Calculate Federal Income Tax
"The hardest thing in the world to understand is the income tax."
-- Albert Einstein
To calculate federal income tax might be difficult but the process can be divided in eight steps.
- Income First you have to report all your income.
There are fourteen plus different types of income to report. For
certain incomes you will need to attach a schedule where the income and
related expenses are calculated.
- Adjustments When these adjustments are made to your income, two things happen:You get a deduction that lowers the amount of income that is taxableYour adjusted gross income (or AGI) becomes lower.The
adjusted gross income is the income that is used to see if you are
eligible for certain tax deductions and credits. A lower AGI means more
tax breaks for you.Adjustments include IRA's, health insurance for self-employed and more.Here you can read more about
- Deductions and Exemptions Deductions and exemptions reduce the amount of income that is taxed but the adjusted gross income remains unchanged.You can either take a
or you can choose to
itemize your deductions
.Either way you are also eligible for
.After deducting these adjustments, deductions, and exemptions from your income you will have your taxable income.
- Federal Income Tax You take your taxable income multiply with the appropriate tax rate. Or you can use a tax table to calculate federal income tax.Some
people cannot use this method of calculating income tax and have to use
the Alternate Minimum Tax (AMT) method which can create a higher tax.
To see if you need to use the AMT method use the IRS provided AMT Assistant.
This method was created to keep the rich from taking too many
deductions. Unfortunately it was not designed with inflation in mind and
Currently it affects many middle class taxpayers, too.
- Tax Credits Tax
credits lower your taxes dollar for dollar and can lower your federal
income tax to zero. These credits are otherwise known as non-refundable
- Other Taxes Here you add the taxes like social security tax which cannot be lowered with the tax credits.
- Payments Since
you most likely have already paid in taxes throughout the year you have
to deduct these payments when calculating federal income tax on your
tax return. These payments include tax withheld on your paycheck and
estimated tax payments
.Refundable tax credits like
Earned Income Credit
Additional Child Tax Credit, and American Opportunity Credit are also considered payments.
- Refund or Balance Due When
comparing your taxes and payments you will see if you overpaid or
underpaid taxes. If your taxes are more than your payments then you owe
and have to pay more tax.And if your payments are more than your taxes
then you get a
Updated January 27, 2015