IG10032 — The U.S. Individual Income Tax System, 2022

/ Tax Liability After Credits 12. 11. The U.S. Individual Income Tax System, 2022 Income Tax Base Includes wages; interest; dividends; capital gain (or loss); business income (or loss); IRA distributions and pensions; social security income; rents; royalties; unemployment compensation Examples of items excluded: employer contributions to health and retirement plans returns to tax-preferred savings accounts (e.g., retirement, education) unrealized portion of capital gains and capital gains from sale of primary residence interest on certain state and local bonds “Above the Line” Deductions For Example: Student Loan Interest Self-employed Health Plan Certain Educator Expenses IRA Contributions 01. 02. Adjusted Gross Income (AGI) 03. 04. 05. Apply Tax Rates Income taxed according to tax bracket and ¬ling status using progressive rate structure. Preferred rates for certain types of income. Taxable Income 06. 07. 08. Tax Before Credits For Example: Credit for Certain Dependents Child and Dependent Care Credit Lifetime Learning Credit Saver’s Credit 09. 10. Pay tax or claim refund (Based on withholding and payment of estimated tax) Standard Deduction For Example: Mortgage Interest Charitable Contributions State and Local Taxes Certain Medical Expenses Itemized OR Deductions Prepared by Molly F. Sherlock, Specialist in Public Finance, and Jamie Hutchinson, Visual Information Specialist. Non-Refundable Tax Credits For Example: Earned Income Tax Credit Child Tax Credit American Opportunity Tax Credit The individual income tax is the federal government’s largest source of revenue. In FY2021, the tax is estimated to generate 50.5% of federal government receipts, or $2.0 trillion. There are several steps involved in calculating ordinary individual income taxes. First, taxpayers must add up all of their income. Then, taxpayers take a series of steps to calculate taxable income. Tax rates are applied to taxable income to calculate income tax before credits. Tax credits o set tax liability. A taxpayer’s individual income tax liability is the amount of tax owed after credits are applied. Some taxpayers also calculate tax liability under the individual alternative minimum tax (AMT). Legislation commonly referred to as the “Tax Cuts and Jobs Act” (P.L. 115-97) made substantive changes to the individual tax system, e ective in 2018. Most of the changes made in P.L. 115-97 are temporary and are scheduled to expire at the end of 2025. The standard deduction, tax brackets, and other tax items depend on ¬ling status (e.g., single, married ¬ling jointly, head of household) Refundable Tax Credits Tax After Non-Refundable Credits AND Deduction for Quali¬ed Business Income SUBTRACT SUBTRACT SUBTRACT SUBTRACT Refundable credits can reduce tax liability below zero and result in payment to the taxpayer

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