ACCY 312 Chap.6 Computing the Regular Income Tax
Computing the Regular Income Tax
Ordinary income and the rate schedules
The regular tax starts from the rate schedule for the taxpayer's filing status. For 2026 there are seven ordinary rates, from 10% at the bottom through 12%, 22%, 24%, 32% and 35% to 37% at the top, and the band edges differ by status.
The married filing jointly schedule reaches the 22% band at $100,800 of taxable income, while the single schedule reaches it at $50,400. Everything that is not preferentially taxed is ordinary income: wages, taxable interest, nonqualified dividends and short-term capital gains.
Character decides the rate
Income keeps a character that decides how it is taxed. Tax-exempt income is excluded.
Qualified dividends, generally paid by U.S. corporations to owners who meet a holding period, and net long-term capital gains on assets held more than one year are preferentially taxed at 0%, 15% or 20%. Gains on assets held one year or less are short-term and taxed as ordinary income.
Capital assets are broadly investment and personal-use assets; inventory, receivables and business property are generally not capital assets.
The stacking rule
Preferential income is placed on top of ordinary income. First separate it: ordinary income is taxable income minus the preferential amount. Tax the ordinary slice on the ordinary schedule.
Then stack the preferential slice above it and tax each part at the rate for the band it occupies, splitting it if it crosses a threshold.
For 2026 the 0% band for a single filer runs to $49,450 of taxable income and the 15% band to $545,500; for joint filers the cut-offs are $98,900 and $613,700. Because preferential income sits on top, a taxpayer with modest ordinary income may pay nothing on part of their dividends.
The kiddie tax
The kiddie tax stops families shifting investment income to children in low brackets.
It applies when a child's unearned income is above $2,700 and the child is under 18 at year-end, or is 18 with earned income not exceeding half of their support, or is a full-time student under 24 in the same position. Net unearned income, the lesser of unearned income over $2,700 and the child's taxable income, is taxed at the parents' marginal rate for the same character of income.
The rest of the child's taxable income is taxed at the child's own rates. A dependent's standard deduction is the larger of $1,350 and earned income plus $450.
Checking your answer
Two checks catch most errors. The ordinary and preferential slices must add back to taxable income, and no slice of preferential income may be taxed at more than 20% or at an ordinary rate.
What this chapter covers
- 01
Ordinary rate schedules for 2026
- 02
Character of income
- 03
Short-term and long-term capital gains
- 04
Qualified dividends
- 05
Stacking preferentially taxed income
- 06
Kiddie tax and net unearned income
Worked example · free
Stack long-term gain on ordinary income
- 2Ordinary slice: $60,000 less $18,000 is $42,000; tax is $1,240 plus 12% of $29,600, or $4,792.
- 2Stack the gain from $42,000 to $60,000: the part up to $49,450, which is $7,450, is taxed at 0%.
- 2The remaining $10,550 is taxed at 15%, or $1,582.50; total tax is $6,374.50.
Key terms
- Ordinary Income
- Income taxed at the regular progressive rates, including wages, taxable interest and short-term gains.
- Qualified Dividend
- A dividend, generally from a U.S. corporation held for the required period, taxed at preferential rates.
- Long-Term Capital Gain
- Gain on a capital asset held for more than one year, eligible for the 0%, 15% or 20% rates.
- Stacking Rule
- The rule that preferentially taxed income is placed on top of ordinary income when applying the thresholds.
- Kiddie Tax
- A rule taxing a child's net unearned income at the parents' marginal rate.
Computing the Regular Income Tax FAQ
Why is preferential income taxed last rather than first?
Stacking it on top means ordinary income fills the lower bands first. The preferential slice then meets the 0%, 15% and 20% thresholds at the highest point of taxable income, which is the rule the thresholds were written for.
Is a short-term capital gain taxed at 15%?
No. A gain on an asset held one year or less is ordinary income and is taxed on the ordinary schedule. Only net long-term gains and qualified dividends receive the preferential rates.
Does the kiddie tax apply to a child's wages from a summer job?
No. It reaches only net unearned income such as interest and dividends. Wages are earned income taxed at the child's own rates, and they also raise the dependent's standard deduction.
Exam move
For each preferential-rate problem, sketch a vertical bar with the ordinary slice at the bottom and the cut-offs marked, then read the rates off the sketch. Rework one kiddie tax case with dividends instead of interest to see the character carry through.
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