User:Fyre4ce/Income tax: Difference between revisions
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| [[Qualified dividend|Qualified dividends]] || [https://www.irs.gov/pub/irs-pdf/f1099div.pdf Form 1099-DIV] box 1b || Form 1040 lines 3a and 3b || Qualified dividends are included in Form 1040 line 3b (ordinary dividends) and fully count as part of Adjusted Gross Income. However, qualified dividends are taxed at a reduced rate, and this calculation is performed further down on the tax return, see | | [[Qualified dividend|Qualified dividends]] || [https://www.irs.gov/pub/irs-pdf/f1099div.pdf Form 1099-DIV] box 1b || Form 1040 lines 3a and 3b || Qualified dividends are included in Form 1040 line 3b (ordinary dividends) and fully count as part of Adjusted Gross Income. However, qualified dividends are taxed at a reduced rate, and this calculation is performed further down on the tax return, see [[User:Fyre4ce/Income_tax#Tax_calculation|tax calculation]]. | ||
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| Long-term capital gains || Generally [https://www.irs.gov/pub/irs-pdf/f1099b.pdf Form 1099-B] or unreported || [https://www.irs.gov/pub/irs-pdf/f1040sd.pdf Form 1040 Schedule D] and Form 1040 line 6 || Long-term capital gains are included in Form 1040 line 6 and fully count as part of Adjusted Gross Income. However, long-term capital gains are taxed at a reduced rate, and this calculation is performed further down on the tax return, see | | Long-term capital gains || Generally [https://www.irs.gov/pub/irs-pdf/f1099b.pdf Form 1099-B] or unreported || [https://www.irs.gov/pub/irs-pdf/f1040sd.pdf Form 1040 Schedule D] and Form 1040 line 6 || Long-term capital gains are included in Form 1040 line 6 and fully count as part of Adjusted Gross Income. However, long-term capital gains are taxed at a reduced rate, and this calculation is performed further down on the tax return, see [[User:Fyre4ce/Income_tax#Tax_calculation|tax calculation]]. | ||
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| Sale of business property held >1 year || - || [https://www.irs.gov/pub/irs-pdf/f4797.pdf Form 4797] and Form 1040 Schedule 1 line 4 || Long-term gains on business property are included in Form 1040 Schedule 1 line 4 and fully count as part of Adjusted Gross Income. However, long-term capital gains are taxed at a reduced rate, and this calculation is performed further down on the tax return, see | | Sale of business property held >1 year || - || [https://www.irs.gov/pub/irs-pdf/f4797.pdf Form 4797] and Form 1040 Schedule 1 line 4 || Long-term gains on business property are included in Form 1040 Schedule 1 line 4 and fully count as part of Adjusted Gross Income. However, long-term capital gains are taxed at a reduced rate, and this calculation is performed further down on the tax return, see [[User:Fyre4ce/Income_tax#Tax_calculation|tax calculation]]. | ||
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| Capital gains from collectibles || - || [https://www.irs.gov/pub/irs-pdf/f8949.pdf Form 8949] || Capital gains from collectibles (art, coins, rare alcohol, etc.) is taxed as ordinary income, except that the tax rate is limited to 28%. Tax is calculated on the [https://www.irs.gov/pub/irs-pdf/i1040sd.pdf Schedule D Instructions] 28% Rate Gain Worksheet and Schedule D Tax Worksheet. | | Capital gains from collectibles || - || [https://www.irs.gov/pub/irs-pdf/f8949.pdf Form 8949] || Capital gains from collectibles (art, coins, rare alcohol, etc.) is taxed as ordinary income, except that the tax rate is limited to 28%. Tax is calculated on the [https://www.irs.gov/pub/irs-pdf/i1040sd.pdf Schedule D Instructions] 28% Rate Gain Worksheet and Schedule D Tax Worksheet. |
Revision as of 20:54, 21 February 2020
Income tax in the United States is a complex and often-misunderstood topic. IRS Publication 17 provides much basic information about US income taxes, including who needs to file a return, when and how to file, filing statuses and dependents, tax withholding and estimated tax, common types of income and their tax implications, retirement accounts, deductions and credits, etc. Much of this information is redundant with other IRS Publications, but it may be useful to have it all in one place.
The entire US tax code is far too complex to be described in a single wiki article. This page walks readers through the major parts of income tax calculations, and lists the most common types of income, deductions, and credits that will apply to the majority of readers. IRS Form 1040 forms the main structure by which income taxes are calculated, although taxpayers age 65 and older may use Form 1040-SR. Where appropriate, this article will list the lines on Form 1040 related to each section, along with other relevant IRS forms and publications. Form 1040 Instructions may provide useful information when filling out Form 1040 as well.
This page applies to US residents who earn income domestically. See also: Taxation as a US person living abroad and IRS Publication 54.
