When paying taxes, sometimes you might have to predict how much you’re going to owe by the end of the calendar year. You may feel it’s complicated, but it’s much a simpler process than you think. One of the things you’ll need to know is the wages that you’ve earned for the year. You’ll also have to know any tax credits or deductions you’re possibly eligible for. Here are some basic tips you can follow when calculating your federal income tax.
- Calculating wages earned
Take a look at your pay stub from your employer near the term “gross amount.” This amount is before any deductions have been taken out. If you’re married and plan to file jointly, look for the same thing for your spouse’s wages, and add that amount. Then multiply your monthly wages by 12 to get the yearly amount. If you’re paid weekly, you should multiply the weekly gross amount by 52. Additionally, you can multiply your weekly or monthly wages by the amount of time that’s left in the year and add it to your gross year-to-date income. Estimated variable income, such as commissions or bonuses, should also be added. Any income that qualifies as exclusions from tax, such as pre-tax retirement plans or employer health insurance, should be subtracted. You’ll then arrive at the estimated amount your employer will report on your W-2 form.
- Add self-employment income
If you or your spouse happen to own a business or freelance, that net profit needs to be added to your regular income. Take the business income you made last year and subtract the expenses from the past year. That amount will be your net profit and what you would have put on your last year’s taxes. Make adjustments for changes to income and expenses, and you’ll get an estimated net profit for this year.
- Estimate investment income
Investment income can refer to interest income from bank accounts, dividends from investments, net rental income or loss if the rental property is owned, and net gains or losses from sales of assets such as stocks. Be sure to remember to subtract expenses from rental income. Once you have your estimated investment income calculated, add it to your total income. It’s helpful to keep a file of your bond and stock purchases and sales. To calculate gains or losses when selling it, you’ll have to have the original amount you paid to buy the stock. Rental losses might not be deductible in full. The reason it might not is that it could be considered a passive loss.
- Add taxable retirement income
If applicable to you, estimate income from annuities and pensions, 401k distributions and IRA, and Social Security income using your prior year taxable amounts. You can read IRS Publication 17 for more details on gross income items and what are considered to be taxable in your situation. As an example, when you reach the age of 59 and a half, and your account has stayed open for five years, any distributions received from a Roth IRA are not taxable.
- Subtract allowable deductions
A variety of deductions can potentially be subtracted from your gross income. Among the possibilities include traditional IRA deductions, self-employed health insurance, contributions to a Health Savings Account, alimony pad, or one-half of self-employed tax. When you subtract the allowable deductions from your gross income, that amount will be your adjusted gross income.
- Determine refunds
To determine if you’ll receive any refunds, compare your federal income tax liability, which you calculated to your estimated payments and federal income tax withholding for the year. If the projected federal tax liability is greater than your payments and withholding, you might have a payment due when filing your tax return
- Determine itemized deductions
If you’re a single person, you’re allowed a certain amount in standard deduction. A married couple that chooses to file jointly is also allowed a standard deduction. As the number can change in different years, you’ll have to check the IRS website to know the exact amount. If you exceed the standard deduction amount, there’s a potential you can itemize your deductions and end up paying fewer taxes.
- Calculate and subtract deductions
In cases where you can itemize, you’ll find the categories allowed detailed on Schedule A of Form 1040. These can include gifts to charity, interest paid, state and local taxes, and medical and dental expenses. Be sure to account for any limitations of those items noted in Schedule A. Medical expenses need to exceed 10% of adjusted gross income.
The total, whether using standard or itemized deductions, will be subtracted from your AGI. When using the standard deduction, review Form-1040-ES for the current year to configure the proper amount based on your filing status. Those who are blind, aged 65 or older, or both, are able to add specific amounts to their standard deduction.
Self-employed individuals may potentially be able to qualify for the Qualified Business Income deduction. If you qualified, when calculating your taxable income, you’d subtract either itemized or standard deductions as well as qualified business income deduction from adjusted gross income. That would determine your federal income tax liability.
- Determine gross income tax
Look at the tax rate schedules in IRS Form 1040-ES. Use the schedule that fits with your situation. As an example, Schedule Y-1 is used for married couples filing jointly, and Schedule X is used for single filing status. Keep in mind that certain kinds of income can qualify for a different tax rate. An example would be depreciation recapture on real estate or long term capital gains.
- Subtract tax credits
If you qualify, you can subtract credits for child and dependent care. Be mindful that both are subject to limitations. You can find all possible credits that can be subtracted in IRS Publication 17. Additions to the tax can include a penalty for withdrawal of funds from IRA plans and other qualified retirement accounts, and also self-employment tax based on self-employment income. Add those amounts to your gross income tax to get your projected federal income tax.
Following this guide when filing your federal income tax can help make the process easier for you. If you’re interested in knowing more about calculating your taxes, you can find more information at this link: https://taxfyle.com/income-tax-return-calculator/.