Knowing your gross income helps calculate federal income tax liability
Every year, citizens have to settle their tax bill with Uncle Sam by April 15. Individuals can calculate their tax liability by hand, buy software, or pay a professional preparer to process their tax return. Even if you use software or hire a professional, there is still a simple and easy way to calculate your federal income tax liability. Knowing this number in advance of filing can help you prepare for tax liabilities or potential refunds.
Instructions
1. Add up all of your income. This income can be W-2 income or 1099-MISC income, Social Security income, or income earned overseas. If you earn income not shown on a W-2 or 1099, the Internal Revenue Service (IRS) expects you to report it.
2. Add up your "above-the-line deductions." Above-the-line deductions are tax deductions that all income earners get without itemizing their return with a schedule A. Above-the-line deductions include IRA contributions, student loan interest, and alimony.
3. Determine your adjusted gross income (AGI). AGI is simply total income minus above-the-line deductions. It is usually the last line on page 1 of Form 1040.
4. Calculate your taxable income. Taxable income is calculated as AGI minus the greater of your standard deduction or your itemized deductions. Itemized deductions include mortgage interest, charitable contributions, taxes, and unreimbursed employee business expenses.
5. Reference the Internal Revenue Service tax table for the current tax year. This table will tell you, based on your filing status and income, the amount of taxes you are liable for.
6. Compare the total liability to your withholding during the year. If more tax was withheld than is due, then you will receive a tax refund. If less tax was withheld, then you will have a tax liability and need to send money to the IRS.
