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

Retirement plan contributions--IRAs, Keoghs, SEP, SIMPLE, etc.

Health Savings Account (HSA) deduction

Educator expenses

 

Moving expenses
= Equals =
Adjusted gross income (AGI)
- Minus -
Standard deduction

OR
Itemized deductions (may be limited based on AGI)
Qualified mortgage interest, investment interest 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"  
= Equals =
Income tax liability
*The Jobs and Growth Tax Relief Reconciliation Act of 2003 provides 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 2008. Previously dividends were taxed at ordinary income rates. Absent further legislative action, qualifying dividends will again be taxed as ordinary income beginning in 2009.