Figuring out the tax you owe based on your income can be determined by taking your taxable income and multiplying it with the tax bracket percentage your income falls under. The percentages range from 10 percent to 35 percent, depending on how much money you make per year. The U.S. federal government and 41 of the 50 states of the U.S. collect income tax. If you don't live in one of the nine states that does not collect income tax, you will need to figure out your income tax for the federal government and your state of residence.
Your total taxable income is not just your gross wages — the money you earn before taxes and other fees are taken out of your paycheck. Your total taxable income also includes cash payments, money earned as an independent contractor, capital gains, child support payments and alimony, among other qualifying income. Take note that certain withdrawals or distributions from a pension fund or a retirement fund, like a 401(k) or 403(b) plan, can count as taxable income if the contributions to the plan were not taxed at the time they were made. Withdrawals of these, therefore, must be included in your total taxable income for the year the distribution was taken. However, qualified distributions from designated Roth accounts that had tax taken out when the contributions were made will not be subject to income tax as the tax was already collected. You can designate part or all of your elected deferrals as after-tax contributions. Also keep in mind that various foreign income, money earned outside the U.S., is also taxable and must be counted as part of your total taxable income -- unless it is qualified military combat pay or you qualify for the foreign earned income exclusion, for example. The IRS provides a list of all types of income in its Publication 525.
You can reduce the amount of your total taxable income by taking deductions. Everyone is entitled to a standard deduction or itemized deductions. The standard deduction varies year-to-year and is based on your filing status. You can claim as many itemized deductions that apply to you, including things like business expense deductions, deductions for medical fees, student loan interest and applicable mortgage interest. Choose whichever deduction total, standard or itemized, is higher to make your taxable income lower.
To figure out how much of your income is subject to income tax, you take your total taxable income and subtract the total of your deductions. The difference is what your taxable income is and determines where you fall in the federal and state tax brackets -- if applicable. For example, if you have a total income of $25,000 and your deductions add up to $5,000, you would have $20,000 in taxable income.
Where you fall within the tax brackets for the federal government and state, if you live in a state that collects individual income tax, can change annually. Also note that each of the states that collect income tax have their own income tax brackets, which may be different from the federal government's and other states. Check with the IRS and your state department of finance, if applicable, for the current tax filing year’s tax brackets. Note that if you live in Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming, you do not need to pay income tax to the state as of 2012.
Your income tax is the amount of your taxable income multiplied by your tax bracket. What you owe the federal government and your state, if you live in one of the 41 states that collects income tax, can be different. You must calculate your income tax for each using each taxing body's individual tax bracket. Taking the earlier example of a taxable income of $20,000 and saying you fall in the 15 percent tax bracket for the federal government, your income tax is $20,000 multiplied by 0.15 or $3,000. That is your income tax for the federal government. Again using the $20,000 taxable income and saying you fall in the 10 percent tax bracket of your state, your income tax is $20,000 multiplied by 0.10 or $2,000 in state income tax.
- Forbes: 2012 Federal Income Tax Brackets (IRS Tax Rates)
- Internal Revenue Service: Income from Abroad is Taxable
- Internal Revenue Service: Publication 525 (2011), Taxable and Nontaxable Income
- Tax Guide for Investors: Income Tax 101
- Bloomberg: States Lacking Income Tax Get No Boost in Growth: BGOV Barometer