Calculating taxes on income can be confusing. There are several things to consider when figuring this out such as: determining your gross and taxable income as well as the applicable deductions. The numbers can be confusing, so read on to learn about all the things to consider when calculating your taxes on income.
A Look at How to Calculate Taxes on Income
Determine your Gross Income
Gross income is your income or pay before any deductions or taxes. Under the US Internal Revenue Code, it is defined as “all income from whatever source derived.” It is simply the compensation, wage, or salary, regardless of its source without any deductions or taxes.
For example, you might be getting $8,000 but your salary is at $10,000. $10,000 is considered your gross income since it is the amount that you received before deductions.
Subtract Standard Deductions
There are several deductions on gross income allowable under the US Internal Revenue Code. These deductions vary every year, so be sure to stay updated on your deductions.
There are three basic filing status categories for standard deductions: single individuals, a married couple, and the head of the household.
The difference between the filing as a single or married couple vs. head of household is that the latter should have the following qualifications:
- Paid for more than half the cost of maintaining the household or keeping up the home for a year; and
- A qualifying child or person has lived with you in the same household for more than half a year; OR
- You have a dependent parent who is or who is not living with you.
If you’re a married couple and file separately, you will fall under the ‘single individual’ category where standard deductions apply.
Subtract Other Allowable Deductions
After the standard deductions, you’ll want to find other applicable deductions. There are special deductible items from your gross income, but these other deductions are only applicable to certain individuals with the following:
- Additional standard deduction for the elderly and the blind – $1,300
- Additional deduction for each dependent – maximum of $1,050 or the sum of $350 and the dependent has earned income
Determine your Taxable Income
To calculate taxes on income, you need to subtract all the deductions from your gross income. Add all the deductions applicable to you, and then subtract the amount from your gross. This is your final taxable income number.
Example 1: Your gross income is $100,000. You are single and unmarried. For 2018, the standard deduction for individuals is $12,000.
$100,000 – $12,000 = Your taxable income is $88,000.
Example 2: You are married, and you opted to file jointly. Together, your gross income is $350,000. For 2018, the standard deduction for a married couple filing together is $24,000.
$350,000 – $24,000 = Your taxable income is $326,000.
Determine and Apply the Applicable Federal Income Tax Rate
Each year, the Internal Revenue Service (IRS) issues official tax brackets for the tax year. For 2018, the income tax rates range from 10% to 37%, with seven levels of rates.
Because the rates depend on the level of your taxable income, always remember to check and re-check which tax rate is applicable to you.
After checking the applicable rate to your taxable income, you can now calculate your total income tax due.
Example 1: As a single individual with a taxable income for 2018 of $88,000, under the 2018 tax rates, your applicable tax rate is at the 4th level:
- $14,089.50 + 24% of the amount over $82,500
- $88,000 – $82,500 = $5,500
- 24% of $5,500 = $1,320
- Total Federal INCOME TAX DUE: $14,089.50 + $1,320 = $15,409.50
Example 2: As a married couple filing joint returns with a taxable income for 2018 of $326,000 under the 2018 tax rates, your applicable tax rate is at the 5th level:
- $64,179 + 32% of the amount over $315,000
- $326,000 – $315,000 = $11,000
- 32% of $11,000 = $3,520
- Total Federal INCOME TAX DUE: $64,179 + $3,520 = $67,699
Calculate Any Applicable State Income Tax Rates
There is a difference between state and federal income taxes. To finalize taxes on income, check whether your state imposes income tax. Currently, there are seven states with no personal income taxes:
- South Dakota
Eight states, on the other hand, have a flat individual income tax rate, which means everyone pays the same amount regardless of how much they made:
- North Carolina
State income taxes are different from federal income taxes. States impose different tax deductions and tax credits for calculating your tax due. Remember to check your state’s income tax laws when you calculate taxes on income.
Calculating income taxes can be confusing, but by making sure you have the correct information it’ll be clearer, and less painful in the future.
Still need help on figuring out your taxes? Here’s a short video from FunSimpleLIFE on calculating income taxes.
Have you tried estimating your income taxes? Share your experience in the comment box below!