Taxes
The Taxes domain tests federal income tax mechanics: filing status, gross income, adjustments, deductions, credits, withholding, payroll taxes, and capital gains. Questions emphasize the difference between deductions and credits and between marginal and effective rates.
Taxable income and tax
Gross income includes wages, interest, dividends, business income, and most other income. Above-the-line adjustments produce adjusted gross income (AGI). Then the taxpayer subtracts the standard deduction or itemized deductions to reach taxable income. A deduction reduces taxable income; its tax savings equal the deduction times the marginal rate. A credit reduces tax owed dollar for dollar. Refundable credits can produce a refund beyond tax paid. Withholding is prepayment, so a large refund generally means too much was withheld, not a bonus.
Rates and payroll taxes
The U.S. income tax is progressive: brackets apply to slices of taxable income, not the whole amount. Marginal rate is the rate on the next dollar; effective rate is total tax divided by income. FICA includes Social Security and Medicare taxes; employees and employers each pay 6.2% for Social Security up to the wage base and 1.45% for Medicare, with an additional Medicare tax for high earners. Self-employed workers pay both shares through self-employment tax. Long-term capital gains and qualified dividends generally receive preferential rates; short-term gains are taxed as ordinary income.
Worked example
A single filer has $60,000 gross income, $5,000 in above-the-line adjustments, and a $15,000 standard deduction. AGI is $55,000; taxable income is $40,000. Using simplified brackets of 10% on the first $10,000 and 12% on the next $30,000, tax is $1,000 + $3,600 = $4,600. The marginal rate is 12%, while the effective rate on gross income is $4,600 ÷ $60,000 = 7.7%. A $1,000 deduction at 12% saves $120; a $1,000 credit saves $1,000.
Traps
Do not subtract a credit from income or a deduction from tax. Do not apply the top bracket to all income. A refund is not investment gain. Side income can trigger self-employment tax even if no tax is withheld. Basis matters when calculating gain on a sale.