What is the difference between taxable income and adjusted gross income?

What is the difference between taxable income and adjusted gross income

When doing your taxes, you will find that there is a difference between taxable income and adjusted gross income. Understanding the difference can be useful in various areas. For instance, if you are applying for a loan or for certain kinds of benefits, they may want your adjusted gross income. So, if you supply the wrong amount, you can risk being denied for the loan or benefit.

Taxable income encompasses all your earnings. This means all the income you received for the entire year. This income can be from earning wages, social security, and any other source of income. Any source that generates money paid to you is included in your taxable income. So, if you work and earn tips or bonuses, they are included as well. It is basically a total of every source of income. However, this is generally not the amount of money you will be taxed on because you still have deductions that will be subtracted from this amount.

Adjusted gross income is your taxable income minus any deductions. This is where you get to take credit and apply it against your taxable income. There are standard deductions that are applied first. This means that there is a generic amount of money that you can subtract from your taxable income. This reduces the amount of money you have to pay taxes on. However, some people choose to do an itemized deduction. This is appropriate when your itemized deduction amount will exceed your standard deduction. So, if you have a lot of mortgage interest and medical expenses (just to name a few), you may get a larger amount than the standard deduction. This means you have to pay taxes on a smaller amount of your income.

So, when you are planning to do your taxes, know that you have to report every kind of income you received during the year. This is your taxable income. Then, you have to take a look at things you have paid for throughout the year that could be used as a deduction against your taxable income. When you subtract the two, that is your adjusted gross income.

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Can I Give Someone $1 Million Tax-Free?

Can I Give Someone 1 Million Tax-Free

You might think you can give money or property away without needing to document it on your tax paperwork, but that is not the case. At this point, you likely want to know whether or not you can give someone $1 million tax-free.

To get an accurate answer, it’s vital you know federal tax laws and consider how much you have given away in the past. As of 2018, the IRS allows you to give up to $11.1 million in your lifetime. You must also consider the $15,000 annual limit on tax-free gifts.

How It Works

The good news is that you won’t have to pay taxes even if you give someone a gift worth $20,000 in one year. The way it works is that the value of gifts over the annual limit count toward your lifetime limit. In simple terms, you can give someone $1 million in cash or property as a gift without paying as long as you did not exceed your lifetime limit.

What counts as a gift?

If you would like to know what the IRS counts as gifts, this section points you in the right direction. Any cash or property you give goes toward your annual or lifetime limit, but selling the property under the market value also counts as a gift. For example, you have a car worth $20,000 and sell it to someone for $10,000. You have given the person a $10,000 gift as far as the IRS is concerned.

If you mow the lawn for your neighbor, you have given your neighbor a gift worth what most lawn care services would charge for doing it. Medical bills and college tuition are exempt from this rule so you can give people a hand with their medical bills or student loans without paying a share to the tax man.

Final Thoughts

You can give anyone a tax-free gift of $1 million as long as you have not yet gone over your lifetime limit. The law requires you to log the value of all gifts you provide others so that it can decide when your tax obligations activate. The good news, though, is that you won’t have to keep track of your gifts if you are not a millionaire.


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What You Need to Know About the 4506-Transcript Income Verification

What You Need to Know About the 4506-Transcript Income Verification

If you are a financial institution such as a credit union, mortgage lender or bank, you may be able to take advantage of a recap regarding how 4506-Transcripts may assist you.

The IRS grants wage-income transcripts as well as W-2 returns over the last decade, retirement income arrangements, 1099 income, and mortgage-bank interest paid-received on the 4506-Transcript.

Confirming the client’s income and earnings are a crucial portion of the underwriting, verification, risk management, and quality control process most professional services firms and financial institutions face.

The 4506-Transcript helps with legal or financial fraud security and can aid:

• Bankruptcy lawyers in verifying the client’s earnings and income in regards to a Chapter 7 or 13 petition.
• Financial institutions in closing a loan or underwriting a mortgage in less time.
• Divorce lawyers in establishing and verifying a client’s take-home pay required to fulfill spousal or custody support demands.
• Validate information entered into a public record or background examination.

