More than 148 million individual federal income tax returns
were filed for the 2014 tax year.
Source: Individual Income Tax Returns Publication 1304 (Complete Report), IRS.gov, 2/10/17
The federal income tax system is progressive, with higher tax
rates applying as the level of taxable income increases. There are seven tax
rate brackets ranging from 10% to 39.6%.
Income Tax Fundamentals
What is "gross income"?
Your gross income is the total income reported on your tax
return, and includes items such as wages, taxable interest, dividends, and
capital gains. Basically, unless a type of income is specifically excluded by
the Internal Revenue Code, it is included in determining gross income.
Internal Revenue Code (IRC) Section 61(a) defines gross
income as: [...] all income from whatever source derived, including (but not
limited to) the following items:
- Compensation for services, including fees, commissions,
fringe benefits, and similar items
- Gross income derived from business
- Gains derived from dealings in property
- Alimony and separate maintenance payments
- Income from life insurance endowment contracts
- Income from discharge of indebtedness
- Distributive share of partnership gross income
- Income in respect of a decedent
- Income from an interest in an estate or trust
What's not included in gross income? Items that are
specifically excluded from gross income include gifts and inheritances, life
insurance death benefits, scholarships, payments for injury or sickness,
certain employment fringe benefits, certain military pay and benefits, interest
on some state and local bonds, and limited gain on the sale of a principal
residence. In some cases, income is specifically excluded if certain conditions
are met. For example, Social Security benefits may be excluded from income, but
a portion of benefits is included once your income reaches a certain level.
Earnings within certain tax-advantaged savings vehicles like IRAs, 401(k)
plans, and 529 plans are excluded from current income, provided certain
criteria are met.
What is "taxable income"?
You start with your gross income, then subtract your
adjustments to income — sometimes called "above-the-line" deductions — to
determine your adjusted gross income (AGI). Adjustments to income may include
deductions for student loan interest, moving expenses, and contributions to
health savings accounts and traditional IRAs.
You're generally also able to take a standard deduction
amount that's based on your filing status. If you choose, you can itemize
deductions on IRS Form 1040, Schedule A, rather than claiming the standard
deduction. Itemized deductions include deductions for medical expenses,
mortgage interest, state and local taxes, and charitable contributions.
You're also able to claim specific dollar exemptions for
yourself, your spouse (if you are married and file a joint return), and your
dependents. Subtracting adjustments to income, deductions, and exemptions from
your gross income results in your taxable income, which is used to calculate
your federal income tax.
Basic Standard Deduction Amounts
|Married filing jointly or qualifying
|Head of household||$9,300||$9,350
|Married filing separately||$6,300||$6,350
Personal Exemption Amounts
Itemized deductions are limited, and personal exemptions are
phased out, for high-income individuals (for 2017,
individuals filing single with AGI exceeding $261,500;
married individuals filing jointly with AGI exceeding $313,800;
head of household filers with AGI exceeding $287,650;
and married individuals filing separately with AGI exceeding $156,900).
Additional standard deduction amounts are available for those 65 and older or
blind. Special rules apply if you can be claimed as a dependent by someone
Choosing an income tax filing status
Your filing status is especially important because it
determines, in part, the tax rate applied to your taxable income, the amount of
your standard deduction, and the types of deductions and credits available.
Because you may have more than one option, make sure you understand the
qualifications. Your filing status is determined as of the last day of the tax
year (December 31). There are five possible filing statuses:
To use the single status, you must be unmarried or
separated from your spouse by either divorce or a written separate maintenance
decree on the last day of the year.
Married filing jointly
Generally, you must be married and living with your
spouse; you can be married and living apart provided that you are not legally
separated under a divorce decree or separate maintenance agreement. When filing
jointly, you and your spouse combine your income, exemptions, deductions, and
Married filing separately
You must be married on the last day of the year. Using this filing status, you would report only your own income and claim only your own deductions and
Head of household
You must be a U.S. citizen or resident alien for the
entire year and: (1) be unmarried at the end of the year (an exception applies
if you live apart from a spouse and meet certain criteria); (2) maintain a
household for your child, dependent parent, or other qualifying dependent
relative (the household must be your home and generally the main home of the
qualifying individual for more than half of the year); and (3) provide more
than half the cost of maintaining the household.
Qualifying widow(er) with dependent child
To claim this filing status, all of the following must be
true: (1) your spouse died in either the last tax year or the tax year before
that; (2) you qualified to file a joint return with your spouse for the year he
or she died; (3) you have not remarried before the end of the tax year; (4) you
have a qualifying dependent child; and (5) you provide over half the cost of
keeping up a home for yourself and your qualifying child.
Determining your tax
The federal income tax system is progressive, with higher
tax rates applying as the level of taxable income increases. There are seven
tax rate brackets ranging from 10% to 39.6%. A tax rate bracket is the tax rate
that applies to a specified range of taxable income. For example, if you file
as single for 2017,
the first $9,325
of your taxable income is taxed at a rate of 10%, but the next dollar in
taxable income is taxed at a rate of 15%. You'll generally calculate your tax
by looking up your taxable income in a tax table, or by using a tax rate
schedule specific to your filing status.
There are, however, a number of complicating factors in
determining the correct amount of tax. For example, special rules and rates
apply to long-term capital gains and qualified dividends. You might also be
affected by the alternative minimum tax (AMT), rules that apply to a child's
unearned income (i.e., the "kiddie tax" rules), or the 3.8% net investment
income tax that applies on the unearned investment income of some high-income
Fundamentals at a glance