Calculating Your Federal Income Tax

Calculating Your Federal Income TaxWhether you like paying taxes or not, you have taxes withheld from your paycheck. The amount of federal income tax withheld is determined by your income and the information on your W-4. If you have your employer withhold too much or too little tax throughout the year you are making a mistake with your money. Even if you have no desire to do your own taxes, you need to be able to estimate your federal income tax for the year because this is the first step in setting your W-4 information correctly. This will allow you to maximize your take-home pay throughout the year so that you can pay off more debt and build more wealth. There are four steps to calculating your federal income tax.

Determine Your Income

You start by estimating your annual household gross income. Whether you are a salaried or an hourly employee, you should have a pretty good idea of how much gross household income you will make during the year. Even if you are in the gig economy and are considered a contractor or own your own business, you still know about how much income you will make. Estimate your household income from all sources to get your gross income for the year.

Above-the-Line Deductions

After you know your gross income you deduct your above-the-line deductions. Above-the-line deductions are deductions that almost everyone can claim. These are not deductions for only the wealthiest people, and you don’t need to itemize to get them. Everyone who qualifies for these deductions can claim them whether they itemize or not.

Some common above-the-line deductions are contributions to retirement accounts and health savings accounts, student loan interest, and various self-employment deductions. Your income minus your above-the-line deductions is your Adjusted Gross Income (AGI).

Standard Deduction

From your AGI, you deduct your standard deduction. Around 14% of the population will itemize. For the 86% who do not itemize, if you are single, your standard deduction is $12,200 for the 2019 tax year, and if you are married filing jointly, your standard deduction is $24,400. Subtract your standard or itemized deduction from your AGI, and you get your taxable income. This is the amount you pay tax on.

As an example, let’s say you are a couple making $80,000 a year and can put 15% ($12,000) of your income into qualified retirement accounts. As a married couple filing a joint return, your standard deduction in 2019 is $24,400. $80,000 gross income – $12,000 to tax-deferred retirement accounts – $24,400 standard deduction = $43,600 taxable income. This is your taxable income. Calculate your tax manually with income tax brackets and rates or use a calculator. For 2019, your tax on $43,600 taxable income before any credits will be $4,844.

Tax credits

After you know your tax, you get to apply any tax credits you qualify for. Let’s say you have two children who both qualify for the child tax credit, which is a $2,000 credit per child. You get to subtract $4,000 from your tax in this example. This means your total tax bill is just $844 for the year. There are many other credits as well, so investigate all of them to see if you qualify.

Other tax credits and deductions can be found on the IRS’s web site.

Now that you have an idea of how to calculate how much federal income tax you owe for the year, you can use this information to determine how many allowances you should enter on your W-4. In the next post, I will go over how to set your W-4 information so that you can maximize your take-home pay throughout the year.


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  1. Thanks for the insightful tips. The intricacies of the federal income tax regulations mean that a trap is always imminent and thus it’s highly important to constantly seek advice from experts.

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