Federal Individual Income Tax Fundamentals


Gross income
  • Salary
  • Alimony received
  • Rental property income
  • Commissions
  • Unemployment income
  • Capital gains on passive activities
  • Bonuses
  • Capital gains or losses on portfolio assets
  • S corporation and partnership income
  • Business income
  • Dividends*
  • Trust and estate distributions
  • Up to 85% of Social Security income
  • Interest
  • Royalties

- Minus -

Adjustments to income


  • Alimony paid
  • Archer medical savings account deduction
  • Self-employment tax (50 pecent)
  • Student loan interest
  • Savings early withdrawal penalties
  • Self-employed health insurance
  • Deduction for qualified higher education expenses (expired for 2008)
  • Retirement plan contributions--IRAs, Keoghs, SEP,SIMPLE, etc.
  • Health Savings Account (HSA) deduction
  • Educator expenses (expired for 2008)
 
  • Moving expenses

= Equals =

Adjusted gross income (AGI)

- Minus -

Standard deduction

or

Itemized deductions (may be limited based on AGI)


  • CCharitable contributions
  • State and local income tax or state and local sales tax
  • State and local real estate and property tax
  • Charitable contributions
  • Medical expenses over 7.5% of AGI
  • Miscellaneous itemized deductions (generally must exceed 2% of AGI)
  • Casualty and theft losses
    

- Minus -

Personal exemptions (may be limited based on AGI)

= Equals =


Taxable income

Calculate tax from tax table or tax rate schedules (and calculate Alternative Minimum Tax (AMT) if applicable).

Use Schedule D to calculate maximum tax on capital gains and qualifying dividends* if appropriate.



- Minus -

Available credits


  • Elderly/disabled
  • Child and dependent care
  • Education
  • Earned income
  • Adoption
  • Foreign tax
  • Child tax credit
  • Retirement savings "savers credit"
  • Foreign tax

= Equals =

Income tax liability



* The Jobs and Growth Tax Relief Reconciliation Act of 2003 and the Tax Increase Prevention and Reconciliation Act of 2005 provide that qualifying dividends paid to individuals by U.S. (and qualified foreign) corporations will be taxed as capital gains. This change applies to dividends received in 2003 through 2010. Previously dividends were taxed at ordinary income rates. Absent further legislative action, qualifying dividends will again be taxed as ordinary income beginning in 2011.