Tax Calculation Steps Overview

Tax Formula: Calculation Steps

• Income: All sources (wages, interest, rental, business, dividends, capital gains, etc.) are considered, excluding certain types like gifts, life insurance payouts, some scholarships, and municipal bond interest. A specific example highlights that only gains on sales (not original cost or loan amounts) are income
• Gross Income: Total income less any exclusions. An example demonstrates how this is calculated.
• Adjusted Gross Income (AGI): Gross income less "above-the-line" deductions (IRA contributions, student loan interest, self-employment expenses, etc.)
• Deductions: Choose between standard deduction (e.g., $14,600 for single in 2024) or itemized deductions (medical expenses over 7.5% of AGI, mortgage interest, charitable contributions, state/local taxes). Choose the higher deduction amount.
• Taxable Income: AGI less deductions. This is the amount subject to tax rates.
• Tax Liability: Calculated using progressive tax brackets (2024 examples provided for single and married filing jointly).
• Credits and Payments: Subtract tax credits (like the Child Tax Credit) and taxes already paid by withholding.
• Refund or Amount Due: The difference between credits & payments and tax liability determines if a refund or amount due is calculated.

Key Concepts

• Exclusions: Income not included in tax calculation (e.g., accident insurance, workers' compensation, certain injuries, gifts, inheritances)
• Above-the-line Deductions: Deductions reducing AGI (HSA contributions, self-employment tax, traditional IRA contributions, alimony before 2019).
• Itemized Deductions: Deductions reducing taxable income (medical expenses over 7.5% of AGI, charitable donations, state and local taxes). Limitations exist, for example, state and local taxes are limited to $10,000.

Filing Statuses

• Single: Unmarried or legally separated.
• Married Filing Jointly: Combined income and deductions of a married couple.
• Married Filing Separately: Each spouse reports their own income and deductions, often resulting in higher overall taxes.
• Head of Household: Applies to unmarried taxpayers maintaining a home for a dependent, offering a higher standard deduction and lower tax rates compared to "Single."
• Qualifying Widow(er): For surviving spouses with a dependent child for two years after the spouse's death.

Example Calculation (Grace)

• Income: Salary and taxable interest constitute total income.
• Adjustments: Example shows reducing AGI through a capital loss deduction.
• Deductions: Standard deduction chosen (head of household).
• Tax Rates: Tax calculation demonstrates how tax liability is calculated using progressive tax brackets.
• Credits and Payments: Illustrates how credits (e.g., Child Tax Credit) reduce tax liability

Important Filing Information

• Filing Deadline: April 15th (unless extended).
• Filing Thresholds (2024): Specific standard deduction amounts for single and married filing jointly are provided.
• Dependents: Guidelines for earned and unearned incomes that meet the criteria for filing as a dependent

Tax Rates and Credits

• Progressive Tax Brackets (2024): Specific tax rates and corresponding income ranges (single and married filing jointly) are detailed.
• Key Credits: Examples of significant tax credits (Child Tax Credit, Dependent Tax Credit, Earned Income Tax Credit) and associated characteristics, including eligibility rules are provided.

Explore the structured steps involved in calculating your taxes, from determining income sources to calculating taxable income. This quiz covers terms like gross income, adjusted gross income, deductions, and tax liability with examples for better understanding. Perfect for anyone looking to enhance their tax knowledge or prepare for tax season.