Summary
The Individual Income Tax, 2023
How Income Tax Liability Is Calculated for Individuals, Families,
and Passthrough Businesses
taxable
income
+ positive
income tax
liability
investment income
long-term capital gains & qualified dividends
- negative
income tax
liability
investment
Calculate Taxable Income
Add up income from various sources to calculate gross income (or total income). Then subtract allowable deductions to arrive at
taxable income.
All income is generally counted
toward gross income, unless it is
excluded by law; i.e., there is an
exclusion. Gross income may be
further characterized between
ordinary income and long-term
capital gains and qualified
dividends (referred to in this
infographic as "investment income")
which are taxed at different rates.
Any above-the-line deductions are subtracted from gross income
to calculate adjusted gross income (AGI). Above-the-line deductions
include those for student loan interest, individual retirement account
(IRA) contributions, certain educator expenses, and health savings
accounts (HSAs). Then, either the standard deduction or the sum of
itemized deductions (whichever is greater) is subtracted from AGI.
Itemized deductions include those for charitable giving, mortgage
interest, state and local taxes (SALT), and medical expenses. Finally,
other deductions are subtracted to arrive at taxable income. In
2023, the other deduction is the 199A deduction for passthroughs.
Apply Marginal Rates
Marginal tax rates are applied to taxable income to arrive at
precredit income tax liability. Special reduced rates apply to
investment income, with overall taxable income determining
the applicable rate.
If a married couple les their taxes jointly in
2023 with $250,000 of taxable income
($220,000 ordinary income / $30,000
investment income):
Subtract Tax Credits
Nonrefundable tax credits are subtracted from
precredit income tax liability, followed by refundable tax
credits to calculate income tax liability.
Tax credits reduce income tax liability dollar for dollar the
amount of the credit. Nonrefundable tax
credits—including the child and dependent care credit,
the Lifetime Learning credit, the saver's credit, and the
credit for other dependents—cannot be greater than
precredit income tax liability. Hence, these credits cannot
reduce income tax liability below zero. In contrast,
refundable tax credits—like the earned income tax credit
(EITC), the child tax credit, and the American Opportunity
tax credit—which are claimed after nonrefundable credits,
are not limited by income tax liability, (meaning they can
reduce income tax liability below zero).
ordinary income 37%
35%
32%
24%
22%
12%
10%
$0
$0
taxable
income
other
standard
or sum of
itemized
above-the-line
gross
income
ordinary
wages, exclusions
salaries,
& tips
rents &
royalties
small
business/self
employment
retirement
interest
other
Examples of exclusions include employer contributions to health and retirement plans, returns to
tax-advantaged savings accounts (e.g., 529s), child and dependent care benefits, adoption benefits,
a portion of capital gains from the sale of a primary residence, and interest on certain bonds.
• ordinary income $220,000 subject to
increasing marginal rates with a top rate
of 24%.
• investment income $30,000 subject to
a 15% rate.
0%
15%
20%
The portion of a refundable
tax credit which reduces
income tax liability to zero is
sometimes called the
"Nonrefundable portion."
nonrefundable
credits
precredit
liability refundable
credits
income tax
liability
A negative income
tax liability means
the taxpayer is
receiving an increase
in after-tax income.
The portion of a
refundable tax credit
which exceeds income
tax liability is
sometimes called the
"Refundable portion."
taxable income increases
taxable income increases
$220K $30K
investment
adjusted
gross
income
AGI)
Information prepared by Margot L. Crandall-Hollick, Specialist in Public Finance and Jamie L. Hutchinson, Visual Information Specialist.
Notes: Various provisions of the tax code may vary by ling status, which is not depicted in this infographic. In addition, certain
taxpayers' investment income may be subject to a 3.8% net investment income tax (NIIT), which is also not depicted in this graphic.
The different sizes of income in section 1 do not reflect actual shares of different types of income reported on tax returns. In addition,
the relative size of precredit liability and tax credits in section 3 do not reflect actual amounts reported on tax returns.