US Federal Income Tax Basics for CPA REG Candidates
By SimplyCPA · 11 October 2026
On this page (7)
- The formula: Gross income − adjustments = AGI; AGI − standard or itemized deductions − other below-the-line deductions = taxable income; tax − credits + other taxes − payments = refund or balance due.
- Rates: Seven brackets — 10%, 12%, 22%, 24%, 32%, 35% and 37% — made permanent by the One, Big, Beautiful Bill Act (OBBBA).
- 2026 standard deduction: $16,100 single, $32,200 married filing jointly, $24,150 head of household.
- New deductions (2025–2028): Qualified tips (up to $25,000), qualified overtime pay (up to $12,500, or $25,000 joint), car loan interest (up to $10,000) and a $6,000 deduction for those 65 and over — all with income phase-outs.
- Exam timing: The AICPA tests OBBBA provisions with 2024 and 2025 effective dates in REG and TCP from July 1, 2026.
Why REG tax looks the way it does
Taxation and Regulation (REG) tests US federal income tax for individuals and entities, property transactions, federal tax procedures, professional ethics and business law. Most of the marks come from the individual and entity tax areas, so the individual tax formula is the foundation of everything else.
The individual tax formula
| Gross income | All income from whatever source derived, unless specifically excluded (wages, interest, dividends, business income, capital gains, rents, retirement distributions) |
| − Adjustments ("above the line") | Educator expenses, deductible IRA and HSA contributions, half of self-employment tax, self-employed health insurance, student loan interest, alimony under pre-2019 agreements |
| = Adjusted gross income (AGI) | Used for many phase-outs and percentage limits |
| − Standard deduction or itemized deductions | Whichever is greater |
| − Other deductions from AGI | Qualified business income deduction (up to 20%); and for 2025–2028, deductions for qualified tips, overtime, car loan interest and seniors |
| = Taxable income | |
| × Tax rates | Ordinary rates, with preferential rates for qualified dividends and long-term capital gains |
| − Credits | Child tax credit, education credits, earned income credit and others |
| + Other taxes | Self-employment tax, 3.8% net investment income tax, 0.9% additional Medicare tax, alternative minimum tax |
| − Payments | Withholding and estimated tax payments |
| = Refund or balance due |
2026 rate brackets
| Rate | Single — taxable income over | Married filing jointly — over |
|---|---|---|
| 10% | $0 | $0 |
| 12% | $12,400 | $24,800 |
| 22% | $50,400 | $100,800 |
| 24% | $105,700 | $211,400 |
| 32% | $201,775 | $403,550 |
| 35% | $256,225 | $512,450 |
| 37% | $640,600 | $768,700 |
Other key 2026 figures
- Alternative minimum tax exemption: $90,100 (unmarried) and $140,200 (married filing jointly), phasing out from $500,000 and $1,000,000.
- Estate tax basic exclusion: $15,000,000. Annual gift exclusion: $19,000.
- Foreign earned income exclusion: $132,900.
- Personal exemptions remain at zero.
The OBBBA in one paragraph
The One, Big, Beautiful Bill Act (Public Law 119-21, enacted July 4, 2025 — the IRS now calls its provisions the "Working Families Tax Cuts") made the 2017 individual rate structure and higher standard deduction permanent, added temporary deductions for tips, overtime, car loan interest and seniors for 2025–2028, raised the state and local tax (SALT) deduction cap, changed charitable deduction rules from 2026, made 100% bonus depreciation permanent for property acquired after January 19, 2025, and raised the Section 179 limit to $2,500,000 (indexed — $2,560,000 for 2026).
Which law does the exam test?
Under the AICPA's policy, a tax law change becomes eligible for testing in the calendar quarter beginning six months after the later of its enactment or effective date. The AICPA has stated that OBBBA provisions with 2024 and 2025 effective dates are eligible in REG and TCP from July 1, 2026, with later-dated provisions phasing in six months after they take effect. Check the AICPA's "Testing of H.R. 1 on the CPA Exam" notice before your exam.
Next, read filing status and standard deduction and AGI, taxable income and tax liability, then work through our REG topics.
Sources
- IRS — Tax inflation adjustments for tax year 2026, including amendments from the One, Big, Beautiful Bill (IR-2025-103)
- IRS — Working Families Tax Cuts (One, Big, Beautiful Bill) provisions
- IRS — Publication 17, Your Federal Income Tax
- AICPA & CIMA — CPA Exam Blueprints and policy on testing new tax legislation