How to Calculate Federal Income Tax
Calculate wages earned., Add any self-employment income for the year., Estimate other investment income., Add in taxable retirement income, if applicable., Subtract allowable deductions., Determine your itemized deductions., Calculate itemized...
Step-by-Step Guide
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Step 1: Calculate wages earned.
Look at your pay stub from your employer under "gross amount." This is before any other deductions are taken out.
Do the same for your spouse's wages and add it to your amount if you are married and plan to file jointly.
Multiply the monthly wages by 12 to get the annual amount.
If you are paid weekly multiply the weekly gross amount by
52.
Add any estimated variable income you will receive during the year, such as commissions and bonuses.
Subtract income that qualifies as exclusions from tax, such as withholding for employer health insurance plans and retirement plans, to arrive at the estimated amount your employer reports on a W-2 form. -
Step 2: Add any self-employment income for the year.
If you and/or your spouse freelance or own a business you will add the net profit to your regular income.
Start with the business income you made last year and subtract expenses from the past year to get the net profit. (This is the number you would have put on last year's taxes.) Then make adjustments for changes in income and expenses to get an estimated net profit for this year. , This can include dividends from investments, net gains or losses from asset sales such as stocks, and net rental income or loss if you own rental property (subtract expenses from the rental income).
Then add this amount to your total income.
It is always a good idea to keep a log or special file of stock and bond purchases and sales.
You will need the amount you originally paid to buy the stock to calculate gains or losses when you sell it.
The capital losses may be limited.
Rental losses may not be deductible in full.
This is because they are considered a passive loss.If you have rental losses, you may want to consult an accountant or tax consultant. , Estimate income from pensions and annuities, IRA and 401k distributions, and Social Security income using prior year taxable amounts.
Refer to IRS Publication 17 for a more detailed coverage of gross income items and what is considered to be taxable for your particular situation.For example, distributions you receive from a Roth IRA are not taxable once you reach age 59½ and your account has been open for at least five years., There are several possible deductions you can subtract from your gross income.
These include self-employed health insurance, one-half of self-employment tax, IRA deductions or alimony paid.
A complete list is shown on page 1 of Form
1040., Single people are allowed a $6,300 standard deduction and married couples filing jointly are allowed a $12,600 standard for calendar year
2016.
If you can exceed these numbers you may be able to itemize (list and add up) your deductions and therefore pay less in taxes., If you can itemize, the categories allowed are detailed on Schedule A of Form
1040.
They include medical and dental expenses, interest paid, gifts to charity, casualty and theft losses, unreimbursed employee expenses and other miscellaneous expenses.
Take into account any limitations of these items noted in Schedule A.For example, to deduct medical and dental expenses they must exceed 10% of your AGI unless you were born before
1950.
Then the expenses must exceed
7.5%. , Whether you are using the standard deduction or itemized deductions, subtract the total from your AGI.
If you are using the standard deduction, refer to Form 1040-ES for the current year to determine the proper amount based on your filing status.
Those who are age 65 or older or blind, or both, can add specified amounts to the standard deduction., Use Form 1040-ES instructions for the current year to determine the amount of an allowed exemption for each qualified dependent.
A qualified dependent is usually a child under 19 years of age or 24 years if they are a full-time student that you support.
It may also include an elderly parent that you support.
Multiply this amount by the number of exemptions allowable to arrive at the total exemption deduction., Refer to the tax rate schedules in IRS Form 1040-ES and use the schedule that applies to your situation.
For example use Schedule X for single filing status or Schedule Y-1 for married filing jointly., A list is provided on page 2 of IRS Form
1040.
The most likely credits would be for child and dependent care or for the child tax credit (both are subject to limitations).
These credits and other possible allowable credits are covered in IRS Publication
17.Additions to the tax include self-employment tax based on self-employment income and early withdrawal of funds from IRA plans and other qualified retirement accounts.
Add these amounts to your gross income tax and you will have your projected federal income tax for the year. -
Step 3: Estimate other investment income.
-
Step 4: Add in taxable retirement income
-
Step 5: if applicable.
