Individual Taxation: Filing Requirements and Income Tax Formula

Vocabulary flashcards detailing key terminology, standard deduction amounts, foreign asset filing thresholds, dependent tests, and filing status rules from Individual Income Tax Study Unit One.

Individual Income Tax Formula

The sequential calculation used to determine tax liability: Gross Income minus Section 62 adjustments equals Adjusted Gross Income; AGI minus the greater of Itemized Deductions or Standard Deduction and minus the Qualified Business Income Deduction equals Taxable Income; Taxable Income multiplied by the tax rate equals Gross Tax Liability; Gross Tax Liability minus Credits equals Net Tax Liability or Refund Receivable.

Taxable Income (TI)

Adjusted gross income (AGI) minus the greater of allowable itemized deductions on Schedule A or the standard deduction, minus the qualified business income deduction (QBID).

Substantial Presence Test

A test determining U.S. residency status for non-citizens, requiring physical presence in the U.S. for at least $31$ days in the current calendar year and at least $183$ days across a $3$-year period (calculated as all days in the current year, $1/3$ of days in the first prior year, and $1/6$ of days in the second prior year).

Green Card Test

A test qualifying an alien individual as a U.S. resident for tax purposes if they were a lawful permanent resident of the United States at any point during the calendar year.

Dual-Status Alien

An individual who is a nonresident alien for part of the tax year and a resident alien for another part, taxed on worldwide income during the residency period and only on U.S.-source income during the nonresidency period.

Form FinCEN 114 (FBAR)

Report of Foreign Bank and Financial Accounts required from any U.S. citizen, resident, or person doing business in the U.S. who holds an interest in or authority over foreign financial accounts exceeding an aggregate value of $\text{\$}10{,}000$ at any time during the year; filed online by April 15 (with an automatic extension to October 15).

Form 8938

A form filed with an individual's federal income tax return to report specified foreign financial assets exceeding aggregate thresholds (for domestic single filers: over $\text{\$}50{,}000$ on the last day of the tax year or over $\text{\$}75{,}000$ at any time during the year; thresholds double for married filing jointly).

Form 5471

An information return filed by U.S. citizens, residents, and domestic entities who serve as officers, directors, or shareholders in certain foreign corporations.

Form 3520

An annual return filed by U.S. persons or executors of U.S. estates to report transactions with foreign trusts, ownership of foreign trusts, and receipt of large foreign gifts or bequests.

Injured Spouse (Form 8379)

A spouse filing a joint return who is entitled to recover their portion of an overpayment or refund that was seized by the IRS to pay past-due legal debts (such as unpaid taxes or student loans) solely owed by the other spouse.

Qualifying Surviving Spouse

A tax filing status available for up to $2$ years after a spouse's year of death for an unmarried widow or widower who maintained over $50\%$ of the cost of keeping up a home for the entire tax year for a dependent son, daughter, stepson, stepdaughter, or adopted child.

Head of Household (HoH)

A filing status for an unmarried individual (or qualifying married person living apart from the spouse the last $6$ months) who pays more than $50\%$ of the cost of maintaining a home that is the principal place of abode for more than half the tax year for a qualifying child or qualifying relative.

Qualifying Child Tests

Four requirements to qualify as a child dependent: (1) Relationship (son, daughter, stepchild, sibling, stepsibling, or descendant); (2) Age (under $19$, full-time student under $24$, or permanently disabled); (3) Principal Residence (living with taxpayer over half the year); and (4) Not Self-Supporting (child does not provide more than half of their own support).

Qualifying Relative Tests

Requirements to claim an individual as a relative dependent: (1) Relationship or full-year member of household (e.g., cousin must live with taxpayer all year); (2) Gross income below the statutory limit ($\text{\$}5{,}200$ for $2025$); and (3) Support exceeding $50\%$ provided by the taxpayer.

2025 Standard Deduction Amounts

Base statutory deductions from income: Married Filing Jointly and Qualifying Surviving Spouse ($\text{\$}31{,}500$ basic, $\text{\$}1{,}600$ additional); Head of Household ($\text{\$}23{,}625$ basic, $\text{\$}2{,}000$ additional); Single ($\text{\$}15{,}750$ basic, $\text{\$}2{,}000$ additional); Married Filing Separately ($\text{\$}15{,}750$ basic, $\text{\$}1{,}600$ additional).

Additional Standard Deduction

An increased standard deduction amount granted to an individual who has attained age $65$ or is legally blind (visual acuity no better than $20/200$ in the better eye with corrective lenses) by the end of the tax year; individuals both $65$ or older and blind receive twice the amount.

Failure to File Penalty

A penalty assessed when a tax return is submitted after the due date, calculated at $5\%$ per month (or fraction of a month) of the unpaid tax, up to a maximum penalty of $25\%$.

Failure to Pay Penalty

A penalty charged when the owed tax is not paid on time, assessed at $0.5\%$ per month (or fraction of a month) of the unpaid tax amount, up to a maximum penalty of $25\%$.

Identity Protection Personal Identification Number (IP PIN)

A $6$-digit number issued by the IRS to verify a taxpayer's identity and prevent unauthorized fraudulent returns from being filed using their Social Security number.

Dependent Standard Deduction Limitation

The standard deduction rule for an individual claimed as a dependent, limited to the greater of $\text{\$}1{,}350$ or their earned income plus $\text{\$}450$, not to exceed the basic standard deduction for their filing status.

Earned and Unearned Income Categories

Earned income encompasses compensation for personal services such as salaries, wages, and tips; unearned income includes investment and passive flows such as interest, dividends, capital gains, trust distributions, debt cancellation, pensions, annuities, Social Security, royalties, and taxable scholarships.

Kiddie Tax

The tax mechanism where the net unearned income of a dependent child under age $19$ (or under age $24$ if a full-time student) is taxed at the parent's higher marginal tax rate rather than the child's rate.

Net Unearned Income (NUI)

For kiddie tax purposes, unearned income minus $\text{\$}1{,}350$ minus the greater of $\text{\$}1{,}350$ or the itemized/production-related allowable deductions directly connected with producing that unearned income.

Innocent Spouse Relief (Form 8857)

Relief granted to protect a spouse from joint and several liability for understated tax, interest, and penalties on a joint return when the deficiency arose from the other spouse's unreported income or erroneous deductions.