Taxable Income
Generally, the IRS taxes all forms of income unless specifically excluded by law, although numerous forms of tax-free income exist. IRS Publication 525 describes the tax treatment of various kinds of incomes. The most common forms are described here.
Fully taxed income
The following types of income are generally fully taxed, and are reported on Form 1040 lines 1-7:
Type of income | How it's reported to taxpayer | How it appears on tax return | Comments |
---|---|---|---|
Employment income | Form W-2, box 1 | Form 1040 line 1 | Tax-deductible contributions (401(k), 403(b), etc.) and pre-tax deductions (health insurance premiums, HSA contributions, etc.) are typically excluded from W-2 box 1 |
Other taxable employment compensation | Form W-2, box 1 | Form 1040 line 1 | Includes vacation/sick pay, bonuses/awards, severance pay, Restricted Stock Unit (RSU) grants, etc. Self-employed health insurance premiums are included in W-2 box 1, and are deducted on Form 1040 Schedule 1 line 16 |
Taxable interest | Form 1099-INT | Form 1040 line 2b | |
Non-qualified dividends | Form 1099-DIV | Form 1040 line 3b | |
Short-term capital gains | Generally Form 1099-B or unreported | Form 1040 Schedule D and Form 1040 line 6 | |
Sale of business property held <=1 year | - | Form 4797 and Form 1040 Schedule 1 line 4 | |
Net income from self-employment | Varies, but often Form 1099-MISC and sometimes not reported | Form 1040 Schedule C and Form 1040 Schedule 1 line 3 | A business is defined as an activity done regularly and for profit. Taxable business income (revenue minus expenses) has one-half of the self-employment tax subtracted. |
Qualified plan distributions | Form 1099-R | Form 1040 lines 4c and 4d | Generally, distributions from pre-tax plans such as 401(k)'s, 403(b)'s, 457(b)'s etc, including Roth conversions, are fully taxable. |
Rental property income | - | Form 1040 Schedule E and Form 1040 Schedule 1 line 5 | Unless the taxpayer is a real estate professional, rental property losses are subject to Passive Activity Loss Limitations |
State unemployment benefits | Form 1099-G | Form 1040 Schedule 1 line 7 | |
Alimony received | ??? | Form 1040 Schedule 1 line 2a | Alimony received from an agreement entered into on or before December 31, 2018 is taxable to the recipient and tax-deductible to the payer. Alimony received from an agreement entered into after December 31, 2018 is tax-free to the recipient and non-deductible to the payer. |
Royalties | Form 1099-MISC | Form 1040 Schedule E and Form 1040 Schedule 1 line 5 | |
Partnership income | Schedule K-1 (Form 1065) | Form 1040 Schedule 1 line 5 | |
S-corporation income | Schedule K-1 (Form 1120S) | Form 1040 Schedule 1 line 5 | |
Gambling winnings | Form W-2G line 1 | Form 1040 Schedule 1 line 8 | |
Barter income | Generally Form 1099-B | Form 1040 Schedule C and Form 1040 Schedule 1 line 3 | Generally, the Fair Market Value (FMV) of all goods and services received through barter transactions are reportable as income, and the value of goods or services given are not deductible against this value. This applies to each party in the exchange. |
Other income | Form 1099-MISC or unreported | Form 1040 Schedule 1 line 8 | Includes hobby income (not from an activity done regularly and for purpose of profit), game show winnings and other awards, found property, canceled debts, jury duty pay, etc. |
Taxed at special rates
The following types of income are are reported on Form 1040 lines 1-7 and fully contribute to Adjusted Gross Income, but are taxed at special rates. The tax rate calculation that applies these special rates occurs further down on the return, see Tax calculation.
