www.taxprofessionals.com - TaxProfessionals.com
Posted by Pat Raskob

Calculating Your Personal Taxes

Calculating Your Personal Taxes

Your 1040s

If your income is over a specific amount, paying the federal income tax is mandatory. You might have to pay income tax in some states as well. The income tax rate is a matter of the income amount and your filing status – separately or jointly.

This article will shed light on everything you need to calculate your taxes, as it could be a pretty confusing task. With IRS form 1040 as a basis, we will explore how you will go about your taxes.


Your Gross or Total income (Line 22)

This includes:

  • Earned income from employment like salary, wages, commissions, tips, bonuses

  • Unearned income from any source asides from employment like interest, dividends, capital gains, savings bonds, etc.


Important Things to Note

  • Further taxable income sources are alimony, unemployment benefits, lottery, or gambling winnings. 

  • Income that cannot be taxed (called exclusions) are child support, gift or inheritance, municipal bond interest, proceeds from life insurance, disability income, and some other employee fringe benefits.

  • For parents, their child’s taxable income is linked to theirs. 

Calculating Your Adjusted Gross Income  - Line 37 

Your AGI (Adjusted Gross Income) is an essential part of your tax calculation. To calculate your AGI, you will subtract some deductions from your income to reduce your taxable income figure. 

Sample deductions that will determine your AGI are:

  • Self-employed health insurance deductions

  • Alimony paid

  • Moving expenses that qualify

  • Penalty for withdrawing early on savings

  • Higher education expenses that qualify

  • Contribution to a retirement plan

Importance of Your AGI

Your AGI is a measure of your eligibility for some credits and deductions.

Standard or Itemized Deductions: Which Should You go for?

After the knowledge of your AGI, you can even reduce your taxable income further by using either the standard deduction or itemized deduction – the greater of the two.


Considering Standard Deduction

People with a simple financial situation will benefit from the standard deduction approach. For 2021, single and couples filing separately have a standard deduction rate of $12,550 while joint filers have a rate of $25,100, and the head of household has it at $18,800

Considering Itemizing Deductions 

People that paid so much in state taxes, gave so much to charity, and had a mortgage, paid so much in medical expenses with a series of investments, itemizing might be the best bet. Sample itemized deductions are property taxes, local and state income taxes, dental and medical expenses, mortgage interest on your first two residences, theft and casualty losses, expense on investment interest, and others. 

Estimating Taxable Income

After an idea of your AGI, the exemptions, and deductions you can claim, it is time to estimate your taxable income and the tax you will pay. 

What Is Your Tax Rate?

Ideally, one will pay a proportionally more significant tax amount on a higher income amount. This gives two tax types:

  • Marginal tax rate: the tax percentage you pay on the final dollar of your taxable income

  • Average tax rate: the average amount you pay, when you consider all your income

For instance, a single filer with a taxable income of $40,000 will have a marginal income rate of 25%, while the average tax rate will be quite lower.


Tax Credits – Line 47 to 54

A tax credit reduces the tax you owe via a dollar-to-dollar amount. Credit is pretty valuable compared to a deduction, as a $200 credit means the amount you will pay in tax will be $200 lower. 

There are several tax credits you can take depending on your circumstance and income. Examples are

  • Credit for adoption expenses that qualify

  • Credit for a kid below 17 that qualify

  • Credit for Child and dependent 

  • Residential energy credit

  • American Opportunity Tax Credit

  • Lifetime learning credit

  • Earned Income Tax Credit 

Tax Due – Line 63

On estimating your taxable income, you need a few more steps to determine your actual tax.

  • Remove all payments and credits from the tax you owe 

  • Line 75 and 76 will determine if you will get a refund or owe more taxes

For people getting a huge refund, the implication is that a huge amount is being withheld from their paycheck. The implication is that you are giving Uncle Sam an interest-free loan. Also, prepare for an underpayment penalty for withholding too little. 



Pat Raskob
Contact Member