Overview of the Federal Tax System

The United States employs a progressive income tax system, meaning that as a taxpayer's income increases, higher portions of income are taxed at increasingly higher rates. For 2024 (the tax year tested on the EA exam during May 2025 - February 2026), there are seven marginal tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

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2024 Federal Income Tax Brackets

Single Filers

Married Filing Jointly (MFJ)

Married Filing Separately (MFS)

Head of Household (HOH)

EA Exam Tip: MFS brackets are generally half of MFJ brackets, but this only applies up to the 35% bracket. The 37% threshold for MFS ($365,600) is exactly half of MFJ ($731,200).

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Marginal vs. Effective Tax Rate

Understanding the difference between these two rates is critical for the EA exam:

Marginal Tax Rate

The marginal tax rate is the rate applied to the last dollar of taxable income. It represents the tax bracket the taxpayer falls into. This rate is important for:

• Evaluating the tax impact of additional income
• Determining the tax benefit of deductions
• Making financial planning decisions

Effective Tax Rate

The effective tax rate (also called the average tax rate) is the total tax paid divided by total taxable income. It represents the actual percentage of income paid in taxes.

Formula: Effective Tax Rate = Total Tax Liability / Taxable Income x 100

Calculation Example

Single taxpayer with $85,000 taxable income in 2024:

• Marginal Tax Rate: 22% (rate on the last dollar earned)
• Effective Tax Rate: $13,753 / $85,000 = 16.18%

EA Exam Tip: A common exam trap is confusing marginal and effective rates. The marginal rate is ALWAYS higher than the effective rate in a progressive system.

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Tax Tables vs. Rate Schedules

When to Use Tax Tables

• Taxable income is less than $100,000
• Use the IRS-provided tables (found in Instructions for Form 1040)
• Look up tax amount based on income range and filing status
• Simplifies calculation for most taxpayers

When to Use Rate Schedules

• Taxable income is $100,000 or more
• Must calculate tax using the rate schedule formulas
• Provides precise tax calculation for higher incomes

Rate Schedule Calculation Method

For each filing status, the IRS provides a rate schedule with these components:

1. Starting taxable income for the bracket
2. Base tax amount (tax on all income below this bracket)
3. Marginal rate for income within the bracket

Example Format: Tax = Base Amount + (Rate x (Taxable Income - Bracket Start))

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Taxable Income Calculation Flow

Understanding how to arrive at taxable income is essential:

Gross Income (all income from all sources)
- Above-the-line deductions (adjustments)
= Adjusted Gross Income (AGI)
- Greater of: Standard Deduction OR Itemized Deductions
- Qualified Business Income (QBI) Deduction (if applicable)
= Taxable Income

2024 Standard Deduction Amounts

Additional Standard Deduction for Age/Blindness:

• Single or HOH (age 65+ or blind): Add $1,950 per qualifying condition
• MFJ or MFS (age 65+ or blind): Add $1,550 per qualifying condition

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Net Investment Income Tax (NIIT)

The Net Investment Income Tax is an additional 3.8% tax imposed on certain net investment income of individuals, estates, and trusts with income above statutory thresholds.

NIIT Thresholds (Not Indexed for Inflation)

What Counts as Net Investment Income?

Included:

• Interest, dividends, capital gains, rental income, royalties
• Passive income from businesses
• Gains from disposition of property (other than property held in an active trade or business)

Excluded:

• Wages, unemployment compensation, Social Security benefits
• Self-employment income from an active trade or business
• Tax-exempt interest (municipal bonds)
• Distributions from qualified retirement plans

NIIT Calculation

The NIIT is 3.8% of the lesser of:

1. Net investment income, OR
2. The excess of MAGI over the threshold amount

Example: A single taxpayer has:

• MAGI: $280,000
• Net Investment Income: $50,000
• Threshold: $200,000

Excess over threshold: $280,000 - $200,000 = $80,000 Lesser of $50,000 (NII) or $80,000 (excess) = $50,000 NIIT: $50,000 x 3.8% = $1,900

EA Exam Tip: The NIIT thresholds have NOT been adjusted for inflation since the tax was enacted in 2013. This means more taxpayers become subject to NIIT each year due to income growth.

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Key Points for the EA Exam

1. Know the bracket thresholds - Especially for Single, MFJ, and HOH
2. Understand the $100,000 dividing line - Tax tables below, rate schedules at or above
3. Calculate effective vs. marginal rates - Be ready to compute both
4. NIIT thresholds are static - They don't adjust annually for inflation
5. MFS has unique rules - Generally half of MFJ but with some restrictions
6. Standard deduction amounts - Memorize the 2024 figures for all filing statuses