Type of income | How it's reported to taxpayer | How it appears on tax return | Comments |
---|---|---|---|
Qualified dividends | Form 1099-DIV box 1b | Form 1040 lines 3a and 3b | Qualified dividends are included in Form 1040 line 3b (ordinary dividends) and fully count as part of Adjusted Gross Income. However, qualified dividends are taxed at a reduced rate, and this calculation is performed further down on the tax return, see tax calculation. |
Long-term capital gains | Generally Form 1099-B or unreported | Form 1040 Schedule D and Form 1040 line 6 | Long-term capital gains are included in Form 1040 line 6 and fully count as part of Adjusted Gross Income. However, long-term capital gains are taxed at a reduced rate, and this calculation is performed further down on the tax return, see tax calculation. |
Sale of business property held >1 year | - | Form 4797 and Form 1040 Schedule 1 line 4 | Long-term gains on business property are included in Form 1040 Schedule 1 line 4 and fully count as part of Adjusted Gross Income. However, long-term capital gains are taxed at a reduced rate, and this calculation is performed further down on the tax return, see tax calculation. |
Capital gains from collectibles | - | Form 8949 | Capital gains from collectibles (art, coins, rare alcohol, etc.) is taxed as ordinary income, except that the tax rate is limited to 28%. Tax is calculated on the Schedule D Instructions 28% Rate Gain Worksheet and Schedule D Tax Worksheet. |
Section 1250 depreciation recapture | Various (Schedule K-1, Form 1099-S, etc.) | Form 4797 | Section 1250 depreciation recapture (typically real estate) is taxed as ordinary income, except that the tax rate is limited to 25%. Tax is calculated on the Schedule D Instructions Unrecaptured Section 1250 Gain Worksheet and Schedule D Tax Worksheet. |
Partially taxed income
The following forms of income require a calculation to determine the portion of the income that is taxable:
Type of income | How it's reported to taxpayer | How it appears on tax return | Comments |
---|---|---|---|
Traditional IRA distributions | Form 1099-R | Form 1040 lines 4a and 4b | Distributions from a Traditional IRA, including Roth conversions, are taxable according to the "pro-rata" rule, with respect to pre-tax and after-tax balances. The taxable portion of an IRA distribution is calculated on Form 8606. |
Social Security benefits | Form SSA-1099 | Form 1040 lines 5a and 5b | The taxable portion of Social Security payments depends on the amount of the payment and amounts of other income (including tax-free interest), and can be anywhere between 0% and 85% of the benefit. The taxable amount is calculated in the Form 1040 Instructions Social Security Benefits Worksheet. |
Disability insurance proceeds | Form W-2, box 1 | Form 1040 line 1 | Generally, disability insurance proceeds from insurance purchased pre-tax are taxable, where proceeds from after-tax insurance are tax-free. For proceeds from insurance paid for by both an employer and employee, the proceeds must be proportioned between pre-tax and after-tax premiums. |
State tax refund | Form 1099-G | Form 1040 Schedule 1 line 1 | Generally, state tax refunds from prior years are taxable if the overpayment in the prior year decreased the taxpayer's tax liability, and tax-free otherwise. The taxable amount is calculated in the Form 1040 Instructions State and Local Income Tax Refund Worksheet. |
Annuity distributions | Form 1099-R | Form 1040 lines 4a and 4b | Annuitized distributions from a non-qualified annuity are partly taxable until the principal has been fully returned, and fully taxable thereafter. The taxable amount of annuity payments is calculated in the Form 1040 Instructions Simplified Method Worksheet. The annuity principal return is spread over between 120 and 360 months, depending on the taxpayer's age. For systematic or periodic withdrawals from an annuity purchased after-tax, distributions are taxed on an interest first, principal last basis. |
Tax-free income
The following forms of income are generally tax-free to the taxpayer who receives them:
Type of income | How it's reported to taxpayer | How it appears on tax return | Comments |
---|---|---|---|
Expense and travel reimbursement from an employer | - | - | Reimbursements for travel (eg. mileage for a work-related trip) and work-related expenses provided by an employer are generally tax-free, if they comply with the IRS guidelines for deductible business expenses in IRS Publication 535. |
De minimis benefits | - | - | Non-cash benefits from an employer to an employee that qualify as "de minimis" benefits per IRS Publication 5137 are generally not taxable as income. |
Tax-free interest | 1099-INT line 8 or 1099-DIV line 11 | Form 1040 line 2a | Generally, interest from state and local government obligations (municipal bonds, etc.) is exempt from federal income taxes |
Roth IRA distributions | 1099-R or unreported | - | Roth plan distributions are tax-free and do not appear on Form 1040, unless certain exceptions apply (non-qualified distribution before age 59½, distributions of gains for account held for less than 5 years, etc.) |
Gifts | - | - | Gifts are generally taxable to the giver and tax-free to the receiver. Gifts to an individual in excess of the annual gift exclusion ($15,000 in 2020) require the filing of Form 709 as part of the giver's tax return, except for gifts made directly to an educational or medical institution. |
