How to Estimate an Income Tax Return

You can reduce some of the stress associated with tax season by learning to estimate the amount of your refund or the amount of tax you will owe before you sit down with your tax preparer. As soon as you receive all your income-related tax documents, such as W-2s and Form 1099s, you can begin estimating your income tax return. You will also need information about your dependents and expenses.

Adjusted Gross Income

To estimate the amount of your refund or the taxes you will owe, start by computing your income. This includes income earned from work, self-employment, residuals, interest, capital gains and losses, winnings from gambling, and income from rental properties. Tax filers must complete additional forms for some types of income, so use estimates from these forms in the final estimation of your total income. For example, self-employment income that may be reported on a Form 1099 requires the tax filer to deduct expenses associated with the self-employment income on Schedule C or C-EZ and compute self-employment taxes on Schedule SE. So the final income estimate for self-employment wages would be the total wages minus the qualified expenses. After estimating your total income, you will need to determine your adjusted gross income. This is done by deducting business and self-employment expenses, such as health insurance deductions and deductible self-employment taxes, student loan interest deductions, IRA deductions, moving expenses, and health saving account deductions from your total income.

Filing Status

Your taxable income is determined by your filing status and the number of your qualifying dependents. If you are unmarried and have qualifying dependents, you can choose the filing status of head of household. If you are married, you can choose married filing jointly or married filing separately. If your spouse died during the year and you have a qualifying dependent, you can file as a widow or widower with qualifying dependent.

Taxable Income

Use your filing status and number of dependents to determine the amount of your standard deductions and exemptions. For example, if you have two qualifying dependents and you are filing as head of household, your standard deduction for 2012 will be $8,700 and the amount of your exemption will be $11,400, which is $3,800 multiplied by 3 (you and your 2 dependents). Then subtract the standard deduction and exemption from your adjusted gross income to estimate your taxable income. If you have deductible medical, property, or job-related expenses, you may choose to itemize instead of taking the standard deduction. Itemize your deductions only if they are more than the standard deduction,

Taxes Owed

The Internal Revenue Service provides tax tables that will help you estimate the amount of tax you owe on your taxable income. Start by finding your income level on the chart. Then, go across the chart to find your filing status. The amount listed under your filing status and income level is the amount of tax you owe on your taxable income. At this point, if you don’t owe any taxes, you can breathe a sigh of relief. However, if you do owe taxes, you may be eligible for deductions and credits that will reduce your tax.

Credits and Other Deductions

Deductions and some credits can lower the amount of tax you owe, but refundable credits can increase your refund. So, when estimating your tax return, go through the list of deductions and credits to determine which ones you are eligible for. For example, if you have qualifying dependents, you may be eligible for the dependent care credit, a nonrefundable credit, and one of three education credits, all of which are refundable. Two important and popular credits are the child tax credit and the earned income credit. The child tax credit can reduce the amount of taxes you owe by $1,000 for each of your qualifying dependents under 17. The additional child tax credit can increase your refund. The earned income credit can reduce your taxes or increase your refund. The IRS provides a chart for tax filers to determine the amount of their credit, which is based on income and number of qualifying dependents. Taxpayers who file as single may also qualify for the credit.

Final Estimate

The number you've come up with isn't the bottom line. Remember that you've likely already paid some of your tax obligation through payroll deductions. You can find the amount of federal tax withheld from your paychecks in box 2 on your W-2 form. If the tax you owe after figuring in the deductions is more than the amount withheld from your paycheck, subtract the withheld amount from the tax you owe to find out how much you can expect to pay the IRS. If the amount withheld is more than you owe, subtract the tax you owe from the withheld amount to get an estimate of your refund.