A married couple has $240,000 of taxable income, two children under 17, $18,000 of qualified dividends, and a $60,000 incentive stock option exercise. Regular tax says one number. Alternative minimum tax (AMT) says a higher number. NIIT pulls in the dividends but not the wages. Two credits phase out. The "tax due" line on Form 1040 is the result of running parallel calculations and stacking credits in the right order. Get the order wrong and a refundable credit gets wasted against a nonrefundable cap.
The return follows a fixed order. Gross income minus adjustments yields AGI. AGI minus the greater of standard or itemized deductions yields taxable income, which drives regular tax. Regular tax is then compared against AMT, increased by surtaxes (NIIT, additional Medicare), and reduced by credits in a specific stacking order. Constants below reflect 2025 / 2026 REG values. Standard deduction, child tax credit, and SALT cap reflect OBBBA per scripts/lib/taxConstants.cjs. AMT exemption uses 2025 inflation-indexed amounts.
Common mistakes
- Applying ordinary brackets to LTCG and qualified dividends. They use the separate 0/15/20 stacked schedule. Throwing them through 10/12/22/24/32/35/37 overstates tax substantially.
- Confusing NIIT and Additional Medicare. NIIT is 3.8 percent on investment income. Additional Medicare is 0.9 percent on wages and SE income. Same MAGI thresholds, different income types, separate forms.
- Including IRA distributions in NII. Qualified plan distributions (401(k), IRA, Roth) are explicitly excluded from NII even when they push MAGI past the threshold. The trap answer applies 3.8 percent to the distribution.
Bottom line
- Regular tax uses graduated brackets: 10/12/22/24/32/35/37 percent on taxable income (AGI minus the greater of standard or itemized deductions), each bracket filling before the next.
- Long-term capital gains and qualified dividends taxed at 0/15/20 percent under a separate stacked schedule, never at ordinary rates.
- Kiddie tax: a dependent child's net unearned income above $2,700 (2025) taxed at the parent's marginal rate; earned income stays at the child's rate.
- AMT runs as a parallel system. 2025 exemption: $87,350 single / $135,950 MFJ. Rates 26/28 percent. Pay the higher of regular tax or tentative AMT.
Exam shortcut
For high-MAGI taxpayers with investment income, run two surtax tests: NIIT on investment income (3.8 percent), Additional Medicare on wages and SE (0.9 percent). Same thresholds, different income types, separate forms. For credits, ask refundable or nonrefundable first. Apply nonrefundable first (they expire), refundable last (they refund anyway). For AMT, the two trigger fact patterns are large SALT deductions (when itemizing) and ISO exercise-and-hold. If neither appears, AMT is unlikely.
The full lesson (about 5,634 words, 38 min read) adds 10 worked examples, all 8 common mistakes, a self-check, free in the app.
Learning objectives
- IV.F1
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