Worker's compensation | ??? | - | |
State disability benefits | ??? | - | |
Life insurance proceeds | ??? | - | Life insurance proceeds are generally tax-free if the policy was purchased after-tax |
Welfare or other public assistance | ??? | - | |
Cash rebates | - | - | Rebates received on condition of purchase are generally tax-free, including credit card rewards |
Principal from a loan | - | - | Principal received from a loan (auto loan, personal loan, mortgage, etc.) is generally tax-free, regardless of whether the interest payments are deductible |
Above-the-line deductions
So-called "above-the-line deductions" are deductions to the taxpayer's taxable income that are subtracted before Adjusted Gross income is calculated on Form 1040 line 8b. Most above-the-line deductions fall into three categories:
- Tax-deductible contributions to certain types of accounts, including 401(k)'s, 403(b)'s, Traditional IRAs, etc
- Health insurance and other related premiums, including Health Savings Account (HSA) contributions
- Business-related expenses, directly associated with earning an income, including the employer half of FICA tax where appropriate
Common above-the-line deductions are listed here:
Type of deduction | Business structure | How it's reported to taxpayer | How it appears on tax return | Comments |
---|---|---|---|---|
Deductible contributions to a qualified plan (401(k), etc.) | Employee | Form W-2 box 12 | Subtracted from the amount in Form W-2, box 1 and Form 1040 line 1 | |
Sole proprietor | ??? | Form 1040 Schedule 1 line 15 | ||
S corporation (employee) | Form W-2 box 12 | Subtracted from the amount in Form W-2, box 1 and Form 1040 line 1 | ||
S corporation (employer) | Subtracted from Schedule K-1 (Form 1120S) box 1 | Form 1120S line 17 | ||
Deductible contributions to a Traditional IRA | -any- | Form 5498 | Form 1040 Schedule 1 line 19 | Deduction of contributions to a Traditional IRA is subject to income limits. The maximum deduction is calculated in IRS Publication 590-B Worksheet 1-2. |
Health Savings Account (HSA) contributions | Through an employer | Form 5498-SA and Form W-2 box 12 | Subtracted from the amount in Form W-2, box 1, 3, and 5 | HSA contributions are only permitted if the taxpayer is covered by a High Deductible Health Plan and also not covered by a FSA or HRA. |
Not through an employer | Form 5498-SA | Form 8889 and Form 1040 Schedule 1 line 12 | HSA contributions made not though an employer are income tax-deductible but not payroll tax-deductible. | |
Health insurance premiums | Employee | Pay stubs | Subtracted from Form W-2, box 1, 3, 5 | This amount can include dental, vision, and other pre-tax deductions like group life insurance premiums |
Sole proprietor | ??? | Form 1040 Schedule 1 line 16 | Note that self-employed health insurance premiums are not deductible as a business expense, although health insurance provided to employees is deductible as a business expense | |
S corporation | Form K-1 (1120S) and included in Form W-2 box 1 | Form 1040 Schedule 1 line 16 | ||
Business expenses | Sole proprietor | Generally unreported | Form 1040 Schedule C | Deductible business expenses must be ordinary and necessary for the business |
S corporation | Subtracted from Schedule K-1 (Form 1120S) box 1 | Form 1120S | ||
Self-employment tax | Sole proprietor | Calculated on Form 1040 Schedule SE | Form 1040 Schedule 1 line 14 | Half of self-employment tax is income tax-deductible |
S corporation | Calculated by payroll and subtracted from Schedule K-1 (Form 1120S) box 1 | Form 1120S line 12 | ||
Losses on the sale of business property or investments | N/A | Generally Form 1099-B or unreported | Form 1040 Schedule D and Form 1040 line 6, or Form 4797 and Form 1040 Schedule 1 line 4 | Deduction of losses is only permitted on assets held for business or investment purposes (losses on personal-use property are non-deductible). Short-term losses first offset short-term gains, then long-term gains. Long-term losses first offset long-term gains, then short-term gains. Net capital losses are deductible against up to $3,000 of ordinary income, and losses excluded by this limit carry over to future years. |
Moving expenses | N/A | - | Form 3903 and Form 1040 Schedule 1 line 13 | Following the passage of the Tax Cuts and Jobs Act (TCJA) of 2017, un-reimbursed moving expenses are only deductible for members of the US Armed Forces. |
Alimony paid | N/A | ?? | Form 1040 Schedule 1 line 18a | Alimony paid from an agreement entered into on or before December 31, 2018 is taxable to the recipient and tax-deductible to the payer. Alimony paid from an agreement entered into after December 31, 2018 is tax-free to the recipient and non-deductible to the payer. |
Student loan interest | N/A | Form 1098-E | Form 1040 Schedule 1 line 20 | Student loan interest is deductible up to $2,500 per year subject to income limits. Deduction is calculated on Form 1040 Instructions Student Loan Interest Deduction Worksheet. |
Tuition | N/A | Form 1098-T | Form 8917 and Form 1040 Schedule 1 line 21 | Qualified education expenses are deductible up to $4,000 subject to income limits. Education expenses can't be deducted while also taking an education credit, and the credit may be worth more. |
