If you’re like most people, tax season can be stressful because the IRS tax codes are a bit obfuscated. Will you owe taxes or get a tax refund? This is a simple guide showing how income tax is calculated for 2019.
What Is Adjusted Gross Income?
Adjusted Gross Income (AGI), is all of your earned income for the year. This includes wages, self-employment, rental income, capital gains, etc… This is not the amount you get taxed. Your taxable income will be determined from this after applying tax deductions.
Tax Deductions: Standard vs. Itemized
Tax deductions are subtracted from your AGI to produce your taxable income. Using the chart below, if you are single with an AGI of $40k, your taxable income would be $28k, lowering your tax bracket and ultimately the amount of taxes you owe.
Standard deductions are a set amount that can be used by anyone. It is a way to simplify deductions so you don’t have to itemize everything. In most cases, the standard deduction will be much higher than listing them line by line anyway. This may or may not be the case for you though, so do both to determine which is more beneficial.
Itemized deductions are just as they sound. A list of deductions, item by item that you can claim.
Calculating Taxable Income
There are other deductions available, but for the purpose of this guide, we will assume you do not own a high yield business or have a personal accountant. This part is simple, subtract your deductions from your AGI and the result is your taxable income. Now you are ready to move on to calculating your taxes.
Federal Tax Brackets Are Marginalized
So, you’ve heard of tax brackets, but did you know that the IRS uses a marginal tax bracket to tax your income? First, let’s go over the tax brackets, then use an example to show how they are marginalize; meaning your tax rate is less than your bracket.
| Tax Brackets in % | Single Income Range ($) | Head of Household Income Range ($) | Married, Joint Income Range ($) |
| 10 | 0 – 9,700 | 0 – 13,850 | 0 – 19,400 |
| 12 | 9,701 – 39,475 | 13,850 – 52,850 | 19,401 – 78,950 |
| 22 | 39,476 – 84,200 | 52,851 – 84,200 | 78,951 – 168,400 |
| 24 | 84,201 – 160, 700 | 84,201 – 160, 700 | 168,401 – 321,450 |
| 32 | 160,701 – 204, 100 | 160,701 – 204, 100 | 321,451 – 408,200 |
| 35 | 204,101 – 510,300 | 204,101 – 510,300 | 408,201 – 612,380 |
| 37 | > 510,301 | > 510,301 | > 612,381 |
Now for an example of marginalized tax bracket, filing as single with a taxable income of $48,000
| 10% Range | 48000 > 9700 so… 9,700 of 48,000 is taxed here. 48000 – 9700 = 38300 left to tax | 9700 * 0.10 = $970 |
| 12% Range | 38300 < 39475 so… The rest is taxed in this bracket. | 38300 * 0.12 = $4,596 |
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| Now, we add the two together to get our taxes and marginal bracket 5566 / 48000 = 0.115953333 or 11.6% (less than 12%) | 970 + 4596 = $5,566 |
FICA Taxes Are A Set Rate
FICA Taxes are Social Security and Medicare taxes that are withheld from your paycheck and are taxed at a flat rate of (7.65%); Social Security at 6.20% and Medicare at 1.45%. Add this to your marginal tax bracket (11.6% from the example above) to get your total taxes owed before credits.
From our above example of filing single with a taxable income of $48000, we would owe $9240 (19.25% x 48000).
Tax Withholding (W-2 vs. 1099)
An important consideration when preparing your taxes is withholding. Most employees will receive a W-2 for tax season after having taxes withheld from their paycheck. This is good because that counts toward your tax debt (what you owe the IRS). If you file a 1099, are self employed or do not have taxes withheld, you will be responsible for paying this after filing.
While it is beneficial to have taxes withheld from your paycheck throughout the year, keep in mind the amount withheld also depends on the number of dependents you claim. If you claim more dependents, they take less from your check but you owe more at tax season and vise verse. You want to come close to breaking even, any tax refund you get is essentially a tax-free loan to the IRS.
Filing Status Matters
Your filing status will determine your tax bracket income range before any calculations are actually done. Filing statuses include Single; Head of Household; Married, filing jointly; or Married, filing separately. See the chart below under Tax Brackets.
Say you have children or dependents you can also qualify for Tax Credits, which we’ll talk about in a minute. This is where filing as head of household gives you significant tax breaks and possibly a larger refund.
Use Tax Credits
Two of the biggest Tax Credits that you’ll want to use are the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC). While there are others, both of these credits are refundable – at least partially – and can both be used to decrease the amount you owe and potentially increase your return.
Earned Income Tax Credit (EITC):
| # of Children | Tax Credit | A.G.I. Less Than |
| 0 | $529.00 | $15,570.00 |
| 1 | $3,526.00 | $41,094.00 |
| 2 | $5,828.00 | $46,703.00 |
| 3 | $6,557.00 | $50,162.00 |
To qualify for EITC:
- You cannot file as Married, Filing Separately;
- You must have an earned income from wages or self-employment;
- Have a valid Social Security Number;
- Be between the age of 25 and 65;
- Have less than $3,600 in investments.
As you can see, you won’t get nearly as much with no children, and the amount phases-out completely at the limits. The more you earn (Adjusted Gross Income), the less your credit is worth.
Child Tax Credit (CTC) and Additional Child Tax Credit (ACTC):
The CTC is $2,000 per qualifying child (Under 17, lives with you and depends on your income), which is non-refundable – meaning it is used to pay down the amount of taxes you owe. The ACTC is the refundable amount, set at $1,400 per child in 2019.
More information at the IRS Website.
Again, there is much more to taxes, but this should simplify it a bit for you. Did you find it helpful?