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Tax Calculation

What is tax calculation?

Tax calculation is the process by which you figure out how much you owe in income tax. If you file federal income tax Form 1040, you must compute your adjusted gross income (AGI) and your taxable income before you can calculate your tax. Essentially, your AGI is your total income minus certain adjustments. Your taxable income is your AGI minus your itemized deductions (or your standard deduction) and your exemptions. (Personal exemptions have been suspended for 2018 to 2025.)

After finding your taxable income, you need to determine your income tax liability from the tax table or the tax rate schedules. This tax amount is then reduced by certain credits you may be entitled to and increased by any other taxes you may owe. In terms of tax calculation and tax planning, certain taxes deserve particular note: the alternative minimum tax, the capital gains tax, and the self-employment tax.

How do you determine your adjusted gross income (AGI)?

AGI is your total income minus any adjustments, including the following:

  • Educator expenses (up to $250 in qualified expenses for eligible educators)
  • IRA deduction for you and for your spouse
  • Deduction for moving expenses (generally suspended for 2018 to 2025)
  • Deduction for employer portion of your self-employment tax
  • Self-employed health insurance deduction
  • Deduction for Keogh, SEP, and SIMPLE retirement plan contributions
  • Penalty on early withdrawal of savings
  • Alimony paid (pre-2019 divorce, unless divorce agreement provides otherwise)
  • Student loan interest deduction
  • Health savings account (HSA) deduction
  • Tuition and fees (qualified tuition deduction)*

Other less common adjustments are also available, including:

  • Archer MSA deduction
  • Certain expenses of qualified performing artists
  • Jury duty pay given to your employer
  • Reforestation amortization and expenses
  • Certain required repayments of supplemental unemployment benefits
  • Contributions to a Section 501(c)(18)(D) pension plan
  • Certain expenses from the rental of personal property
  • Contributions by certain chaplains to Section 403(b) plans
  • Attorney fees and court costs for actions involving certain unlawful discrimination claims

*Not available after 2017 unless extended by Congress.

How do you determine your taxable income?

To figure the amount of your taxable income, you must first subtract either your itemized deductions or your standard deduction from your adjusted gross income (AGI). Next, you subtract your exemptions. (Personal exemptions have been suspended for 2018 to 2025.) Whether or not you itemize deductions, you may also subtract a qualified business income deduction from your AGI.

Deductions

You can choose to itemize your deductions on Schedule A (Form 1040) or take the standard deduction.

  • Itemized deductions: You can itemize your deductions (such as medical expenses, taxes, mortgage interest, and casualty losses) on Schedule A (Form 1040). You can benefit from itemizing your deductions on Schedule A if you have total itemized deductions that are more than the highest standard deduction amount to which you otherwise are entitled. Note, however, that in years 2013 to 2017, itemized deductions may be limited for taxpayers with high AGIs.
  • Standard deduction: The standard deduction is based on your filing status and whether you are 65 or older or blind. If you were 65 or older or blind during this tax year, you’re entitled to a higher standard deduction than taxpayers under 65 and/or not blind. There are special rules that may eliminate or reduce your standard deduction, such as when your filing status is married filing separate and your spouse itemizes deductions.

Exemptions

Whether you itemize your deductions or use the standard deduction, currently, you can generally deduct $4,050 (for 2016 and 2017) for each exemption you are allowed to claim. However, if your AGI exceeds a specified dollar amount for your filing status, the amount of your deductions and exemptions may be limited or phased out (the phaseout did not apply in 2012). Personal exemptions have been suspended for 2018 to 2025.

How do you determine your tax?

After finding your taxable income, the next step is to figure your income tax liability. This tax amount is then reduced by certain credits to which you may be entitled and increased by any other taxes you owe. Finally, you apply any payments or other credits against your liability to determine whether you owe additional tax or whether you are entitled to a refund.