Adjusted Gross Income (AGI)
A taxpayer's Adjusted Gross Income (AGI) equals their taxable income minus any above-the-line deductions, and appears on Form 1040 line 8b. A taxpayer's AGI can have far-reaching consequences, including:
- Eligibility for tax credits like as the Saver's Credit, Child Tax Credit, and Earned Income Tax Credit
- Many below-the-line deductions are limited with a floor that's a percentage of AGI, so AGI effectively limits these deductions
- Many states calculate income tax based on federal AGI
In addition, many other tax calculations use a Modified Adjusted Gross Income (MAGI) that is based on AGI with certain additions and subtractions. There are many different MAGI's for different purposes (see MAGI for details), but they are all tightly correlated with AGI. Examples of tax consequences of different MAGIs include:
- Eligibility for other tax credits like as the American Opportunities Credit, Lifetime Learning Credit, and Child and Dependent Care Credit
- Deduction of tuition expenses
- Taxation of Social Security benefits
- Ability to make Roth IRA contributions, and to deduct Traditional IRA contributions
- Limitations of Passive Activity (eg. rental property) Loss deductions
- Calculation of Net Investment Income Tax (NIIT)
- Medicare premiums through IRMAA (Income-Related Monthly Adjustment Amount)
- Need-based financial aid
- Subsides through the Affordable Care Act
Below-the-line deductions
Taxpayers have a choice to take either the appropriate Standard Deduction, or to "itemize" below-the-line deductions on Form 1040 Schedule A, and are allowed to choose the option most financially beneficial. Total below-the-line deductions appear on Form 1040 line 9. Below-the-line deductions are generally much less valuable to the taxpayer than above-the-line deductions, for three reasons:
- They do not lower AGI and the various related forms of MAGI
- Many have severe limits in the amounts that are deductible, such as State and Local Tax deduction limited to $10,000, and medical expenses only deductible above a 7.5% AGI floor
- They compete with the Standard Deduction (made larger by the Tax Cuts and Jobs Act); only itemized deductions in excess of the Standard Deduction, if anything, are effectively deductible
Itemized deductions
As of 2020, the most common below-the-line deductions available on Schedule A are:
Type of deduction | Limitations | How it's reported to taxpayer | How it appears on tax return | Comments |
---|---|---|---|---|
State and Local Taxes (SALT) | $10,000 regardless of filing status | Various | Form 1040 Schedule A line 5e | Typically includes state income tax and property tax on a primary residence. Sales tax can be deducted instead of, but not in addition to state income tax. |
Mortgage interest | $750,000 balance for loans taken out after Dec 15, 2017, $1.0M otherwise | Form 1098 | Form 1040 Schedule A line 8e | Includes loans (primary mortgage, second mortgage, HELOC, etc.) against the primary residence, but only if the proceeds were used to buy, build, or improve the home. Points are deductible, but must be deducted over the life of the loan if certain conditions are not met. Under current law, mortgage insurance such as Private Mortgage Insurance (PMI) is also deductible. See also: IRS Publication 936. |
Charitable gifts | 60% of AGI or less, depending on gift type and recipient | - | Form 1040 Schedule A line 14 | Includes cash gifts and the Fair Market Value (FMV) of tangible property or securities to qualifying non-profit organizations, excluding political organizations or donations for which you receive a benefit. See also: IRS Publication 526. |
Medical expenses | Amount in excess of 7.5% AGI | - | Form 1040 Schedule A line 1 | Publication 502 contains details on deductible and non-deductible medical expenses. |
The Tax Cuts and Jobs Act eliminated other itemized deductions that were previously available, including unreimbursed work expenses for employees, imposed the $10,000 SALT limit, lowered the deductible mortgage interest limit to $750,000 balance, raised the charitable gift limit to 60% AGI, and lowered the medical expense deduction floor form 10% to 7.5%.
Standard Deduction
Taxpayers have the choice to deduct either itemized deductions on Schedule A, or the appropriate Standard Deduction. For 2020, the available Standard Deductions are listed below:
Filing Status | No Taxpayer Age >=65 | One Taxpayer Age >=65 | Both Taxpayers >= Age 65 |
---|---|---|---|
Single | $12,400 | $14,050 | N/A |
Married Filing Jointly | $24,800 | $26,100 | $27,400 |
Married Filing Separately | $12,400 | $13,700 | $15,000 |
Head of Household | $18,650 | $20,300 | N/A |
The Standard Deductions are slightly higher if one or both taxpayers are blind. See Form 1040 Instructions for more details.
Section 199A deduction
The Tax Cuts and Jobs Act of 2017 added to the tax code the Section 199A deduction for certain types of business-related income, starting in tax year 2018. Section 199A deductions are taken below-the-line, but are in addition to and do not compete with, the Standard Deduction or Schedule A itemized deductions, and appear on Form 1040 line 10. Section 199A is extremely complex; see the main article for details.
