The major sources of federal tax revenue are individual income taxes, Social Security and other payroll taxes, corporate income taxes, excise taxes, and estate and gift taxes. This report describes the federal tax structure, provides some statistics on the tax system as a whole, and presents analysis of selected tax concepts. The individual income tax is the major source of federal revenues, followed closely by Social Security and other payroll taxes. As a revenue source, the corporate income tax is a distant third. Estate and gift and excise taxes play only minor roles as revenue sources. The individual income tax is based on earnings individuals accrue from a variety of sources. Included in the individual income tax base are wages, salaries, tips, taxable interest and dividend income, business and farm income, realized net capital gains, income from rents, royalties, trusts, estates, partnerships, taxable pension and annuity income, and alimony received. The tax base is reduced by adjustments to income, including contributions to Keogh and traditional IRAs, some interest paid on student loans and higher education expenses, contributions to health savings accounts, and alimony payments made by the taxpayer. This step of the process produces adjusted gross income (AGI), which is the basic measure of income under the federal income tax. Deductions from the income tax base that result in an individual's AGI are also known as "above the line" deductions. These deductions are available to all taxpayers, whether the taxpayer chooses to take the standard deduction or itemize deductions. The tax base is further reduced by either the standard deduction or individuals' itemized deductions. Itemized deductions are allowed for home mortgage interest payments, state and local income taxes, state and local property taxes, charitable contributions, medical expenses in excess of 10% of AGI, and for a variety of other items. For taxable years 2004 through 2013, at the election of the taxpayer, state and local sales taxes can be deducted as an alternative to state and local income taxes. The tax base is reduced further by subtracting personal and dependent exemptions. Exemptions are a fixed amount to be subtracted from AGI. Exemptions are allowed for the taxpayer, the taxpayer's spouse, and each dependent. In 2014, the exemption amount per person is $3,950. For taxpayers with high levels of AGI, the personal and dependent exemptions are phased out. Federal income taxes are assessed on a taxpayer's taxable income. Taxable income equals AGI reduced by either the standard deductions or itemized deductions and personal and dependent exemptions. Figure 1 illustrates the computation of taxable income. The tax liability depends on the filing status of the taxpayer. There are four main filing categories: married filing jointly, married filing separately, head of household, and single individual. The computation of a taxpayer's tax liability depends on their filing status. The income tax system is designed to be progressive, with marginal tax rates increasing as income increases. At a particular marginal tax rate, all individuals, regardless of their level of earnings, pay the same tax rate on their first dollar of taxable income. Once a taxpayer's income surpasses a threshold level placing them in a higher marginal tax bracket, the higher marginal tax rate is only applied on income that exceeds that threshold value. Currently, the individual income tax system has seven marginal income tax rates: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. These marginal income tax rates are applied against taxable income to arrive at a taxpayer's gross income tax liability. After a taxpayer's tax liability has been calculated, tax credits are subtracted from gross tax liability to arrive at a final tax liability. Major tax credits include the earned income tax credit, the child tax credit, education tax credits, and the credit for child and dependent care expenses. Not all income is subject to the marginal income tax rates noted above. Long-term capital gains—that is, gain on the sale of assets held more than 12 months—and qualified dividend income are taxed at lower tax rates. Net investment income is also subject to an additional tax for taxpayers above certain income thresholds. In order to levy an income tax, income must first be defined. As a benchmark, economists often turn to the Haig-Simons comprehensive income definitions. Here, taxable resources are defined as changes in a taxpayer's ability to consume during the tax year. Another way to view the individual income tax base is as an approximation of the sum of all labor and capital income earned or received over the course of the year. Under this view, the tax base resembles national income as measured by economists. In addition to labor and capital income, many transfer payments are also subject to taxation. There are a number of forms of what would broadly be defined as income that are excluded from taxable income in practice. For example, wage income of employees is taxed, although most