Individual income tax returns in the U.S. can become complex due to multiple income sources, deductions, credits, and reporting requirements. While many taxpayers file a basic Form 1040, complexity increases when certain thresholds, limits, or special tax rules apply. Understanding these issues is important to avoid underreporting income, missing deductions, or triggering IRS notices.
This article explains key complex areas in individual tax returns, their current limits, and how the One Big Beautiful Act is expected to impact individual taxpayers.
Multiple Sources of Income and Reporting Requirements
Individuals often earn income from more than one source during the year. This may include wages, self-employment income, investment income, rental income, or retirement distributions.
All income must be reported on the tax return, even if tax is not withheld.
Examples of common income sources
- Wages and salaries (Form W-2)
- Freelance or contract income (Form 1099-NEC)
- Interest and dividends (Forms 1099-INT and 1099-DIV)
- Rental income
- Capital gains from selling assets
- Retirement income such as pensions or IRA distributions
Example:
An individual earns $65,000 in wages and $8,000 from freelance consulting. Even if no tax was withheld on the freelance income, the full $73,000 must be reported. The freelance income may also create self-employment tax liability.
Standard Deduction vs Itemized Deductions
Choosing between the standard deduction and itemized deductions is a major decision for individual taxpayers.
Current Standard Deduction Limits
- Single: $13,850
- Married Filing Jointly: $27,700
- Head of Household: $20,800
Taxpayers should itemize only if total eligible expenses exceed the standard deduction.
Common Itemized Deductions with Limits
- State and Local Taxes (SALT): Limited to $10,000
- Mortgage Interest: Interest on up to $750,000 of qualified mortgage debt
- Charitable Contributions: Generally up to 60% of adjusted gross income (AGI)
- Medical Expenses: Deductible only if exceeding 7.5% of AGI
Example:
If a married couple has $18,000 in mortgage interest, $9,000 in SALT, and $3,000 in charitable donations, total itemized deductions are $30,000. Since this exceeds the $27,700 standard deduction, itemizing is beneficial.
Capital Gains and Investment Income
Capital gains taxation depends on how long an asset is held.
Current Capital Gains Tax Rates
- Short-term gains: Taxed as ordinary income
- Long-term gains: 0%, 15%, or 20%, depending on income level
Example:
If an individual earns $90,000 and sells stock held for more than one year with a $10,000 gain, that gain may be taxed at 15% instead of the higher ordinary income rate.
Tax Credits with Income Limits
Tax credits directly reduce tax liability but often come with income thresholds.
Key Credits and Limits
- Child Tax Credit: Phases out at higher income levels
- Education Credits (AOTC, Lifetime Learning): Subject to income phase-outs
- Retirement Savings Credit: Available only for lower-income taxpayers
Example:
A taxpayer earning $50,000 may qualify for education credits, while a taxpayer earning $120,000 may be partially or fully phased out.
Alternative Minimum Tax (AMT)
AMT applies when certain deductions or income items reduce regular tax too much.
Key AMT Factors
- High state and local tax deductions
- Incentive stock options
- Large capital gains
Although fewer taxpayers are subject to AMT today, it still affects high-income individuals.
What Is Expected to Change Under the One Big Beautiful Act
The One Big Beautiful Act is expected to bring changes affecting individual taxpayers, especially those with complex returns.
Anticipated Changes
- Adjustments to standard deduction amounts
- Possible revision of SALT deduction limits
- Changes to tax brackets and phase-out thresholds
- Simplification of certain credits
- Expanded reporting requirements for high-income taxpayers
Example:
If SALT limits increase under the new law, taxpayers in high-tax states may be able to deduct more state and local taxes, reducing taxable income.
Increased Reporting and Documentation Requirements
Under the proposed changes, individuals with investment income, multiple income streams, or foreign assets may face stricter reporting rules.
Missing or incorrect reporting could lead to penalties or IRS correspondence.
How These Changes Impact Individual Taxpayers
For individuals, these changes may:
- Affect total tax liability
- Change eligibility for deductions or credits
- Increase compliance requirements
- Require more detailed record-keeping
Taxpayers with multiple income sources or higher income levels are likely to be impacted the most.
How Trusty Accounts Supports Individuals with Complex Tax Returns
Trusty Accounts assists individuals by:
- Reviewing income sources for complete reporting
- Applying correct deduction and credit limits
- Assessing impact of new tax law changes
- Ensuring compliance with IRS rules
- Preparing accurate and audit-ready returns
With evolving tax laws and increasing complexity, professional support helps individuals avoid errors and stay compliant.
Conclusion
Individual tax returns can become complex due to income thresholds, deduction limits, credit phase-outs, and new legislative changes. Understanding these areas is essential to accurate tax filing and compliance. As tax laws continue to evolve under measures like the One Big Beautiful Act, professional guidance ensures that individual taxpayers remain prepared and informed.
Trusty Accounts provides structured and compliant tax support for individuals navigating these complexities.