All federal income tax forms calculate your tax liability in the same way. Therefore, familiarizing yourself with the essential components of the calculation is helpful for determining how much you will get back from your income taxes. However, to compute an accurate refund, it’s essential that you have access to your total earnings for the year.
Calculate your gross income. Your gross income includes all earnings that the tax law doesn’t specifically exempt from tax. This includes your employment earnings on a W-2 form, self-employment earnings, interest, dividends and even the alimony payments you receive. However, gross income doesn’t include child support payments, inheritances or gifts you receive.
Compute adjusted gross income (AGI). Although the types of expenses you can deduct can change each tax year and can depend on the tax form you choose, the IRS allows you to claim deductions that directly reduce your gross income to arrive at your AGI. Common deductible expenses include half of the self-employment tax payments you make, college tuition, student loan interest payments and some of your contributions to retirement accounts and health savings accounts. Once you calculate each deduction, subtract the total from your gross income to arrive at your AGI.
Compare the standard deduction to your itemized deductions. Each tax year you have a choice whether to claim the standard deduction for your filing status or to itemize. Since you can always choose the larger of the two, it’s beneficial to evaluate the amount of itemized deductions you can claim on Schedule A, such as your mortgage interest and charitable donations. Once you make your choice, reduce your AGI by the deduction.
Calculate your taxable income. The IRS provides all taxpayers who are not dependents to other taxpayers with one personal exemption. However, you can claim one additional exemption for each dependent you are eligible to claim. Multiply the number of exemptions you can claim by the applicable exemption amount for the year and subtract the result from your remaining income to arrive at your taxable income.
Use tax tables to assess your tax liability. Using the tax tables from the instructions to your tax form, calculate your income tax liability using your taxable income and filing status. The result is your federal income tax bill.
You should always reference the instructions to your tax form to evaluate whether you are eligible to claim a tax credit. Unlike a deduction that only reduces your taxable income, a tax credit provides a dollar-for-dollar reduction in the tax bill you calculate and can increase your refund.
Items you will need
- IRS Form 1040, 1040A or 1040EZ and instructions
- IRS Schedule A and instructions
- W-2 forms