contributions to employee pension and health insurance plans and certain other employee benefits are not included in wages subject to income tax. Employer contributions to Social Security are also excluded from wages. When pensions are received, they are included in income to the extent that they represent contributions originally excluded. If the taxpayer has the same tax rate when contributions are made and when pensions are received, this treatment is equivalent to eliminating tax on the earnings of pension plans. Some Social Security benefits are also subject to tax. Passive capital income, in the form of capital gains, interest, and dividends on financial instruments, is also taxed. The tax base excludes capital gains that are unrealized, such that capital gains are only taxed on realization. Unlike capital gains, assets earning interest are taxed on accrual. Taxes are paid on the interest earned in each tax year. Taxable interest income is added to a taxpayer's AGI and taxed according to the taxpayer's marginal tax rate. Interest that is earned on tax-exempt securities, such as those issued by state and local governments, is not subject to taxation. Like capital gains, dividends are taxed at a lower rate than other income. Qualified dividends are taxed at the same rate as capital gains. Income from operating a business through a proprietorship, partnership, or small business corporation that elects to be treated similarly to a partnership (Subchapter S corporation), or through rental property (which reflects returns to both investment and effort) is also subject to tax. This income is the net of gross receipts reduced by such deductible costs as payments to labor, depreciation, costs of goods acquired for resale and other inputs, interest, and taxes. Some investment income of small businesses is subject to favorable treatment through provisions that allow costs of capital equipment to be expensed. Other income, such as miscellaneous income, gambling winnings, and royalties, is also included in the tax base. As noted above, there are several adjustments to the income made to determine adjusted gross income (AGI). These are the so-called "above the line" deductions noted above. As was illustrated in Figure 1 , deductions and exemptions are subtracted from AGI to determine taxable income. The next section provides more detail on these deductions and exemptions. Individuals subtract from their adjusted gross income either the standard deduction or itemized deductions, along with an exemption for each family member. The standard deduction and personal exemption are indexed for inflation. Personal exemptions and standard deductions from 2006 through 2014 are given in Table 1 . Personal exemptions are limited for certain high-income taxpayers under current law. Provisions under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA; P.L. 107-16 ) gradually reduced the personal exemption phaseout (PEP), such that the phaseout was completely repealed in 2010. The Tax Relief, Unemployment Reauthorization, and Job Creation Act of 2010 ( P.L. 111-312 ) extended the repeal of PEP for two years, through 2012. PEP was reinstated as part of the American Taxpayer Relief Act (ATRA; P.L. 112-240 ). For 2014, personal exemptions are phased out for single taxpayers with adjusted gross income (AGI) above $254,200 ($305,050 for married filing jointly; $279,650 for head of household filers). Personal exemptions are phased out by 2% for each $2,500 by which a taxpayer's AGI exceeds these thresholds. Itemized deductions are also phased out as income exceeds a certain threshold. Like PEP, the limitation on itemized deductions, also known as Pease, was phased out under EGTRRA. By 2010, the Pease limitation was repealed. The Pease-related provisions of EGTRRA were scheduled to expire at the end of 2010. The Tax Relief, Unemployment Reauthorization, and Job Creation Act of 2010 ( P.L. 111-312 ) extended repeal of the Pease-limitation through 2012. The Pease limitation was reinstated beginning in 2013 for certain high-income taxpayers as part of ATRA. For 2014, itemized deductions begin to phase out once AGI exceeds $254,200 for single filers, $279,650 for head of household filers, and $305,050 for married taxpayers filing jointly. For these taxpayers, the total of certain itemized deductions is reduced by 3% of the amount of AGI exceeding the threshold. The total reduction, however, cannot be greater than 80% of the deductions (and the taxpayer always has the option of taking the standard deduction). The deductions not subject to the Pease limitation are medical and dental expenses, investment interest, and casualty and theft losses. Tax rate schedules for individuals include joint returns for married couples, single returns, and head of household returns for single individuals with dependents. Married couples can file separate returns; the brackets in these schedules are half as wide as brackets in the joint return, so there is no tax rate advantage in filing such a return. The individual income tax rate schedules for 2014 are shown in Table 2 .