At first glance, the 1040 form may seem a bit confusing, but if you tackle it one section at a time, you’ll probably realize that calculating the income tax you owe on a federal return isn’t extremely complex. And even if you normally file on the abbreviated 1040A or 1040EZ forms, the underlying tax calculation doesn’t change. As a result, familiarizing yourself with six essential tax calculations can help you prepare all three forms.
Total income specifically refers to all income you receive during the tax year minus any amounts that are exempt from tax under the law, such as municipal bond interest and all or part of your Social Security income. Most of the other types of income you receive during the year, most of which are identified on your tax form, aren’t tax-exempt and will increase your total income number.
Adjusted Gross Income
Your adjusted gross income, or AGI, is computed as total income minus the sum of all deductions you report in the “Adjusted Gross Income” section of your tax form. These deductions consistently cover items like alimony payments, interest on student loans, early withdrawal penalties that your financial institution charges and contributions you make to certain tax-advantaged retirement accounts.
To arrive at your taxable income, AGI is reduced by the standard deduction, or if you itemize, by the total reported on Schedule A. The amount of your standard deduction depends on the filing status you choose, but if the deduction calculated on Schedule A is larger, you can save more in tax by itemizing. Your AGI is further reduced by the number of personal and dependent exemptions reported multiplied by the applicable exemption amount for the tax year.
Tax & Total Tax
To calculate the correct amount of tax on your taxable income, you’ll need to apply the appropriate tax brackets for your filing status. Tax brackets certainly change over time, but in general, single filers have more of their income taxed at higher rates than those who file as head of household. A head of household filer may end up paying more tax than a married couple on the same amount of taxable income as a result of the preferential tax brackets that apply to joint filers. To compute your “total tax,” subtract the total amount of certain tax credits you’re eligible for from your “tax” and increase the result by the other taxes you’ve paid, such as self-employment and household employment taxes.
Refund or Overpayment
The next and final step is to calculate your annual tax payments and determine whether you owe the Internal Revenue Service or are due a refund. Subtract the federal income tax withheld that’s reported on your W-2s, all estimated tax payments you made and the total of your refundable tax credits that the IRS treats as tax payments. If your total payment is greater than your total tax, the difference is a tax refund. But if payments are less than your total tax, the difference is the amount you owe to the IRS.
Jeff Franco's professional writing career began in 2010. With expertise in federal taxation, law and accounting, he has published articles in various online publications. Franco holds a Master of Business Administration in accounting and a Master of Science in taxation from Fordham University. He also holds a Juris Doctor from Brooklyn Law School.