Tax calculation
Income tax due is calculated based on taxable income (Adjusted Gross Income minus below-the-line deductions and any Section 199A deductions), listed on Form 1040 line 11b. Income tax due is entered on line 12a, along with certain other taxes and penalties discussed below. Depending on the types and amount of income, Form 1040 Instructions require tax due to be calculated one of several ways. The most common methods are listed in the table below:
Tax calculation method | Where calculation is performed | When the method applies |
---|---|---|
Tax Tables | Form 1040 Instructions | Taxable income <= $100,000 and no income taxed at special rates |
Tax Computation Worksheet | Form 1040 Instructions | Taxable income > $100,000 and no income taxed at special rates |
Qualified Dividends and Capital Gain Tax Worksheet | Form 1040 Instructions | Taxpayer has qualified dividends and/or long-term capital gains, but no collectibles gains or Section 1250 depreciation recapture. This worksheet references the Tax Tables and/or Tax Computation Worksheet to calculate the income tax due on the ordinary income portion. |
Schedule D Tax Worksheet | Form 1040 Schedule D Instructions | Taxpayer has capital gains on collectibles and/or Section 1250 depreciation recapture. This worksheet uses the 28% Rate Gain Worksheet and the Unrecaptured Section 1250 Gain Worksheet, also in the Schedule D Instructions, to calculate the income taxable at these rates. This worksheet references the Tax Tables and/or Tax Computation Worksheet to calculate the income tax due on ordinary income. |
Tax rates
The following tax rates apply to various types and amounts of income:
Filing status and annual taxable income - 2024 | Ordinary income tax rate | ||||
---|---|---|---|---|---|
Single | Married Filing Jointly or Qualified Widow(er) | Married Filing Separately | Head of Household | Trusts and Estates | |
$0-$11,600 | $0-$23,200 | $0-$11,600 | $0-$16,550 | $0-3,100 | 10% |
$11,601-$47,150 | $23,201-$94,300 | $11,601-$47,150 | $16,551-$63,100 | n/a | 12% |
$47,151-$100,525 | $94,301-$201,050 | $47,151-$100,525 | $63,101-$100,500 | n/a | 22% |
$100,526-$191,950 | $201,051-$383,900 | $100,526-$191,950 | $100,501-$191,950 | $3,101-$11,150 | 24% |
$191,951-$243,725 | $383,901-$487,450 | $191,951-$243,725 | $191,951-$243,700 | n/a | 32% |
$243,726-$609,350 | $487,450-$731,200 | $243,726-$365,600 | $243,701-$603,950 | $11,151-$15,200 | 35% |
$609,351+ | $731,201+ | $365,600+ | $603,951+ | $15,201+ | 37% |
|
Filing status and annual taxable income - 2024 | Long-term capital gain rate | ||||
---|---|---|---|---|---|
Single | Married Filing Jointly or Qualified Widow(er) | Married Filing Separately | Head of Household | Trusts and Estates | Qualified dividends and other investments |
$0-$47,025 | $0-$94,050 | $0-$47,025 | $0-$63,000 | $0-$3,100 | 0% |
$47,026-$518,900 | $94,041-$583,750 | $47,026-$291,850 | $63,001-$551,350 | $3,101-$15,450 | 15% |
$518,901+ | $583,751+ | $291,851+ | $551,351+ | $15,451+ | 20% |
Filing status and annual taxable income - 2023 | Ordinary income tax rate | ||||
---|---|---|---|---|---|
Single | Married Filing Jointly or Qualified Widow(er) | Married Filing Separately | Head of Household | Trusts and Estates | |
$0-$11,000 | $0-$22,000 | $0-$11,000 | $0-$15,700 | $0-$2,900 | 10% |
$11,001-$44,725 | $22,001-$89,450 | $11,001-$44,725 | $15,701-$59,850 | n/a | 12% |
$44,726-$95,375 | $89,451-$190,750 | $44,726-$95,375 | $59,851-$95,350 | n/a | 22% |
$95,376-$182,100 | $190,751-$364,200 | $95,376-$182,100 | $95,351-$182,100 | $2,901-$10,550 | 24% |
$182,101-$231,250 | $364,201-$462,500 | $182,101-$231,250 | $182,101-$231,250 | n/a | 32% |
$231,251-$578,125 | $462,501-$693,750 | $231,251-$346,875 | $231,251-$578,100 | $10,551-$14,450 | 35% |
$578,126+ | $693,751+ | $346,876+ | $578,001+ | $14,451+ | 37% |
|
Filing status and annual taxable income - 2023 | Long-term capital gain rate | ||||
---|---|---|---|---|---|
Single | Married Filing Jointly or Qualified Widow(er) | Married Filing Separately | Head of Household | Trusts and Estates | Qualified dividends and other investments |
$0-$44,625 | $0-$89,250 | $0-$44,625 | $0-$59,750 | $0-$3,000 | 0% |
$44,626-$492,300 | $89,251-$553,850 | $44,626-$276,900 | $59,751-$492,300 | $3,001-$14,650 | 15% |
$492,301+ | $553,851+ | $276,901+ | $492,301+ | $14,651+ | 20% |
Penalties and other taxes
Numerous possible penalties and additional taxes exist, and are either added into the tax due on Form 1040 line 12a, or appear on Form 1040 Schedule 2 and are included in Form 1040 line 12b. A lengthy list is available in Form 1040 Instructions. Common examples of additional taxes and penalties are listed in the table below:
Additional tax or penalty | How it appears on tax return | Comments |
---|---|---|
