CUMULATIVE INCOME: WHAT ARE THEY, FORMULA AND EXAMPLES - ARTE - 2024

Cumulative income is a legal term that refers to all income that must be added or accumulated in order to incur a tax. The resulting total amount is used to calculate the amount of tax that a person or corporation owes the government in a given tax year.

They are generally described as gross income or adjusted gross income, when deductions or exemptions that are entitled to claim for that tax year are reduced. For an individual, cumulative income includes wages, salaries, bonuses, and tips, as well as investment income and unearned income.

Source: svgsilh.com

For a company, the income it gets from the sale of the products it makes can be mentioned as an example, as well as from the rent of a part of its properties. These two income must be accumulated for the consolidated result to generate the corresponding tax.

The amounts included as income, expenses, and other deductions vary by country or system.

What is cumulative income?

Cumulative income can refer to the income of any taxpayer, whether individuals or companies.

It is important to note that income is more than just wages earned from work. In general, if compensation is received in any form, it likely qualifies as cumulative income.

Also keep in mind that you may be entitled to a variety of tax deductions, credits, and exemptions that reduce the amount of income that is accumulative.

Deductions

In the United States, the Internal Revenue Service offers tax filers the option of requesting the standard deduction or a list of itemized deductions. Itemized deductions can be:

- Contributions to individual retirement accounts.

- Interest paid on mortgages.

- Some medical expenses.

- A variety of other expenses.

The standard deduction is a fixed amount that each tax filer can claim if they don't have enough itemized deductions to claim.

For 2018, individual taxpayers could claim a standard reduction of $ 12,200. However, that reduction will expire at the end of 2024. The figure for married people filing jointly is $ 24,400, between 2018 and 2025.

A taxpayer would need a significantly large amount of medical expenses, charitable contributions, mortgage interest, and other qualifying itemized deductions to exceed these standard deduction amounts.

When businesses file their taxes, they don't report their sales as income. Instead, they subtract your business expenses from sales to calculate your business income. They then subtract the deductions to calculate the cumulative income.

Non-cumulative income

The US Internal Revenue Service considers almost all types of income as cumulative, but considers a small number of income not cumulative.

Some examples include prize winnings, debts that are forgiven by a creditor, gifts, payments made for jury duty, strike benefits, unemployment benefits, etc.

For example, if you are a member of a religious organization where you have taken a vow of poverty and you work for an organization directed by that order, then the income is not cumulative if the income is transferred to that order.

Tax agencies in different countries define cumulative and non-cumulative income in different ways.

For example, while lottery winnings are considered cumulative income in the United States, the Canada Revenue Agency considers that most lottery winnings and other windfall windfalls are not cumulative.

Cumulative income formula

-For an individual

The cumulative income formula is very simple. It can be obtained through the following four steps:

Determine gross income

The individual's total gross income is determined. This includes all sources of income, such as salary / salary, property rental income, proceeds from asset sales, income from other business interests, etc.

Determine exemptions

The total exemptions used by the individual are determined. Different types of tax exemption can include charities, humanitarian aid, educational materials, etc. The list may vary by country.

Determine deductions

The total deductions applicable to the individual's income are determined. The different types of tax deductions can include interest on a student loan, interest on a home loan, medical expenses, etc. This list may also vary by country.

Calculate cumulative income

Finally, the cumulative income formula is calculated by subtracting the total exemptions and deductions from the individual's total gross income, as shown below:

Cumulative Income for Individuals = Total Gross Income - Total Exemptions - Total Deductions.

-For a company

The cumulative income formula for an organization can be derived using the following six steps:

Confirm gross sales

First, the total gross sales must be confirmed by the sales department.

Determine cost of merchandise sold

The cost of the merchandise sold is then determined by the cost department.

Step 3

Next, operating expenses are also calculated through the cost department.

Determine interest paid

The interest paid is calculated based on the interest rate charged and the outstanding debt of the company. Interest expense = Interest rate x Debt.

Determine deductions

Next, all tax deductions and credits applicable to the company are determined.

Calculate cumulative income

Finally, the calculation of the accumulative income equation is made by deducting from the gross sales of the company the cost of merchandise sold, operating expenses and interest paid on debts.

In addition, to arrive at the final income, the adjustment is made for any tax deduction or credits, as shown below.

Cumulative income for companies = Gross sales - Cost of merchandise sold - Operating expenses - Interest expenses - Tax deduction or credits.

Example

Joe earns $ 50,000 annually from his work and earns an additional $ 10,000 in non-job income as it comes from his investments. Therefore, your cumulative income is $ 60,000.

Joe claimed an adjustment to this income of $ 3,000 for contributions he made to a qualifying retirement account. He then claimed the standard deduction of $ 12,200 for his filing status as single. This means your total deductions are $ 15,200.

By lowering the total deductions from your total cumulative income, your taxable income is $ 44,800. Although Joe had $ 60,000 in cumulative income, he will only pay taxes on this final amount.

References

1. Julia Kagan (2019). Taxable Income. Investopedia. Taken from: investopedia.com.
2. B. Maverick (2019). Taxable Income vs. Gross Income: What's the Difference? Investopedia. Taken from: investopedia.com.
3. Wikipedia, the free encyclopedia (2019). Taxable income. Taken from: en.wikipedia.org.
4. Investing Answers (2019). Taxable Income. Taken from: investinganswers.com.
5. Wall Street Mojo (2019). Taxable Income Formula. Taken from: wallstreetmojo.com.