Federal Taxation of Individuals
Core concepts
Individual taxation tests gross income, above-the-line deductions, standard vs. itemized deductions, and credits. Gross income includes wages, interest, dividends, business income, and gains, but excludes certain items (municipal bond interest, gifts, inheritances, life insurance proceeds, qualified scholarships). Above-the-line deductions include retirement contributions, HSA contributions, and student loan interest (subject to limits). Itemized deductions include state and local taxes (capped), mortgage interest, charitable contributions, and medical expenses above a percentage floor.
Credits vs. deductions
Credits reduce tax dollar-for-dollar; deductions reduce taxable income. Know refundable credits (Earned Income Tax Credit, additional child tax credit, American Opportunity Credit partially refundable) vs. nonrefundable (Child and Dependent Care Credit, Lifetime Learning Credit).
Traps
Questions test the standard deduction amount, the treatment of capital gains (preferential rates), and the distinction between for AGI and from AGI deductions. Watch for the self-employment tax and the qualified business income deduction (Section 199A).
Worked rule of thumb
Example: taxpayer has $60,000 wages, $5,000 municipal bond interest, and $3,000 student loan interest. Gross income = $60,000 (municipal interest excluded). AGI = $60,000 − $3,000 = $57,000. Then subtract the standard deduction to reach taxable income.
Key points
- Municipal bond interest excluded from gross income.
- Credits reduce tax directly; deductions reduce income.
- Refundable credits: EITC, additional child tax credit.
- Capital gains taxed at preferential rates.
- Student loan interest is an above-the-line deduction (subject to limits).