Alternative Minimum Tax (AMT) | Form 6251 and Form 1040 Schedule 2 line 1 | AMT is a separate tax calculation, originally designed by legislators to limit perceived abuses of deductions by high-income taxpayers. The AMT has a high exemption, reduced deductions compared to the regular tax code, and only two tax brackets (26% and 28%). Tax due must be calculated using the regular tax code and AMT, and if the AMT is greater, the taxpayer must enter the difference on Form 1040 Schedule 2 line 1. |
Self-employment tax | Form 1040 Schedule SE and Form 1040 Schedule 2 line 4 | Self-employment tax is how sole proprietors pay FICA tax. Self-employment tax is calculated based on net business profit from Form 1040 Schedule C, and the calculation accounts for any Social Security tax paid through other employment. Half of self-employment tax is deductible against income tax, on Form 1040 Schedule 1 line 14. |
Additional Medicare Tax | Form 8959 and Form 1040 Schedule 2 line 8 | Additional Medicare Tax of 0.9% is due on any wages in excess of $200,000 for a single filer, or $250,000 for married joint filers. |
Net Investment Income Tax (NIIT) | Form 8960 and Form 1040 Schedule 2 line 8 | Net Investment Income Tax of 3.8% is due on investment income (interest, dividends, royalties, capital gains, income from real estate and annuities, etc.) above $200,000 MAGI for single filers or $250,000 for married joint filers. |
Early distribution from a qualified plan | Form 5329 lines 1-4 and Form 1040 Schedule 2 line 6 | Taxpayers must pay a 10% penalty, in addition to any income tax, on distributions from a qualified plan (401(k), 403(b), IRA, etc.) prior to age 59½, unless an exception applies. |
Nonqualified distribution from an education plan | Form 5329 lines 5-8 and Form 1040 Schedule 2 line 6 | Taxpayers must pay a 10% penalty, in addition to income tax, on distribution of growth from a 529 plan, ESA, or ABLE account, if the proceeds were not used for qualified education expenses. |
Nonqualified distribution from a HSA | Form 8889 lines 14a-17b and Form 1040 Schedule 2 line 8 | Taxpayers must pay a 20% penalty, in addition to income tax, on distributions from a HSA not used for qualified medical expenses. This penalty is waived for taxpayers age 65 and older. |
Excess IRA contributions | Form 5329 lines 9-41 and Form 1040 Schedule 2 line 6 | Taxpayers must pay a 6% penalty on any excess contributions to Traditional or Roth IRAs, Coverdell ESAs, and Archer MSAs, until the excess contribution is rectified. |
Excess HSA contributions | Form 5329 lines 42-49 and Form 1040 Schedule 2 line 6 | Taxpayers must pay a 6% penalty on any excess contributions to a Health Savings Account, until the excess contribution is rectified. |
Insufficient Required Minimum Distribution (RMD) | Form 5329 lines 52-55 and Form 1040 Schedule 2 line 6 | Taxpayers must pay a 50% penalty on any amount that should have been withdrawn as a RMD but was not. |
Tax credits
The federal government offers tax credits to taxpayers as incentives for certain behaviors or to offset certain expenses. Tax credits can be categorized as refundable, meaning that they can reduce a taxpayer's total tax liability below $0 (resulting in an overall tax refund for the year), or non-refundable, meaning they can only be applied against other tax owed but cannot reduce the total tax liability below $0. For a given amount, tax credits provide a greater benefit to the taxpayer than a tax deduction. Taxpayers receive the full value of a tax credit (except if limited by income, or a non-refundable credit limited by $0 tax liability), whereas a tax deduction only reduces taxable income and has a value equal to the amount multiplied by the taxpayer's marginal tax rate. Many tax credits are phased out by level of income. Common tax credits are listed in the following table, roughly ordered by lowest to highest income limits:
Tax credit | Income limits | Refundable? | How it appears on tax return | Comments |
---|---|---|---|---|
Earned Income Tax Credit (EITC) | AGI less than $15,820-$56,844 depending on filing status and number of children. Investment income less than $3,600. No foreign income, and other requirements. | Yes | Form 1040 line 18a | EITC can provide up to $6,660 (as of 2020) tax credit for earned income for lower-income taxpayers. The requirements and credit amount are described in the Form 1040 Instructions. |
Saver's credit | AGI less than $32,500-$65,000 depending on filing status | No | Form 8880 and Form 1040 Schedule 3 line 4 | The Saver's credit provides a non-refundable credit equal to 10%, 20%, or 50% of contributions to qualifying retirement plans, which include Traditional IRAs, Roth IRAs, SEP-IRAs, SIMPLE IRAs, 401(k)'s, 403(b)'s, ABLE accounts, and governmental 457(b)'s. |
ACA Premium Tax Credit | Household MAGI <= 400% of federal poverty line | Yes | Form 8962 and Form 1040 Schedule 3 line 2 | The PTC subsidizes the purchase of health insurance on the ACA marketplace. See Form 8962 Instructions for details. |
