How to Calculate Federal Income Tax

Three Parts:Determining Adjusted Gross IncomeCalculating Federal Taxable Income and TaxCalculating Exemptions and Final Tax

Sometimes you want to predict how much you will owe in taxes before the end of a calendar year. To calculate federal income tax, you need to first estimate your adjusted gross income (AGI). Then you can estimate your taxable income by subtracting allowable deductions and exemptions from your AGI. After you calculate your tax on taxable income, subtract credits and make other adjustments to arrive at the final net federal income tax amount.

Part 1
Determining Adjusted Gross Income

  1. Image titled Calculate Federal Income Tax 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 what will be the estimate of reported income your employer sends in a W-2 form.
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    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.
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    Estimate other investment income. 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.
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    Add in taxable retirement income, if applicable. 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.[1]
    • 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.[2]
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    Subtract allowable deductions. 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.[3]

Part 2
Calculating Federal Taxable Income and Tax

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    Determine your itemized deductions. Single people are allowed a $6,300 standard deduction and married couples filing jointly are allowed a $12,600 standard for calendar year 2015. If you can exceed these numbers you may be able to itemize (list and add up) your deductions and therefore pay less in taxes.[4]
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    Calculate itemized deductions. 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.[5]
    • 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%.
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    Subtract your deductions. 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.[6]

Part 3
Calculating Exemptions and Final Tax

  1. Image titled Calculate Federal Income Tax Step 9
    Calculate allowable exemptions. 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 21 or elderly parent that you support.
    • Multiply this amount by the number of exemptions allowable to arrive at the total exemption deduction.[7]
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    Determine gross income tax for the current year. 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.[8]
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    Subtract any tax credits that you qualify for. 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.[9][10]
    • 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.

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Categories: Taxes and Fees