United States
Hong KongThe income tax calculation, line by line
Gross income less above-the-line adjustments gives adjusted gross income. Less the standard or itemized deduction and the qualified business income deduction gives taxable income. Rates apply progressively, then credits reduce tax directly.
Learn the sequence and most tax questions become a matter of placing an item in it.
The sequence
- Gross income - everything not specifically excluded.
- Less adjustments - above the line, available whether or not you itemize.
- Equals adjusted gross income.
- Less the greater of the standard deduction or itemized deductions.
- Less the qualified business income deduction, where it applies.
- Equals taxable income.
- Apply the rate schedule.
- Less credits, which reduce tax dollar for dollar.
- Plus other taxes - self-employment, net investment income, additional Medicare.
Filing status
| Status | Applies to |
|---|---|
| Single | Unmarried, not qualifying for another status |
| Married filing jointly | Married couples filing together |
| Married filing separately | Married couples filing apart - generally the worst outcome |
| Head of household | Unmarried, maintaining a home for a qualifying person |
| Qualifying surviving spouse | A widow or widower with a dependent child, for two years after the year of death |
Head of household is the one questions test, because the requirements are specific - unmarried at year end, paying more than half the cost of maintaining the home, and a qualifying person living there for more than half the year.
Married filing separately loses or limits several credits and deductions, and it is rarely the right recommendation without a specific reason such as liability separation or an income-driven student loan calculation.
Marginal against effective
The marginal rate applies to the next dollar. The effective rate is total tax divided by income, and it is always lower under a progressive system.
Planning decisions use the marginal rate: whether a deduction is worth taking, whether to convert to a Roth, whether to realize a gain this year or next. The effective rate describes the past.
Clients believe moving into a higher bracket taxes all their income at the higher rate. It does not - only the income within that bracket. Correcting it is one of the more useful things a planner does, and questions include it as a distractor.
Standard deduction figures
For 2026: USD 32,200 married filing jointly, 16,100 single, and 24,150 head of household, with additional amounts for age and blindness.
The large standard deduction means most taxpayers do not itemize, which changes the value of a charitable gift or a mortgage interest deduction and is the reason bunching strategies exist.
Where the marks are
Placing an item correctly. Is alimony income? Depends on the date of the divorce decree. Is a scholarship taxable? Depends what it covers. Is life insurance taxable? Depends how it was acquired.
Those are the questions, and they reward knowing the rule rather than the arithmetic.
Dollar limits and rate thresholds here are indexed annually and several were changed by the 2025 reconciliation act. Confirm the current figure against the IRS before relying on it, and expect the exam to test the rule rather than the number.
Common questions
What is the income tax calculation sequence?
Gross income, less adjustments, gives adjusted gross income; less the standard or itemized deduction and the qualified business income deduction gives taxable income; apply rates, subtract credits, add other taxes.
What are the head of household requirements?
Unmarried at year end, paying more than half the cost of maintaining the home, and a qualifying person living there for more than half the year.
Is married filing separately ever right?
Rarely, and only for a specific reason such as separating liability or an income-driven student loan calculation. It loses or limits several credits and deductions.
What is the difference between marginal and effective rates?
Marginal applies to the next dollar and drives planning decisions. Effective is total tax divided by income and describes what already happened.
Does moving into a higher bracket tax all your income at that rate?
No, only the income within that bracket. It is one of the most common client misconceptions and it appears as an exam distractor.