How to Determine Your Tax Liability
Every year many tax payers have no idea whether they will owe taxes or not. Often, some tax payers feel that they may owe, but have no idea how much or why? Understanding how to determine your tax liability will not only help you make better decisions about the way you treat income, but it will go a long way to ease the stress that is often experienced when it’s time to file your tax return.
clearly, the first variable in the tax formula is gross income. This is the aggregate of all earned and unearned income from various supplies throughout the year. Income is either earned or unearned. Earned income is cash or in-kind benefits people receive in exchange for work or service, including employment and self-employment. Unearned income is cash or in-kind benefits that people receive without being required to perform work or service. Depending on the kind of income you receive, in addition as other variables your tax outcome could vary.
Next, certain deductions are subtracted from gross income. These deductions are referred to as above the line deductions, and are used to arrive at modificated gross income or AGI. The name comes from their paperwork placement. They are found on page one of Form 1040, just above the line where modificated gross income is tabulated. They include contributions to traditional IRA, alimony, moving expenses, and many others. For a complete list of “above the line” deductions please see irs.gov/pub. 17.
After you arrive at AGI, there’s another round of deductions known as personal and dependency exemptions. The personal exemption amount in 2016 is $4,050.00 dollars. The IRS allows every resident tax payer to deduct this amount from personal income. Dependency exemptions are personal exemptions allowed for tax payers who have qualified dependents. For example, if a tax payer filed married filing jointly, and they have 2 children; the number of personal exemptions would be 4. Please see IRC section 152 for additional information.
There two types of additional deductions. One is called standard deduction, or tax payers may itemize deductions. Generally, a comparison is done to origin at which deduction kind is most advantageous. The standard deduction is a pre-determined amount based on filing position. The standard deductions for year ending December 31, 2016 is the following:
Single – $6,300.00
Married Filing Jointly – $12,600.00 Married Filing Separate – $6,300.00
Head of Household – $9,300.00
Qualifying Surviving Spouse – $12,600.00
At this point, both personal exemptions and either standard or itemized deductions are subtracted from AGI to arrive at taxable income. To determine your tax rate, examine applicable tax tables at irs.gov.
Please be mindful of additional deductions (credits, prepayments toward tax, overpayments or credits from past years, and tax withheld by an employer or before made estimated tax payments) that are subtracted from your tax liability to determine net tax payable.