In the United States, federal income tax liability is calculated on a progressive basis, explains the Internal Revenue Service. This means that as you earn more income, higher earnings are subject to be taxed at a higher percentage. Earnings from income is therefore grouped into brackets that are determined by the IRS. Only the money that is earned within a particular tax bracket is subject to that particular tax rate, and it does not apply retroactively.
To accurately determine federal income tax liability, you must first determine your filing status, explains the IRS. Definitions of filing statuses are available on IRS.gov. Once that is determined, add together all income earned for a given year, and then subtract your personal exemption to determine the Adjusted Gross Income, or AGI. You are allowed to claim one personal exemption for yourself and one for your spouse, if married. However, if somebody else can list you as a dependent on his tax return, you are not permitted to claim a personal exemption for yourself.
For tax year 2015, the personal exemption amount is $4,000, which is up from $3,950 in 2014, according to the IRS. The personal exemption amount phases out for taxpayers with higher incomes. Next, subtract any deductions from the AGI to determine your modified adjusted gross income, known as the MAGI. There are two main types of tax deductions: the standard deduction and itemized deductions. You can claim one type of deduction on your tax return, but not both. For example, if you claim the standard deduction, you cannot itemize deductions – and vice versa. Use whichever deduction results in the lowest tax liability. Using the MAGI and appropriate IRS tax table, multiply each amount of income by the appropriate percentage, and add together the totals to estimate total tax liability.