Federal Individual Income Tax - Income, Deductions, Credits, and Filing Status
Federal Individual Income Tax - Income, Deductions, Credits, and Filing Status tests the classification chain from gross income to taxable income to tax liability. The exam favors items that look like deductions but are adjustments, credits that look interchangeable but differ in refundability, and filing-status facts that change the standard deduction and credit eligibility.
Core rules
- Gross income under IRC §61 includes wages, interest, dividends, rents, royalties, business income, and gains. Exclusions include gifts, inheritances, life insurance proceeds, qualified scholarships, and tax-exempt municipal bond interest.
- Above-the-line deductions reduce gross income to AGI: trade or business expenses, self-employed health insurance, HSA contributions, traditional IRA contributions if eligible, student loan interest, and educator expenses.
- Below-the-line deductions are itemized: state and local taxes subject to the SALT cap, mortgage interest, charitable contributions, and medical expenses above the AGI floor. The standard deduction is an alternative, not an addition.
- Credits reduce tax dollar-for-dollar. Refundable credits can produce a refund; nonrefundable credits generally stop at zero unless a specific carryforward applies.
- Filing status is determined by marital status on December 31 and dependency facts. Head of household requires an unmarried or considered-unmarried taxpayer, a qualifying person, and more than half the cost of maintaining the home.
Worked example
A single taxpayer has $85,000 of W-2 wages, $1,200 of taxable interest, and contributes $5,000 to a traditional IRA. She is not covered by a workplace retirement plan. Gross income is $86,200. The IRA contribution is an adjustment, so AGI is $81,200. Using a $14,600 standard deduction, taxable income is $66,600. The standard deduction is subtracted once; the IRA contribution is not also itemized. If she were covered by a workplace plan, the IRA deduction could be phased out at higher AGI.
Traps
Do not treat the standard deduction as an adjustment to income. Do not assume the child tax credit, American Opportunity Credit, or dependent care credit is fully refundable. Do not claim head of household without a qualifying person. Do not ignore basis in property sales, and remember the $3,000 capital loss limitation against ordinary income. Check IRA deduction eligibility before subtracting it.