Along with any investment income, if you work for an employer, you must pay taxes on your income from work. Your employer withholds taxes from your wages as you receive them and sends you a Form W-2 at the end of the tax year showing how much you prepaid in taxes throughout the year. Depending on the withholding information you provided to your employer when you began working for him, he might have withheld enough tax money to cover any other income you have from investments and stock dividends, leaving you with a tax refund when you file your return.
Add all of your income together. Include the income listed on your W-2s, investment income, rental income and income from contract work. According to U.S. Code § 61, any compensation for your services, money derived from a business, capital gains, interest, estate or trust income, rent, inheritances, royalties, partnership income, dividends, debt forgiveness, alimony, pensions, annuities, life insurance and endowments are taxable income.
Subtract your income deductions to determine your adjusted gross income. Choose between the standard deduction provided by the IRS or itemizing your deductions. Deductions include expenses for items used in a business, mortgage interest, medical expenses, business travel expenses, educational expenses, charitable contributions and employee expenses.
Look at the tax rate that is appropriate for your filing status for the return year. For example, if your AGI is $120,000 and you file as a single person, your tax liability is 28 percent, or $33,600.
Calculate any tax credits you have. Subtract the credits from the amount of tax you owe. For example, if you qualify for a $1,000 saver's credit and a $3,000 education credit, your $33,600 tax liability decreases to $29,600.
Inspect your W-2s to determine how much your employer(s) withheld from your pay for taxes. For example, if your gross income from your wages was $130,000 and the amount in Box 2 of your W-2 is $36,400, that is how much you paid toward your tax liability during the year.
Subtract your tax liability from the amount of taxes withheld to calculate your refund. For example, if you owe $29,600 and you paid $36,400, the IRS owes you $6,800.
Consult a tax professional if you have any questions about filing your tax return.
You must file Schedule SE with your tax return if you have income from sources other than an employer to calculate the self-employment tax for that income.
- Cornell University Law School: § 61. Gross Income Defined
- IRS.gov: Tax Topics -- Itemized Deductions
- Efile.com: Federal Tax Credits for Family, Children, Home, Work and School
- IRS. "Taxable and Nontaxable Income," Page 27. Accessed Aug. 9, 2020.
- IRS.gov. "Schedule 1—Additional Income and Adjustments to Income." Accessed March 18, 2020.
- Consult a tax professional if you have any questions about filing your tax return.
- You must file Schedule SE with your tax return if you have income from sources other than an employer to calculate the self-employment tax for that income.
Specializing in business and finance, Lee Nichols began writing in 2002. Nichols holds a Bachelor of Arts in Web and Graphic Design and a Bachelor of Science in Business Administration from the University of Mississippi.