Susan E. Thomas CPA
Federal Individual Income Tax Fundamentals

Gross income
  • Salary

  • Commissions

  • Bonuses

  • Business income

  • Up to 85% of Social Security income
  • Alimony received

  • Unemployment income

  • Capital gains or losses on portfolio assets

  • Dividends*

  • Interest
  • Rental property income

  • Capital gains on passive activities

  • S corporation and partnership income

  • Trust and estate distributions

  • Royalties
- Minus -
Adjustments to income
  • Alimony paid

  • Student loan interest

  • Deduction for qualified higher education expenses (2005 only)

  • Educator expenses (2005 only)
  • Archer medical savings account deduction

  • Savings early withdrawal penalties

  • Retirement plan contributions--IRAs, Keoghs, SEP, SIMPLE, etc.
  • Self-employment tax (50 pecent)

  • Self-employed health insurance

  • Health Savings Account (HSA) deduction

  • Moving expenses
= Equals =
Adjusted gross income (AGI)
- Minus -
Standard deduction
Itemized deductions (may be limited based on AGI)
  • Qualified mortgage interest, investment interest

  • Charitable contributions

  • Casualty and theft losses
  • State and local income tax or state and local sales tax

  • Medical expenses over 7.5% of AGI
  • State and local real estate and property tax

  • Miscellaneous itemized deductions (generally must exceed 2% of AGI)
- Minus -
Personal exemptions (may be limited based on AGI)
= Equals =
Taxable income
Calculate tax from tax table or tax rate schedules (and calculate Alternative Minimum Tax (AMT) if applicable).

Use Schedule D to calculate maximum tax on capital gains and qualifying dividends* if appropriate.

- Minus -
Available credits
  • Elderly/disabled

  • Earned income

  • Child tax credit
  • Child and dependent care

  • Adoption

  • Retirement savings "savers credit"
  • Education

  • Foreign tax
= Equals =
Income tax liability


The Jobs and Growth Tax Relief Reconciliation Act of 2003 and the Tax Increase Prevention and Reconciliation Act of 2005 provide that qualifying dividends paid to individuals by U.S. (and qualified foreign) corporations will be taxed as capital gains. This change applies to dividends received in 2003 through 2010. Previously dividends were taxed at ordinary income rates. Absent further legislative action, qualifying dividends will again be taxed as ordinary income beginning in 2011.

Prepared by Broadridge Investor Communication Solutions, Inc, Copyright 2011