Question

Describe how the Federal tax liability for regular taxes (Form 1040) is calculated. What are the components and how do they contribute to the final tax due?

Answer 1

Solution:

In order to calculate the Federal Tax liability following procedures needs to be followed:

Firstly filing status of the & dependents should be verified

i.e whether single, married filing jointly/ separately, qualified widow(er), also whether they are dependent , dependent qualifying for child tax credit.

Secondly , the income , which includes,

• Wages , salaries, tips
• Taxable interest, exempt interest
• Ordinary dividend, qualified dividend
• Alimony received
• Short term / long term capital gains/loss
• Taxable pension/annuity distributions
• Income from rental/ royalties
• Farm income
• Total unemployment compensation
• Social security benefits
• Any other income

Above all income are included which concludes to total income.

Thirdly, we have to calculate adjusted Gross income, which includes,

• Educator expenses
• Certain business expenses
• Health savings account
• Self employed health insurance deductions
• Penalty on early withdrawal of savings
• Ali money paid
• IRA deduction
• Student loan interest deduction
• One half self employment tax..

Above all are included which concludes to Adjusted Gross income

Fourthly, we calculate standardized or itemized deduction

• Standard deduction includes ,
• Medical or dental expenses
• Taxes paid
• Interest paid
• Gifts to charity

After the above deductions, we achieve the taxable income.

After we achieve taxable income , we calculate the tax on taxable income with the help of following slab tax rate

               

T     Tax Rate	Married Filing Jointly or Qualified Widow(er)	Single	Head of Household	Married Filing Separately
10%	$0 - $19,400	$0 - $9,700	$0 - $13,850	$0 - $9,700
12%	$19,400 - $78,950	$9,700 - $39,475	$13,850 - $52,850	$9,700 - $39,475
22%	$78,950 - $168,400	$39,475 - $84,200	$52,850 - $84,200	$39,475 - $84,200
24%	$168,400 - $321,450	$84,200 - $160,725	$84,200 - $160,700	$84,200 - $160,725
32%	$321,450 - $408,200	$160,725 - $204,100	$160,700 - $204,100	$160,725 - $204,100
35%	$408,200 - $612,350	$204,100 - $510,300	$204,100 - $510,300	$204,100 - $306,175
37%	Over $612,350	Over $510,300	Over $510,300	Over $306,175

Then we have to calculate tax credits, viz

• Foreign tax credits
• Credit for child & dependent care expenses
• Education credit
• Retirement savings contribution

After all the deductions we achieve at total tax after credits.

Finally after all calculations we conclude that whether we have to pay or we will get refund.