Individual Income Tax Formula

Taxable Income: This is the tax base for the individual income tax.
Exhibit 4-1: Individual Income Tax Formula
- Gross Income
  - Minus: For AGI (Above the Line) deductions
- Equals: Adjusted Gross Income (AGI)
  - Minus: From AGI (Below the Line) deductions
    - Greater of:
      - Standard deduction or
      - Itemized deductions
    - Deduction for qualified business income
- Equals: Taxable Income
  - Times: Tax rates
- Equals: Income Tax Liability
  - Plus: Other taxes
- Equals: Total Tax
  - Minus: Credits
  - Minus: Prepayments
- Equals: Taxes Due or (Refund)
Individuals file tax returns each year to report their taxable income to the Internal Revenue Service (IRS).
The individual income tax formula is embedded in Form 1040 (pages 1 and 2), which is generally used to report taxable income.
Exhibit 4-2: 2023 Form 1040, pages 1, 2, and Schedule 1
- Line 11: Adjusted Gross Income (AGI)
- Line 15: Taxable Income
AGI is an important reference point in the income tax formula.