How to Calculate Total Tax Liability

  Reviewed by: Ryan Cockerham, CISI Capital Markets and Corporate Finance      Updated November 02, 2018
  Written by: Jane Meggitt

When you want to calculate the income taxes you owe to Uncle Sam, you must take the total of all taxes into consideration, not just the amount your employer withheld from your paychecks. The new tax law may change your tax liability substantially. Understanding the details of the new law can help you prepare for your financial future.

Tips

  • Your total tax liability is a combination of the amounts listed on lines 52 through 62 of IRS Form 1040. You can then subtract qualifying credits, prepayments and deductions in order to arrive at your current tax bill.

Understanding Your Tax Liability Formula

Simply put, your tax liability is the total amount of tax you must pay to the federal government, and it will change from year to year. Income taxes apply to your wages or salary, investment income, capital gains on asset sales and other events that may prove taxable. You'll also pay FICA taxes for Social Security and Medicare.

For income taxes, you’ll determine your gross income by adding wages, salaries and tips, taxable interest, ordinary dividends, capital gains or losses, taxable amounts of retirement plans if you receive distributions and any other income, such as rentals, alimony or tax refunds. You will then deduct items such as traditional IRA contributions if you meet the deductibility requirements, student loan interest, health savings account contributions and pension contributions. This gives you your adjusted gross income. If you itemize, you can deduct home mortgage interest and state and local property taxes if the amount is higher than the standard deduction.

After you fill out Form 1040, your federal income tax return, you’ll find your total tax liability for the year by adding lines 52 through 62, and entering that amount on line 63. However, that’s not the last word on your tax liability. You then adjust that amount by factoring in tax credits and tax prepayments. The IRS is revealing a new Form 1040 for 2018 which will differ from prior forms, but the final version has not yet been made public.

Tax Liability Formula 2018

The Tax Cuts and Jobs Act, signed into law on Dec. 22, 2017, made sweeping changes to the tax code and likely changed your prior tax liability formula. The new tax law eliminates personal exemptions, raises the standard deduction to $12,000 per person, caps state and local property tax deductions at $10,000 and limits home mortgage interest deductions to loans under $750,000, although that only includes taxpayers who had a contract on a new home by Dec. 15, 2017. Home equity loan interest is no longer deductible unless the funds were used to improve, buy or build a home. Work-related moving expenses are no longer deductible unless you are serving in the military. Alimony is no longer deductible by the payee for divorces finalized in 2018, and the recipient will not owe taxes on alimony payments. The child tax credit doubles to $2,000 and many more people are eligible for it, as the income limit is now $400,000 for married couples filing jointly and $200,000 for all other filing statuses. Because of the higher standard deduction, it is estimated that far fewer taxpayers will itemize deductions.

The law also created new tax brackets. For 2018, the brackets start at 10 percent for singles up to $9,525, heads of households up to $13,600 and married couples filing jointly up to $19,050. The next bracket is 12 percent for singles on income between $9,525 and $38,700, heads of household for income between $13,600 and $51,800 and married couples filing jointly for income between $19,050 and $77,400. After that, the bracket jumps to 22 percent for singles on income between $38,700 and $82,500, heads of household for income between $51,800 and $82,500 and married couples filing jointly for income between $77,400 and $165,000. The next bracket is 24 percent for singles and heads of household on income between $82,500 and $157,500 and married couples filing jointly for income between $165,000 and $315,000. The 32 percent bracket applies to singles and heads of household for income between $157,500 and $200,000 and to married couples filing jointly for income between $315,000 and $400,000. The 35 percent bracket applies to singles and heads of household for income between $200,000 and $500,000 and to married couples filing jointly for income between $400,000 and $600,000. The highest tax bracket, 37 percent, applies to singles and heads of households for income above $500,000 and to married couples filing jointly for income above $600,000.

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Tax Liability Formula 2017

In the 2017 tax year, personal exemptions are $4,050 and all state and local property taxes are deductible. Mortgage interest is deductible on loans up to $1 million. Work-related moving expenses are still deductible. The child tax credit is $1,000 and phases out for married couples filing jointly at $110,000 and single filers at $75,000.

The standard deduction is $6,350 for single filers, $9,350 for heads of households and $12,700 for married couples filing jointly. The 2017 tax brackets are 10 percent for singles up to $9,325, heads of households up to $13,350 and married couples filing jointly up to $18,650. Since the tax system is graduated, each next percentage of tax liability takes place after meeting the previous bracket threshold. The 15 percent bracket is up to $37,950 for single filers, $50,800 for heads of households and $75,900 for married couples filing jointly; 25 percent up to $91,900 for single filers, $131,200 for heads of households and $153,100 for married couples filing jointly; 28 percent up to $191,650 for single filers, $212,500 for heads of households and $233,350 for married couple filing jointly; 33 percent for single filers, heads of households and married couples filing jointly up to $416,700; 35 percent up to $418,400 for single filers, $444,550 for heads of households and $470,000 for married couples filing jointly and 39.6 percent for all filers if they exceed their 35 percent bracket by $1.

About the Author

A graduate of New York University, Jane Meggitt's work has appeared in dozens of publications, including Sapling, Zack's, Financial Advisor, nj.com, LegalZoom and The Nest.

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