Wiley Tax Preparer: A Guide to Form 1040

CHAPTER 32

Figuring the Regular Tax

A taxpayer's regular income tax is based on taxable income, which is gross income reduced by various adjustments (such as individual retirement account [IRA] deductions and alimony), the standard deduction or itemized deductions, and personal and dependent exemptions. Taxable income is calculated before taking into account any tax credits that the taxpayer may claim.

The method used to determine a taxpayer's tax liability depends on whether taxable income equals or exceeds $100,000 and whether taxable income includes certain types of income.

Keep in mind that the regular tax is only a tentative number. The final tax liability depends on whether the taxpayer owes any alternative minimum tax (see Chapter 33), other taxes, and whether the taxpayer qualifies for any tax credits.

Taxable Income

Taxable income is the result of several computations:

• Gross income (Chapters 4–13 and 18), reduced by
• Adjustments to gross income (“above-the-line deductions,” Chapters 15–18), reduced by
• The standard deduction or itemized deductions (Chapters 19–26), reduced by
• Personal and dependent exemptions ($3,800 each in 2012; Chapter 3).

Example

Howard is single with income from wages of $32,000 and interest income of $875. He made a tax-deductible contribution to his IRA of $2,500. He claims the standard deduction ($5,950 in 2012) and has no dependents. His taxable income is $20,625 ($32,000 + $875 – $2,500 – $5,950 – $3,800).

Regular Tax Computation Options ...