Tax Formula For Individuals
The taxpayer’s federal income tax legal responsibility is determined on Form 1040 is illustrated in the below given formula. If the taxpayers wanted to make use of the tax saving policies effectively, he or she should understand this basic formula.
The formula reads that,
Federal individual Income Tax Formula Gross Income – Deductions for the Adjusted Gross Income (AGI) = Adjusted gross income (AGI) and Gross includes the specific deductions.
Total Income - Nontaxable Income =
Gross income - Adjustments to Gross income=
Adjusted Gross Income - Exemptions and larger of itemized Deductions or standard deductions =
Taxable Income Times Applicable Tax Rate =
Income tax liability -tax credits and tax payments = Tax due or refund available.
Now you are able to understand how this formula works and helping in tax saving policy.
1040 Form; This is the standard IRS (Internal revenue Service) utilized by an individual’s to file it up their income tax return.
AGI; Adjusted Gross Income (AGI) is the amount of taxable income, consisting of gross income from all taxable sources minus all allowable adjustments.
Deduction; in order to reduce the amount of business income subjected to taxation, any expenditure or any allowable item can be deducted from the gross income.
Exemption; it is the deduction based on a status or circumstances to reduce the entire amount of taxable income and is allowed by law.
Itemized deduction; A deduction from an individual’s taxable adjusted gross income, it consist of money spent on certain goods and services throughout the year. The particular deductions that are allowed by the IRS and include such expenses as mortgage interest, state and local taxes, gifts, and medical expenses; and they are documented on IRS form 1040 schedule A.
Tax Credit; A dollar for dollar reduction which is used to lowers the actual amount of tax payable.
Taxable Income; The amount of net income that is used to calculate the income tax owed. Net income is the gross income minus all adjustments, deductions, and exemptions.
Standard Deduction; The base amount of income which is not subject to tax and is used to reduce the taxpayer’s adjusted gross income, if he or she does not choose the itemized deduction method of calculating taxable income. The standard deduction amount is merely based on the taxpayer’s filing status, age and whether he or she is blind or can be claimed as a dependent on someone else tax return.