Barriers to Third-party 4506-T Appeals

It was evident that something was awry in regards to lender appeals for 4506-T transcripts ever since mid-2015. Because of internal policy modifications, the IRS gave back a few of the 4506-T requests along with this rejection message: “Limitations.”

This “Limitations” code implies a warning signal is on the borrower’s data. The red flag can also result from errors amidst the borrower’s tax, income, Social Security number or documentation that was used to qualify for the credit.

Freddie Mac lets lenders know that such red flags are as serious as any other fraud indicator. This “limitations” code is how the IRS takes a stand against fraud and keeps personal data safe from unauthorized admittance.

Additional means of complying

With borrowers trying to qualify using only W-2 income, not every financial institution will demand a complete IRS transcript. This is as long as they possess proof of your W-2 income.

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What Borrowers Should Know About A 4506-T

What Borrowers Should Know About A 4506-T

If you’re applying for a mortgage or other loan, your lender may ask you to sign an IRS Form 4506-T. This form allows the lender to request your tax transcripts directly from the IRS for the last three years. A tax transcript is a summary of the information you provided on your return such as your income and deductions.

Many people are understandably concerned about signing this document. Allowing someone to review your tax information gives them access to a lot of personal information. You have no legal obligation to sign a Form 4506-T and can refuse to do so. However, your lender has the right to require you to sign the form as a condition of your loan application. If you don’t sign the form, they can deny your application.

The reason lenders ask for this form is to prevent fraud. Loan applicants may lie about their income on their application. In some cases, they may even go as far as to fake pay stubs or tax returns. A Form 4506-T allows the lender to see what you really filed with the IRS to remove any doubt about the information you gave.

You should also be aware that falsifying a mortgage application may constitute mortgage fraud. If you lie about your income, the lender may decide to refer you to federal prosecutors. Of course, mistakes and misunderstandings can also happen. For example, you might provide your income before deductions, while the lender wants your adjusted gross income. As long as there is a reasonable explanation with no intent to deceive, your lender will work with you to correct your application.

Similarly, a Form 4506-T can raise red flags with the IRS. If you haven’t filed your tax returns, the IRS may wonder why someone is asking to see them. They may decide to conduct an audit, and if they find unreported income, they could charge you with tax evasion.

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How Long Does it Take to Process a Mortgage Loan?

How Long Does it Take to Process a Mortgage Loan

Thinking about applying for a mortgage? If so, you may be wondering how long the process actually takes, from beginning to end. While the length of time may vary based on the extenuating factors of your case, there are some general guidelines to keep in mind as you enter this new and exciting phase.

Understanding the Process

There are several steps involved in obtaining a mortgage: the pre-approval process, the appraisal of the property in question, and the processing of the actual loan. Here, we’ll talk you through each of these points to help you understand what’s involved.

Before you start actively searching for a home, it’s important to know how much you can potentially spend. That’s why you should visit your local bank to get pre-approved before signing with a real estate agent. The lender will check your credit history, debt-to-income ratio, and other factors to decide how much you can credibly borrow. Bear in mind that this pre-approval can also be recognized by other banks–you don’t have to borrow from the same one that gave you the rating.

Once you’ve made an offer on a home and it’s been accepted by the seller, an appraiser will have to come in to ensure that the property is worth what’s being paid. During this time, an underwriter will be looking over the details of your mortgage, checking for any holes and discrepancies.

If all the pieces come together, closing day is the day you receive the actual loan. You’ll meet with a lawyer, the mortgage officer, and the real estate professionals to sign the final paperwork and obtain the keys to your new home.

The Bottom Line
The length of time from the pre-approval to closing day is usually two to three months, but there’s always a slight risk of delay. This is why it’s important to get started as soon as possible if time is an important factor.

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