7 Steps to Compute Your Tax Liability !
That is a ubiquitous question –how to do taxes? Under the Internal Revenue Code, there is a fixed procedure to compute your gross income, claim tax deductions and tax credits, arrive at the taxable income (total income ), and compute the tax as per your income tax bracket.
The starting point of tax computation is often the most difficult for a taxpayer, followed by claiming tax deductions and tax credits, which have many ifs and buts conditions.
Yes, many websites provide how to do taxes online, but that helps only those who understand some basics of the computation of income and taxes.
So why not simplify the basic concept of tax computation under US tax law in just seven steps?I am sure after reading this post, you may not ask the answer to the question “How to Do Taxes?”. You may not need a costly tax attorney for simple types of tax returns and using the free file tax program, even file your tax return successfully.
Step 1: Find Gross Income
Add all your earned and unearned income ( taxable plus non-taxable, in your opinion ). This may be called Gross Income.
[ In step 1 , you should write down all earned and unearned income -wages, perquisites,gifts, alimony, lottery income, dividend, interest, etc and aggregate it to represent all income you received during the tax year.]
Step 2: Deduct Non-Taxable Income
Then, find out which receipts during the tax year, added in step 1 , fall under the definition of Non-Taxable Income. For example, disaster relief federal tax refunds or child support are non-taxable income. See the list of non-taxable income under US tax laws. So, Gross Income minus the Non-taxable Income. is the taxable Gross Income.
Step 3: Then deduct above-the-line deductions
“Above-the-line deductions” are those types of deductions that are reduced from the gross income itself even before the standard deduction or the itemized deductions are applied by a taxpayer. Here I have listed all those above-the-line deductions, after which you get the Adjusted Gross Income.
Step 4: Apply Deductions & Exemption on the Adjusted Gross Income
From the Adjusted Gross Income, you need to reduce deductions of two types. You can claim only one of them and not both.
Standard deduction is inflation-adjusted and is announced every year by the IRS. For 2023 & 2024, standard deduction for single unmarried is $13,850 and $14,600, respectively. For joint returns, it is $27,700 and $29,200 for 2023 and 2024 respectively. The standard deduction is the simplest form of claim of reduction, as you are not required to maintain any expense record.
If you want to avoid claiming a standard deduction, you can claim an itemized deduction, which allows many types of deduction. But, you will need to maintain proof of such expenditure.
After deducting either the Standard Deduction or the Itemized Deduction from the adjusted gross income, you arrive at taxable total income. for the tax year.
Step 5: Apply tax rates on the taxable total income
When we arrived at Taxable Total Income (step 4), now is the time to apply the tax rate as per the tax bracket to find out your tax payable.
Step 6: Deduct the tax credit
Several tax credits are available to you, like child tax credits, Child and Dependent Credits, and many others. These tax credits can be adjusted with the tax payable amount. If the net figure is positive, i.e you have tax payable even after adjustment of tax credits, you need to pay the tax,
Step 7: Deduct estimated tax paid or tax withheld
The balance ( Step 5 — Step 6) is the tax to be deposited. From this tax to be deposited, you need to deduct the tax already paid in the form of estimated tax or the tax which is withheld from income already. The net amount you must pay online or offline before filing the tax return
