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OBJECTIVE 1 Use the tax formula to compute an individual's taxable income ADDITIONAL COMMENT The IRS estimated taxpayers would spend an average of 4 hours preparing Form 1040 for 2017. Recordkeeping and other related activities increased the es- timate to 15 hours, and additional forms and schedules added even more time. ADDITIONAL COMMENT Comedian Jay Leno's explanation as to why the IRS calls it Form 1040 was, "For every $50 you earn, you get $10 and they get $40. TYPICAL MISCONCEPTION As explained in Chapter 1:1, the federal income tax includes a pro- gressive tax rate structure, mean- ing that the tax rate increases as the tax base increases. For example, if a taxpayer is in the 22% marginal tax bracket, some taxpayers incorrectly assume that this means that all of their income is being taxed at 22%. Instead, the actual calculation will include some of the income taxed at 10%, some at 12% and only the last portion of income taxed at 22%. FORMULA FOR INDIVIDUAL INCOME TAX BASIC FORMULA Most individuals compute their income tax by using the formula illustrated in Table 1:2-1. The formula itself appears rather simple. However, the complexity of the income tax re- sults from the intricate rules that must be applied in order to arrive at the amounts that enter into the formula. The tax formula is incorporated into the income tax form. The tax formula illustrated in Table 1:2-1 can be compared with Form 1040, which is reproduced in Figure 1:2-1 (see page 1:2-8). Some differences exist between the tax formula below and the tax form itself. For example, taxpayers generally are not required to report exclusions (nontaxable income) on their tax returns. One exception does require taxpayers to disclose tax-exempt interest income. A number of separate schedules are used to report various types of in- come. For example, income from a sole proprietorship is reported on Schedule C, where gross income from the business is reduced by related expenses that are deductions for adjusted gross income (AGI). Only the net income from the business actually appears on Form 1040. Also, the federal government uses Form 1040 to collect other taxes, such as the self-employment tax. This tax is discussed in Chapter I:14, and Form 1040 includes a line to report it. The main reason for differences between the formula and the form is administrative convenience. That is, there is no reason to require taxpayers to disclose TABLE 1:2-1 Tax Formula for Individuals Income from whatever source derived Minus: Exclusions Gross income Minus: Deductions for adjusted gross income Adjusted gross income Minus: Deductions from adjusted gross income: Greater of itemized deductions or the standard deduction Qualified business income deduction Taxable income Times: Tax rate or rates (from tax table or schedule) Gross tax Minus: Credits and prepayments Net tax payable or refund due $ xxxx,xxxx (xxxx) $ XX, XXXX (xxxx) X,XXXX 1 Sec. 1

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