Calculating federal tax can be a daunting task for many taxpayers, especially for those who are filing their taxes on their own for the first time. In this article, we will guide you through the process of calculating your federal tax liability in a step-by-step manner so that you can easily estimate what you owe to the government.

Step 1: Determine your filing status

Your filing status impacts the amount of tax you owe and the deductions that you’re eligible to claim. Choose the appropriate status for your situation:

1. Single

2. Married Filing Jointly

3. Married Filing Separately

4. Head of Household

5. Qualifying Widow(er) with Dependent Child

Step 2: Calculate your Adjusted Gross Income (AGI)

To calculate your AGI, begin with your gross income, which includes all sources of income, such as wages, salaries, bonuses, tips, interest, dividends, and rental property income. From this number, subtract any adjustments to income like qualified educational expenses, student loan interest, deductions related to self-employment taxes and contributions to qualified retirement accounts.

Step 3: Determine your taxable income

Your taxable income is the amount that’s used to calculate your federal tax liability. To find it, start with your AGI and subtract any deductions you are eligible for—either using the standard deduction or itemized deductions (whichever is higher). The standard deduction amounts vary based on your filing status:

1. Single – $12,550 (2021)

2. Married Filing Jointly – $25,100 (2021)

3. Married Filing Separately – $12,550 (2021)

4. Head of Household – $18,800 (2021)

5. Qualifying Widow(er) – $25,100 (2021)

Step 4: Determine your tax liability

Apply the tax rates to your taxable income as per the tax brackets. The United States operates with a progressive tax system, so different rates will apply to different portions of your taxable income. For 2021, the federal income tax brackets are:

1. 10% – Up to $9,950 (Single), $19,900 (Married Filing Jointly), $9,950 (Married Filing Separately), $14,200 (Head of Household)

2. 12% – Up to $40,525 (Single), $81,050 (MFJ), $40,525 (MFS), $54,200 (HoH)

3. 22% – Up to $86,375 (Single), $172,750 (MFJ), $86,375 (MFS), $86,350 (HoH)

4. And so forth…

Add the calculated amounts together from each tax bracket to determine your total federal income tax liability.

Step 5: Subtract credits and payments

Subtract any non-refundable and refundable credits, such as Earned Income Tax Credits or Child Tax Credits, and any taxes withheld by your employer from your total federal income tax liability. This will give you the final tax amount you owe or any refund due to you.

Conclusion

Calculating federal tax can be a complex process with various factors to consider. By following these steps and understanding the importance of filing status, AGI calculation, deductions and credits, you can effectively calculate your federal tax liability or any refund owed to you. Always check for updates and changes in the tax code from year-to-year before filing your taxes and consult a tax professional if you need additional help.