Individual Tax Brackets and Deductions
Individual taxation is a core topic on the REG section of the CPA exam. You must understand the tax formula, filing statuses, deduction types, and how tax brackets apply. This cheat sheet covers the essential framework.
Individual Tax Formula
| Line | Item | Notes |
|---|
| 1 | Gross Income | All income from whatever source derived (IRC §61): wages, interest, dividends, business income, capital gains, rents, royalties, alimony (pre-2019 agreements), etc. |
| 2 | Less: Adjustments (Above-the-Line Deductions) | Deducted FROM gross income to arrive at AGI |
| 3 | = Adjusted Gross Income (AGI) | Critical threshold for many deduction limitations |
| 4 | Less: Greater of Standard Deduction or Itemized Deductions | Taxpayer chooses the larger benefit |
| 5 | Less: Qualified Business Income Deduction (§199A) | Up to 20% of qualified business income from pass-through entities |
| 6 | = Taxable Income | Amount subject to tax rate schedule |
| 7 | Tax Liability (from rate tables) | Graduated rates applied to taxable income |
| 8 | Less: Tax Credits | Dollar-for-dollar reduction of tax liability |
| 9 | Plus: Other Taxes | Self-employment tax, AMT, Net Investment Income Tax (3.8%) |
| 10 | Less: Payments & Withholding | Estimated payments, W-2 withholding |
| 11 | = Tax Due or Refund | |
Filing Status Rules
| Status | Requirements | Standard Deduction (2024) |
|---|
| Single | Unmarried or legally separated on Dec 31 | $14,600 |
| Married Filing Jointly (MFJ) | Married on Dec 31; both spouses agree to file jointly | $29,200 |
| Married Filing Separately (MFS) | Married on Dec 31; elect to file separately | $14,600 |
| Head of Household (HOH) | Unmarried; pays >50% of household costs; qualifying person lives with taxpayer >50% of year | $21,900 |
| Qualifying Surviving Spouse | Spouse died in one of the two preceding tax years; dependent child lives at home; not remarried | $29,200 |
Above-the-Line Deductions (Adjustments to Income)
- Educator expenses (up to $300)
- Self-employed health insurance premiums
- One-half of self-employment tax
- IRA contributions (subject to limits and income phase-outs)
- Student loan interest (up to $2,500; subject to AGI phase-out)
- Health Savings Account (HSA) contributions
- Alimony paid (divorce/separation agreements executed before 2019)
- Moving expenses (military only after TCJA)
Itemized Deductions (Schedule A)
| Category | Deductible Amount | Key Limitations |
|---|
| Medical & Dental | Amount exceeding 7.5% of AGI | Only unreimbursed expenses qualify |
| State & Local Taxes (SALT) | State income (or sales) tax + property tax | Capped at $10,000 total ($5,000 MFS) |
| Mortgage Interest | Interest on acquisition debt up to $750,000 | $1M for loans originated before Dec 16, 2017 |
| Charitable Contributions | Cash: up to 60% of AGI; Capital gain property: up to 30% of AGI | Must be to qualified organizations; 5-year carryforward for excess |
| Casualty & Theft Losses | Only federally declared disaster losses | Excess over $100 per event, then over 10% of AGI |
Key Tax Credits
| Credit | Amount | Refundable? |
|---|
| Child Tax Credit | $2,000 per qualifying child under 17 | Partially ($1,700 refundable) |
| Child & Dependent Care Credit | 20-35% of up to $3,000/$6,000 expenses | No |
| Earned Income Credit (EIC) | Varies by filing status and # of children | Yes (fully refundable) |
| American Opportunity Credit | Up to $2,500 per student (first 4 years) | Partially (40% refundable, up to $1,000) |
| Lifetime Learning Credit | 20% of up to $10,000 qualified education expenses | No |
Key distinction: A refundable credit can reduce tax liability below zero (generating a refund). A nonrefundable credit can only reduce tax to zero.
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