-
Step 6: Subtract allowable deductions.
-
Step 7: Determine your itemized deductions.
-
Step 8: Calculate itemized deductions.
-
Step 9: Subtract your deductions.
-
Step 10: Calculate allowable exemptions.
-
Step 11: Determine gross income tax for the current year.
-
Step 12: Subtract any tax credits that you qualify for.
Detailed Guide
Look at your pay stub from your employer under "gross amount." This is before any other deductions are taken out.
Do the same for your spouse's wages and add it to your amount if you are married and plan to file jointly.
Multiply the monthly wages by 12 to get the annual amount.
If you are paid weekly multiply the weekly gross amount by
52.
Add any estimated variable income you will receive during the year, such as commissions and bonuses.
Subtract income that qualifies as exclusions from tax, such as withholding for employer health insurance plans and retirement plans, to arrive at the estimated amount your employer reports on a W-2 form.
If you and/or your spouse freelance or own a business you will add the net profit to your regular income.
Start with the business income you made last year and subtract expenses from the past year to get the net profit. (This is the number you would have put on last year's taxes.) Then make adjustments for changes in income and expenses to get an estimated net profit for this year. , This can include dividends from investments, net gains or losses from asset sales such as stocks, and net rental income or loss if you own rental property (subtract expenses from the rental income).
Then add this amount to your total income.
It is always a good idea to keep a log or special file of stock and bond purchases and sales.
You will need the amount you originally paid to buy the stock to calculate gains or losses when you sell it.
The capital losses may be limited.
Rental losses may not be deductible in full.
This is because they are considered a passive loss.If you have rental losses, you may want to consult an accountant or tax consultant. , Estimate income from pensions and annuities, IRA and 401k distributions, and Social Security income using prior year taxable amounts.
Refer to IRS Publication 17 for a more detailed coverage of gross income items and what is considered to be taxable for your particular situation.For example, distributions you receive from a Roth IRA are not taxable once you reach age 59½ and your account has been open for at least five years., There are several possible deductions you can subtract from your gross income.
These include self-employed health insurance, one-half of self-employment tax, IRA deductions or alimony paid.
A complete list is shown on page 1 of Form
1040., Single people are allowed a $6,300 standard deduction and married couples filing jointly are allowed a $12,600 standard for calendar year
2016.
If you can exceed these numbers you may be able to itemize (list and add up) your deductions and therefore pay less in taxes., If you can itemize, the categories allowed are detailed on Schedule A of Form
1040.
They include medical and dental expenses, interest paid, gifts to charity, casualty and theft losses, unreimbursed employee expenses and other miscellaneous expenses.
Take into account any limitations of these items noted in Schedule A.For example, to deduct medical and dental expenses they must exceed 10% of your AGI unless you were born before
1950.
Then the expenses must exceed
7.5%. , Whether you are using the standard deduction or itemized deductions, subtract the total from your AGI.
If you are using the standard deduction, refer to Form 1040-ES for the current year to determine the proper amount based on your filing status.
Those who are age 65 or older or blind, or both, can add specified amounts to the standard deduction., Use Form 1040-ES instructions for the current year to determine the amount of an allowed exemption for each qualified dependent.
A qualified dependent is usually a child under 19 years of age or 24 years if they are a full-time student that you support.
It may also include an elderly parent that you support.
Multiply this amount by the number of exemptions allowable to arrive at the total exemption deduction., Refer to the tax rate schedules in IRS Form 1040-ES and use the schedule that applies to your situation.
For example use Schedule X for single filing status or Schedule Y-1 for married filing jointly., A list is provided on page 2 of IRS Form
1040.
The most likely credits would be for child and dependent care or for the child tax credit (both are subject to limitations).
These credits and other possible allowable credits are covered in IRS Publication
17.Additions to the tax include self-employment tax based on self-employment income and early withdrawal of funds from IRA plans and other qualified retirement accounts.
Add these amounts to your gross income tax and you will have your projected federal income tax for the year.
About the Author
Gloria Ward
Committed to making pet care accessible and understandable for everyone.
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