Estimated study time: 50 minutes
Content:
Gross income is broadly defined: all income from whatever source derived unless specifically excluded. Key exclusions from gross income: gifts and inheritances, life insurance death proceeds (generally), workers' compensation, personal injury damages (physical injury only), employer-paid health insurance, up to $250/$500K gain exclusion on sale of principal residence (Section 121), municipal bond interest, qualified scholarship amounts for tuition/fees.
Adjusted Gross Income (AGI): Gross income minus above-the-line deductions (student loan interest, educator expenses up to $300, self-employment taxes paid — 50% deductible, self-employed health insurance, HSA contributions, alimony paid for pre-2019 agreements, IRA deductions). AGI is a critical threshold: affects the deductibility of medical expenses (7.5% AGI floor), misc. itemized deductions (eliminated through 2025 by TCJA), and phase-outs.
Standard deduction vs. itemized deductions: Taxpayers deduct the greater amount. Standard deduction amounts indexed annually. Itemized deductions include: state and local taxes (SALT — limited to $10,000 for federal purposes under TCJA), mortgage interest on acquisition debt (up to $750,000 of principal for loans originated after 12/15/2017), charitable contributions (cash up to 60% of AGI; appreciated property at FMV up to 30% of AGI), medical expenses exceeding 7.5% of AGI, casualty losses in federally declared disaster areas.
Filing status affects tax brackets, standard deduction, and certain thresholds: Married Filing Jointly, Qualifying Surviving Spouse (2 years after death), Married Filing Separately, Single, Head of Household (unmarried, paid >50% of maintaining home for qualifying person). Kiddie tax: unearned income of children under 19 (or under 24 if full-time student) above $2,500 threshold taxed at parents' marginal rate.
Self-employment: Schedule C net profit subject to self-employment tax (SE tax) = 15.3% on net SE income × 92.35% (accounts for the "employer" half deduction). Deduct 50% of SE tax as above-the-line deduction. Quarterly estimated tax payments required (Form 1040-ES) if expected tax liability ≥$1,000.
Alternative Minimum Tax (AMT): AMT income = regular taxable income + AMT preference/adjustment items (accelerated depreciation on real property, ISO stock option spread, percentage depletion, large itemized deductions). AMT exemption ($126,500 for MFJ, $81,300 for single — 2024 approximate; phase out at higher AMT income). Tentative minimum tax − regular tax = AMT.
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