1,100. Let's put it in the right place. 1,100. That's done. Tax preparation fee. Tax preparation fee is a miscellaneous itemized deduction. That's no longer based on the tax cuts and jobs act. That's out. Utilities and maintenance. We already took half and the other half is not usable. We cannot use the other half because that's personal depreciation or rental property. We already took care of that. So now all that we have left really is the interest in the property taxes that we did not take on the on the mortgage from the rental property. So remember on the rental property. Let me go back here. Let me get my pen. Okay. Remember on the mortgage mortgage on the mortgage on the vacation home and the property tax on the vacation home. Interest on the vacation home. Those two. Let's compute those two in total. So if we compute those two, it's 4,758 plus 1,080. Those are the total. Now remember, this is the total amount of which we used up 963 for the business. Let me just. 963 was used up. Therefore, what's left that we can use on schedule A is 4,893. So this is going to be mortgage and taxes on rental property. That's the left on rental on rental. Okay. That's going to be amount left, which is 4,893 because we could not use them. You could use those deduction on schedule A and put it as a minus because everything else is a minus. Okay. So those are practically, not practically, those are your deductions, the allowed deduction because we believe we covered everything. Now we could compute taxable income. We can compute taxable income. If we take this amount, well, just if we sum, because it's going to net, if we take including 0, what's that? 06. If we net them out, 07, 07. Our taxable income is 25,506.63 rounding 507. So all I did is I took, you know, the income minus all the deduction, and this is your taxable income. Now this individual is single. You have to look at the total itemized deduction, which is amounted to 19,893. You have to compare this to the standard deduction. If the standard deduction, whatever year you are in is higher, you would use the standard deduction. Otherwise, you would use the itemized deductions because it's a greater than the standard deduction. If you have any questions about this topic or if you'd like to access the Excel sheet or additional exercises and lectures, please visit my website where I have additional resources if you're studying for your CPA, EA, or just studying for your course. Good luck. Stay motivated and study hard.