How to Calculate Federal Income Tax Liability

Every year citizens have to settle up their tax bill with Uncle Sam by April 15. Individuals can calculate their tax liability by hand or 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.

Difficulty: Moderate

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 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.

4. Calculate your taxable income. Taxable income is calculated as AGI minus the greater of your standard deduction or your itemized deduction. Itemized deductions include mortgage interest, theft, and non-reimbursed business expenses.

5. Reference the IRS tax table for the current tax year. This table will tell you based on your filing status and income how much 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 refund. If you did not have enough taxes withheld, then you will have a tax liability.

References

• Calculating Taxable Income
• Calculating your Net Income Tax Liability
• IRS tax table