Federal Taxation of Individuals
Federal Taxation of Individuals
This domain tests how you compute an individual's taxable income and tax: inclusions and exclusions, deductions for and from AGI, credits, filing status, and the parallel AMT and NIIT regimes.
Core rules
- Gross income is all income from whatever source derived unless excluded; common exclusions include gifts, inheritances, qualified scholarships, and tax-exempt interest. Capital gains retain character and stack on top of ordinary income.
- Above-the-line deductions reduce AGI (HSA, IRA, student loan interest, half SE tax); itemized deductions (SALT capped, mortgage interest, charity, medical above 7.5% AGI) reduce taxable income only if they exceed the standard deduction.
- §199A QBI deduction is up to 20% of qualified business income, limited by taxable income and, for specified service trades, phased out at higher incomes.
- Credits reduce tax dollar-for-dollar; refundable credits (EITC, part of CTC and AOTC) can generate refunds. Phaseouts raise effective marginal rates.
- NIIT: 3.8% on the lesser of net investment income or MAGI over $200,000 single/$250,000 MFJ. AMT adds back preference items and phases out the exemption.
Worked example
Single taxpayer, 2024: $57,600 wages, $2,000 interest, $5,000 long-term gain, $14,600 standard deduction. Taxable income = $50,000; ordinary taxable income = $45,000. Ordinary tax = $1,160 + 12% × ($45,000 − $11,600) = $5,168. The $5,000 gain stacks above $45,000; $2,025 fills the 0% bracket up to $47,025, and $2,975 is taxed at 15% = $446. Total tax ≈ $5,614. The gain is taxed in layers; it does not convert ordinary income to capital gain.
Traps
Mixing deductions for AGI with itemized deductions; forgetting the QBI deduction or its wage/UBIA limits; taxing all income at the top bracket; applying the 0% capital-gain rate to gains stacked above the threshold; ignoring NIIT and AMT; treating a state refund as income when the prior deduction produced no tax benefit.