Child and Dependent Care Credit | Phased down with earned income between $15,000-$43,000 but never completely phased out | No | Form 2441 and Form 1040 Schedule 3 line 2 | Taxpayers can receive a credit of between 20-35% of child and dependent care expenses, on up to $3,000 of expenses for one qualifying dependent or $6,000 for two or more dependents. |
Lifetime Learning Credit | $58,000-68,000 for single filers or $116,000-$136,000 for married joint filers | No | Form 8863 and Schedule 3 line 3 | Credits up to $2,000 per return of qualified higher education expenses (tuition, fees, books, supplies, and equipment) to the taxpayer who paid the expenses and claims the student as dependent. Credit equals 20% of first $10,000 of qualifying expenses. Can be claimed an unlimited number of times per student, and claiming precludes claiming of the American Opportunity Credit or deducting tuition for that student. See IRS Publication 970 for details. |
American Opportunity Credit | $80,000-90,000 for single filers or $160,000-$180,000 for married joint filers | 40% refundable for most taxpayers | Form 8863, Form 1040 line Form 1040 line 18c, and Schedule 3 line 3 | Credits up to $2,500 per eligible student of qualified higher education expenses (tuition, fees, and books) to the taxpayer who paid the expenses and claims the student as dependent. Credit equals 100% of first $2,000 plus 25% of the next $2,000 of qualifying expenses. Can only be claimed up to 4 years per student, and claiming precludes claiming of the Lifetime Learning Credit or deducting tuition. See IRS Publication 970 for details. |
Child Tax Credit / Credit for Other Dependents | Phased out with MAGI >$200,000 for single filers and >$400,000 for married joint filers | No | Form 1040 line 13a | Taxpayers can receive a credit $2,000 per qualifying child or $500 per qualifying other dependent. See Publication 972 for details. |
Additional Child Tax Credit | N/A | Yes | Form 1040 Schedule 8812 and Form 1040 line 13a | Taxpayers whose Child Tax Credit or Credit for Other Dependents was limited due to being non-refundable can receive up to $1,400 per child of the lost credit as a refundable credit, based on income. See Publication 972 for details. |
Foreign Tax Credit | N/A | No | Form 1116 and Form 1040 Schedule 3 line 1 | Taxpayers who paid foreign taxes (eg. by owning international investments) can take a credit for those taxes paid. The rules and calculations are complex; see Form 1116 Instructions and Publication 514 for more details. |
Total prior payments
The US tax code is a "pay-as-you-go" system, meaning that taxpayers are required to pay throughout the year, as money is earned. Employees are required to withhold income tax from their paychecks per Form W-4 (updated for 2020), and the self-employed are required to make estimated tax payments four times per year. Credits for prior tax payments appear in several places:
Prior payment | How it appears on tax return | Comments |
---|---|---|
Withholding from paychecks | Form W-2 box 2 and Form 1040 line 17 | |
Other withholding | Various (eg. Form 1099-DIV line 4) and Form 1040 line 17 | |
Payments with extension request | Form 4868 and Form 1040 Schedule 3 line 10 | |
Estimated tax payments | Form 1040 Schedule 3 line 18d | |
Excess Social Security tax | Form W-2 box 3 and 4, and Form 1040 Schedule 3 line 12 | When a taxpayer works for two or more employers during the year (serially or concurrently) and the total wages exceed the Social Security Wage Base ($137,700 in 2020), excess Social Security tax will be withheld. This excess tax is applied toward income tax owed, or returned to the taxpayer as a refundable credit. |
Refund or tax due
The net tax due or refund is calculated by comparing total tax due (Form 1040 line 16) with total payments (Form 1040 line 19). If total payments exceed total tax due, then the refund is calculated on Form 1040 line 20. If total tax due exceeds total payments, then tax due at filing is calculated on Form 1040 line 23.
Underpayment penalties and Safe Harbor
If a taxpayer owes too much upon filing of their tax return they could be required to pay an underpayment penalty. Underpayment penalties are calculated on Form 2210 and appear on Form 1040 line 24. The IRS grants "Safe Harbor" from underpayment penalties if any of the following conditions apply:
- The amount you owe at filing is less than $1,000
- You have paid at least 90% of the tax owed for the current year
- You have paid at least 100% of the tax you owed for the previous year (this amount is increased to 110% if the previous year's Adjusted Gross Income is greater than $150,000)
- You had no tax liability the previous year
Furthermore, the IRS may otherwise waive underpayment penalties if certain conditions apply (eg. disaster or disability); see Form 2210 Instructions.