Q:

How do you calculate federal taxes?

A:

Quick Answer

Federal income tax is calculated by considering all income, relevant deductions and any payments, as noted by Forbes. Federal income tax regulations are dynamic, meaning that the specific guidelines vary from period to period.

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Full Answer

Business entities and individuals are required to calculate federal income taxes and file the appropriate returns, as noted by Chron Small Business. All documentation supporting income tax calculation must be provided to successfully calculate federal tax. Individuals can show proof of wages through W-2 statements. A business has separate statements to depict financial performance over a given period. Corporations use Form 1120 to calculate income taxes, whereas partnerships use Form 1065.

Different income and deduction rules apply to individuals and business entities. Individuals calculate income by summing up all values related to income from salaries, payments, distributions and even dividend income, notes Chron Small Business. Any associated deductions are taken to arrive at taxable income. If applicable, credits can be utilized to reduce taxable income even further. Individuals must then refer to the federal income tax tables to determine what final rate to utilize. Business entities follow a similar approach, but instead rely on financial statements to provide the data that gets transferred to the income tax returns, as noted by About.com. The profit and loss statement is used to generate income, and then any applicable deductions are netted against this figure. Eligible credits may then be use to offset taxable income.

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