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.

  1. 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.
  2. 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 adjustments .
  3. 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 standard deduction or you can choose to itemize your deductions .Either way you are also eligible for personal exemptions .After deducting these adjustments, deductions, and exemptions from your income you will have your taxable income.
  4. 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.
  5. 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 tax credits.
  6. Other Taxes  Here you add the taxes like social security tax which cannot be lowered with the tax credits.
  7. 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.
  8. 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 REFUND!

› Calculate Tax

Updated January 27, 2015

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