ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

Calculating Income Tax: The Tax Formula

Updated on January 31, 2015

The Tax Formula for Individuals:

This is just a basic explanation of the tax formula for individual tax payers. I hope someone can find this information useful when trying to understand taxes better.

Individual tax payers calculate their tax in accordance with a tax formula. Understanding the formula is important, since all tax determinations are based on the result. The formula is as follows:

GROSS INCOME
-DEDUCTIONS FOR AGI (adjusted gross income)
=AGI
-GREATER OF ITEMIZED DEDUCTIONS OR STANDARD DEDUCTION
-EXEMPTIONS
=TAXABLE INCOME
x TAX RATE (using appropriate tax tables or rate schedules)
=GROSS TAX LIABILITY
-TAX CREDITS AND PREPAYMENTS
=TAX DUE OR REFUND

Gross Income:

The calculation of taxable income begins with gross income. Gross income includes ALL income, unless the tax law provides for a specific exclusion.

Deductions for Adjusted Gross Income:

The first category of deductions includes the deductions for AGI. These deductions include student loan interest, a tuition and fees deduction, certain educator expenses, alimony payments, trade or business expenses, certain reimbursed employee business expenses paid under an accountable plan, moving expenses, the penalty on early withdrawal from savings, and contributions to qualified retirement plans. I am not going to go into detail about these deductions however if I can provide more detail in a later hub if enough people request it.

Adjusted Gross Income:

The amount of adjusted gross income is sometimes referred to as the “magic line”, since it is the basis for several deduction limitations. For example, the limitation on medical expenses is one. A taxpayer’s AGI is used to determine the phase-out of the otherwise allowable itemized deductions and personal dependency exemption amounts.

Standard Deduction or Itemized Deductions:

Itemized deductions are personal items that congress has allowed as deductions. Included in this category are medical expenses, certain interest expenses, certain taxes, charitable contributions, casualty losses, and other misc. items. Tax payers should itemize their deductions only if the amount exceeds the standard deduction amount. The table below gives the standard amounts for 2014.

Exemptions:

The personal exemption and the dependency exemption for 2014 is $3,950. Keep in mind that there is a Phase-out tax bracket for high-income families. (This can also be discussed in detail in a later hub if requested)

The Gross Tax Liability:

A tax payer’s gross tax liability is obtained by reference to the tax table or use of a tax rate schedule (which is provided below). Tax credits and prepayments are subtracted from gross tax liability to calculate the net tax due the government or the refund due the tax payer.

2014 Tax Brackets

Married Individuals Filing Joint Returns and Qualifying widow/widower:

Tax rate: 10%

Single filers: Up to $9,075

Married filing jointly or qualifying widow/widower: Up to $18,150

Married filing separately: Up to $9,075

Head of household: Up to $12,950

Tax rate: 15%

Single filers: $9,076 to $36,900

Married filing jointly or qualifying widow/widower: $18,151 to $73,800

Married filing separately: $9,076 to $36,900

Comments

    0 of 8192 characters used
    Post Comment

    • profile image

      Olaf 

      3 years ago

      I think you meant to ask if your health iunarnsce premiums are taken out of your check before or after tax. In the United States, almost all companies take out the premiums pre-tax because this costs you less. (For example, if your gross pay is $ 100, your tax rate is 20%, and your premiums are $ 30, you would have $ 50 of net pay if your premiums were taken out after tax [(100 x 80%) - 30 = 50] but you would have $ 56 of net pay if premiums were taken post-tax [(100-30) x 80% = 56].Hope that helps!

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://hubpages.com/privacy-policy#gdpr

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)