How IRC Section 63 Defines Taxable Income
Learn how IRC Section 63 provides the official framework for reducing your gross income to the final taxable figure your tax liability is based on.
The calculation of federal income tax begins with taxable income. This amount is the foundation for determining tax liability for individuals and corporations. The rules for defining this number are located in the Internal Revenue Code (IRC), the body of law governing federal taxes in the United States.
The Definition of Taxable Income
Internal Revenue Code Section 63 provides the definition of taxable income. It establishes the formula for determining this amount: a taxpayer’s gross income less any deductions allowed by the tax code. Gross income is a broad concept, encompassing all income from any source, such as wages or business profits, unless specifically exempted by law.
The primary function of this section is to outline the two methods for taking deductions. For individuals, the code provides two pathways to reduce gross income: taking a standard, predetermined deduction or electing to itemize specific expenses. The choice between these options is a central decision when preparing an income tax return.
The Role of the Standard Deduction
The standard deduction is a specific dollar amount that individuals can subtract from their income. This option simplifies tax preparation because it does not require taxpayers to keep detailed records of every eligible expense. The amount is determined by a taxpayer’s filing status, is adjusted annually for inflation, and includes additional amounts for those age 65 or older or who are legally blind.
For the 2024 tax year, the standard deduction amounts are set as follows. For Single or Married Filing Separately status, the deduction is $14,600. Heads of Household can claim a $21,900 deduction, while Married Filing Jointly couples and Qualifying Surviving Spouses are entitled to a $29,200 deduction.
The tax code provides an increased standard deduction for certain individuals. Taxpayers who are 65 or older or are blind can add an extra amount to their base deduction. For 2024, this additional amount is $1,950 for those filing as Single or Head of Household and $1,550 per married, qualifying individual. A person who is both over 65 and blind can claim two of these additional amounts.
Available Itemized Deductions
Taxpayers may choose to itemize deductions if their total eligible expenses exceed their available standard deduction. This choice requires careful record-keeping and reporting these expenses on Schedule A (Form 1040), which is filed with the tax return.
One of the most common itemized deductions is for state and local taxes (SALT), including income, sales, and property taxes. The total SALT deduction is capped at $10,000 per household. Another deduction is for home mortgage interest, which is limited to interest on up to $750,000 of mortgage debt for loans taken out after December 15, 2017.
Taxpayers can also deduct charitable contributions to qualified organizations, limited to a percentage of their adjusted gross income (AGI), up to 60% for cash. Medical and dental expenses are deductible only to the extent they exceed 7.5% of the taxpayer’s AGI, meaning only those with high medical costs benefit.
Restrictions on Using the Standard Deduction
While most individual taxpayers are eligible to take the standard deduction, the tax code specifies certain situations where it is not permitted. In these cases, the taxpayer is required to itemize deductions, regardless of whether their total itemized expenses are substantial.
The most common restriction applies to a married individual filing a separate return whose spouse chooses to itemize. The code requires both to use the same method to prevent one from itemizing while the other takes the standard deduction. If one spouse itemizes, the other’s standard deduction becomes zero.
Other taxpayers are also barred from taking the standard deduction. This includes:
- Most nonresident aliens and dual-status aliens
- An individual who files a tax return for a period of less than 12 months due to a change in their accounting period
- Estates and trusts
- Common trust funds and partnerships