Income tax calculation is a complex process that involves taking your gross income and subtracting any applicable deductions to arrive at your taxable income. This taxable income is then used to calculate your tax liability, which is the amount of taxes you owe. In the United States, income is taxed by the federal government, most state governments, and many local governments. The federal income tax system is progressive, meaning that the tax rate increases as your income increases. Marginal tax rates range from 10% to 37%.
Taxpayers can reduce their tax burden and the amount of taxes they owe by applying for deductions and credits. Financial advisors can help you understand how taxes fit into your overall financial goals and provide guidance on financial and investment plans such as retirement, homeownership, insurance, and more. The United States has a progressive income tax system. This means that there are higher tax rates for higher income levels. These are called “marginal tax rates”, meaning that they don't apply to total income, but only to income within a specific range.
These ranges are called brackets and vary depending on whether you're single, married, or head of household. To calculate taxable income, start by making certain adjustments to gross income to arrive at adjusted gross income (AGI). Once you've calculated adjusted gross income, you can subtract any deduction you qualify for (whether itemized or standard) to calculate taxable income. Many taxpayers claim the standard deduction, which varies by marital tax status. Tax credits apply to your tax liability, that is, the amount of tax you owe. Some credits are refundable, meaning you can get paid for them even if you don't owe any income tax.
Conversely, non-refundable tax credits can reduce your liability to no lower than zero. Whether or not you receive a tax refund depends on the amount of tax you paid during the year and whether or not you received any refundable tax credit. If the amount of tax you owe (your tax liability) is less than the amount withheld from your paycheck during the course of the year, you will receive a refund for the difference. If you don't get a tax refund and instead owe money on tax day, there may be a way to reduce the problem. To get started, you still need to file your taxes on time. Otherwise, you'll also have to pay a fee for filing after the deadline.
If you think you can't pay your tax bill in full, contact the IRS as they may be able to offer payment options. The most economical way to pay a tax bill is still with a check or through direct payment from the IRS. All major tax filing services will provide instructions for both payment options. Additionally, many states have their own income taxes which are collected in addition to federal income taxes.