Tax tables and tax rate schedules are used to ascertain tax. The tax table must be used for taxable income of less than $100,000 (unless Form 8615 or Schedule D is used to calculate tax). The tax rate schedule, however, must be used for taxable income of $100,000 or more (unless Form 8615 or Schedule D is used to calculate tax). Form 8615 is used to calculate the tax for a child’s unearned income that is subject to the kiddie tax rules. Regardless of whether you use the tax table or the tax rate schedule, the amount of tax you pay depends on your tax bracket.

A tax bracket is, generally, the income tax rate at which you are taxed for a certain range of income. Brackets are expressed by their marginal tax rate. Currently, there are seven marginal tax rates: 10, 12, 22, 24, 32, 35, and 37 percent. The income levels at which each rate applies vary depending upon your filing status: married filing separately, married filing jointly, head of household, or single.

What are the current tax rates?

The tax rate schedules for 2019 are as follows:

Single:

 

If Taxable Income Is:

Your Tax Is:

Not over $9,700

10% of taxable income

Over $9,700 to $39,475

$970 + 12% of the excess over $9,700

Over $39,475 to $84,200

$4,543 + 22% of the excess over $39,475

Over $84,200 to $160,725

$14,382.50 + 24% of the excess over $84,200

Over $160,725 to $204,100

$32,748.50 + 32% of the excess over $160,725

Over $204,100 to $510,300

$46,628.50 + 35% of the excess over $204,100

Over $510,300

$155,798.50 + 37% of the excess over $510,300

Married filing jointly and surviving spouses:

 

If Taxable Income Is:

Your Tax Is:

Not over $19,400

10% of taxable income

Over $19,400 to $78,950

$1,940 + 12% of the excess over $19,400

Over $78,950 to $168,400

$9,086 + 22% of the excess over $78,950

Over $168,400 to $321,450

$28,765 + 24% of the excess over $168,400

Over $321,450 to $408,200

$65,497 + 32% of the excess over $321,450

Over $408,200 to $612,350

$93,257 + 35% of the excess over $408,200

Over $612,350

$164,709.50 + 37.6% of the excess over $612,350

Married individuals filing separately:

 

If Taxable Income Is:

Your Tax Is:

Not over $9,700

10% of taxable income

Over $9,700 to $39,475

$970 + 12% of the excess over $9,700

Over $39,475 to $84,200

$4,543 + 22% of the excess over $39,475

Over $84,200 to $160,725

$14,382.50 + 24% of the excess over $84,200

Over $160,725 to $204,100

$32,748.50 + 32% of the excess over $160,725

Over $204,100 to $306,175

$46,628.50 + 35% of the excess over $204,100

Over $306,175

$82,354.75 + 37% of the excess over $306,175

Heads of household:

 

If Taxable Income Is:

Your Tax Is:

Not over $13,850

10% of taxable income

Over $13,850 to $52,850

$1,385 + 12% of the excess over $13,850

Over $52,850 to $84,200

$6,065 + 22% of the excess over $52,850

Over $84,200 to $160,700

$12,962 + 24% of the excess over $84,200

Over $160,700 to $204,100

$31,322 + 32% of the excess over $160,700

Over $204,100 to $510,300

$45,210 + 35% of the excess over $204,100

Over $510,300

$152,380 + 37% of the excess over $510,300

Trusts and estates:

 

If Taxable Income Is:

Your Tax Is:

Not over $2,600

10% of taxable income

Over $2,600 to $9,300

$260 + 24% of the excess over $2,600

Over $9,300 to $12,750

$1,868 + 35% of the excess over $9,300

Over $12,750

$3,075.50 + 37% of the excess over $12,750

How do the long-term capital gains tax rates come into play?

Currently, the highest marginal tax rate applicable to ordinary income and short-term capital gains of individuals is 37 percent, whereas the top long-term capital gains rate for individuals is 20 percent for most long-term capital gains. Because of this difference, you need to complete a special capital gains tax worksheet to calculate your capital gains tax.

Long-term capital gains and qualified dividends are generally taxed at special capital gains tax rates of 0 percent, 15 percent, and 20 percent depending on your taxable income. The actual process of calculating tax on long-term capital gains and qualified dividends is extremely complicated and depends on the amount of your net capital gains and qualified dividends and your taxable income. These rates also generally apply to qualified dividends paid to individuals from domestic corporations and qualified foreign corporations.

