Calculating your income tax liability is a complex process that requires you to take into account a variety of factors. To estimate your taxable income, you need to start by taking your gross income and subtracting any tax deductions and exemptions. Then, you need to apply the corresponding tax category based on your income and marital status to calculate your tax liability. To find an estimated tax refund or due date, you must first determine your taxable income.
You can use the W-2 forms as a reference for filling in the input fields. The corresponding W-2 boxes are shown on the side if they can be extracted from the form. When calculating gross income, subtract deductions and exemptions such as contributions to a 401(k) or pension plan. The resulting figure should be the amount of taxable income. Interest income is generally taxed as ordinary income, including accrued interest on checking and savings accounts, certificates of deposit, and income tax refunds. However, there are certain exceptions such as municipal bonds, interest bonds, and private sector bonds. Ordinary dividends should be considered ordinary unless they are specifically classified as qualifying.
Ordinary dividends are taxed as normal income, while qualified dividends are taxed at the same rate as long-term capital gains, which is lower than ordinary dividends. There are many strict measures in place to ensure that dividends are legally defined as qualifying. Passive income generally comes from two sources: rental properties or businesses that don't require material participation. Any excessive loss of passive income can accrue until it is used or deducted in the year in which the taxpayer disposes of the passive activity in a taxable transaction. Tax exemptions are monetary exemptions aimed at reducing or even completely eliminating taxable income. They don't just apply to personal income tax; for example, charities and religious organizations are generally exempt from taxes.
At some international airports, duty free shopping is available. Other examples include that state and local governments are not subject to federal income taxes. Modified Adjusted Gross Income (MAGI) deductions lower Adjusted Gross Income (AGI), which means less income to pay taxes. They include the expenses claimed in Schedules C, D, E and F, and the adjustments to income. An advantage of MAGI deductions is that they are allowed under the Alternative Minimum Tax (AMT).
MAGI deductions have no effect on whether you take the standard deduction or itemize it instead. See the official IRS website for more detailed information on accurate tax deduction calculations. Here are some common examples of MAGI deductions: most taxpayers will claim the most common and common deductions mentioned above, including several others such as investment interest or tax preparation fees. However, the IRS allows for certain costs that may reduce tax bills. The examples given below are not exhaustive; for more information, visit the official IRS website. Any cost associated with running a business or operation can generally be deducted if the company is operating for a profit.
However, it must be both ordinary and necessary. Try to distinguish between business expenses from other capital or personal expenses and expenses used to determine the cost of goods sold. Any business expenses incurred under the operation of a sole proprietorship are considered MAGI because they are deducted in Schedule C and then subtracted to calculate AGI. Business-related expenses involve many different rules and can be complex. Some may be considered MAGI deductions while many will be itemized deductions. Therefore, it may be a good idea to consult the official IRS rules related to deducting business expenses. To see the difference between standard and itemized deductions, take the example of a restaurant with two options for a meal: the first is à la carte service which is similar to an itemized deduction and allows for consolidation of a series of items culminating in a final price; while the second option is a standard fixed-price dinner which is similar to a standard deduction in that most items are already pre-selected for convenience. While not as simple as shown here, this is a general comparison between detailed and standard deductions.
The calculator automatically determines whether the standard or detailed deduction (based on inputs) will generate greater tax savings and uses the greater of the two values in its estimated calculation of taxes due or due. Because of the complexity of income tax calculations, our income tax calculator only includes input fields for certain tax credits for simplicity. However, it is possible to enter them manually in the 'Other' field; just make sure you come up with correct numbers for each tax credit by following IRS rules. In addition, what follows are basic summaries; see the official IRS website for more detailed information on accurate tax credit calculations:
- Foreign Tax Credit: A non-refundable credit that reduces double taxation for taxpayers earning income outside of the US
- Adoption Credit: A non-refundable tax credit for qualified expenses up to an amount determined by each adopted child whether through public foster care, domestic private adoption or international adoption
- American Opportunity Credit or Lifetime Learning Credit: It is possible to apply for either one in any year but not both
- Credit for Non-Business Energy Properties: Equipment and materials that meet technical efficiency standards established by Department of Energy may qualify; there are two types: qualified energy efficiency improvements (e.g., home insulation, exterior doors/windows/skylights, certain roofing materials) and residential energy property costs (e.g., electric heat pumps, air conditioning systems, stoves with biomass fuels)