Educational Article
Understanding Your Tax Return
Filing your taxes may feel overwhelming, but understanding the key parts of a tax return can make it much clearer. This overview breaks down how different pieces, like income, deductions, and credits fit together to determine what you owe or get back.
Gross income
Total earned income (wages, salaries, self-employment income, etc.) and unearned income (dividends, capital gains, interest, etc.) before any deductions or taxes.
Adjusted gross income (AGI)
Gross income minus adjustments (e.g., student loan interest, pre-tax IRA contributions).
Taxable income
AGI minus deductions (standard or itemized).
How Taxes Are Calculated: A Step-by-Step Breakdown
Step 1. Determine your adjusted gross income (AGI)
Calculate your total income, then subtract adjustments like pre-tax retirement contributions and student loan interest.
Step 2: Calculate your taxable income
Subtract the standard deduction or itemized deductions from AGI.
Step 3: Use tax brackets to calculate taxes due
You can use the IRS tax tables for simpler returns and taxable income under $100,000. If your taxable income is over $100,000, use the IRS Tax Computation Worksheet. If you are using tax software like TurboTax or FreeTaxUSA, the software calculates taxes owed automatically.
Step 4: Apply tax credits
Subtract tax credits (e.g. Child Tax Credit) from the taxes due to determine the tax owed.
Step 5: Determine your tax bill or refund
Subtract taxes withheld from your paycheck (or quarterly tax payments) from the taxes owed. If total payments exceed taxes owed, you get a refund. If taxes owed exceed payments, you will need to make a payment to the IRS.