What about the alternative minimum tax (AMT)?

The purpose of the alternative minimum tax (AMT) is to ensure that taxpayers with substantial income will not escape taxation entirely by employing certain exclusions, deductions, and credits. The tax law gives special treatment to some kinds of income and allows special deductions and credits for some kinds of expenses. Taxpayers who benefit from the law in these ways may have to pay at least a minimum amount of tax through an additional tax: the AMT.

What about the self-employment tax?

If you are self-employed, you must pay Social Security and Medicare taxes for yourself as part of your income tax. The self-employment tax is based on net earnings from self-employment, not on taxable income. The rate on net earnings is 15.3 percent; 12.4 percent is for Social Security and 2.9 percent is for Medicare. The maximum amount subject to the Social Security part is currently $132,900 (up from $128,400 in 2018). All of your net earnings of at least $400 are subject to the Medicare tax.

You generally must report and pay self-employment tax (Schedule SE of Form 1040) if either of the following applies to you (or to your spouse, if you file a joint return):

  • You were self-employed and your net earnings from self-employment were $400 or more
  • You had church employee income of $108.28 or more

For tax years after 2012, a 0.9 percent Medicare surtax also applies to wages and self-employment income in excess of $200,000 for single taxpayers and over $250,000 for married couples filing joint returns ($125,000 for married couples filing separate returns).

What are some other taxes that might affect you?

  • Social Security and Medicare tax on tips not reported to employer: If you received tips of $20 or more in any month while working for one employer but didn’t report all of them to your employer, you must figure your Social Security and Medicare tax on the tips not reported. Use Form 4137 and attach it to Form 1040.
  • Household employment taxes: If you have a household employee, you may need to pay state and federal household employment taxes. You generally must add your federal employment taxes to the income tax that you report on your federal income tax return. Household work is work done in or around your home by baby-sitters, nannies, health aides, private nurses, maids, caretakers, yard workers, and similar domestic workers. A household worker is your employee if you can control not only what work is done but also how it is done. If you have a household worker, you may need to withhold and pay Social Security and Medicare taxes, or you may need to pay federal unemployment tax, or you may need to do both. For more information, see IRS Publication 926, or Schedule H and its instructions.
  • Premature distribution tax: If you take a distribution from your qualified plan before you reach age 59½, you may have to pay a 10 percent premature distribution tax on that part of the distribution that is taxable (unless you meet an exception). This penalty tax can amount to a substantial sum if your distribution is large.
  • A 20 percent tax on excess (golden parachute) payments: If you received an excess parachute payment (EPP), you may have to pay a tax equal to 20 percent of this excess payment.
  • For tax years after 2012, an additional hospital insurance (Medicare) tax of 0.9 percent: This additional tax will be assessed on wages (as well as self-employment income) that exceed $200,000 ($250,000 for married couples filing joint returns, $125,000 for married couples filing separate returns). Employees will be liable for this amount to the extent that the additional tax has not been withheld from wages.
  • For tax years after 2012, a new unearned income Medicare contribution tax on the investment income of high earners: The 3.8 percent tax will apply to the lesser of (1) net investment income or (2) the amount by which adjusted gross income (AGI) exceeds the $200,000 or $250,000 for married couples filing jointly ($125,000 for married couples filing separate returns) threshold amounts. Net investment income generally includes interest, dividends, capital gains, annuity income, royalties, and rents. Tax-exempt interest won’t be included, nor will income or distributions from qualified retirement accounts.
  • Starting in 2014, a new tax on individuals who don’t have adequate health care coverage (this is often referred to as the individual insurance mandate): This tax will be phased in over three years, starting at the greater of $95, or 1 percent of gross income in 2014 (up to a family maximum of $285); increasing to the greater of $325, or 2 percent of gross income in 2015 (up to a family maximum of $975); and rising to the greater of $695, or 2.5 percent of gross income in 2016 and 2017 (up to a family maximum of $2,085). The individual insurance mandate has been eliminated for months beginning after December 31, 2018.
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