April 15 can be a sweet surprise or a rude awakening if you're not aware of your annual tax liability. Luckily, you can use a basic income tax formula for individuals to get an idea of what you're going to pay in federal income taxes. The figure won't be exact by any means, but it will provide a ballpark figure for your tax liability.
Adjusted Gross Income
The first step in the income tax formula is calculating adjusted gross income -- that is, total income minus exclusions from gross income and adjustments to income. Total income is income from any source -- most commonly, salaries and interest income. Exclusions from income are income sources that aren't taxable, such as payments from insurance, educational assistance plans or fringe benefits. Child support, financial gifts, and Social Security and welfare payments are also excluded. Adjustments to income are usually alimony, attorney fees, retirement contributions, tuition payments and student loan interest.
The next step is to calculate taxable income. From adjusted gross income, subtract all personal and dependent exemptions. Next, subtract the larger of either the standard deduction or your itemized deductions to find taxable income. The Internal Revenue Service publishes the personal exemption rates in its annual tax rate bulletin. You'll get an exemption for you and your spouse, plus one for each dependent. To decide between the standard and itemized deduction, compare the annual standard rate with your qualified itemized deduction expenses. Those couples that pay mortgage interest and mortgage insurance, or had high medical expenses, often itemize.
Plug your taxable income figure into the tax rate tables for the current year and subtract tax credits to figure out how much you owe in tax. The tax tables are progressive -- you pay 10 percent tax on the 10 percent tax range, 15 percent on the 15 percent range, and so on. Common tax credits for married couples are educational credits, child credits and earned income credits. Subtract the total from what you've already paid the federal government in taxes in tax withholding, which you can find on your last pay stub for the year or on your W-2 form. The difference between your tax liability and what you've paid is what you'll owe on April 15.
Exceptions and Limitations
Of course, taxes aren't always this simple -- if they were, we wouldn't pay for programs and accountants to do the job for us. Specifically, income from business activities and capital gains and losses are treated a little differently on your tax return. As well, married couples that earn more than $300,000 between the two of them have to start worrying about alternative minimum tax and personal exemption phase-outs. You won't know the exact number until you sit down at tax time with your tax forms, tax software program or tax professional.
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