Q:

How do you calculate taxes?

A:

Quick Answer

To calculate income taxes, a person should consider his income minus any relevant deductions, then multiply the result by the tax rate or use IRS tax tables. Income can include salary, earnings from dividends and investments, royalties, gambling earnings and lottery winnings. Deductions can include medical expenses, retirement contributions and interest expenses.

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Full Answer

Individual tax calculations vary from person to person. However, each individual must follow basic processes to calculate a tax obligation. The first process revolves around calculating total income. This income can contain a number of components, including dividends, capital gain, royalties and business income. In addition, several factors affect the total income. These factors include the number of dependents, exemptions claimed and filing status.

After income is calculated, a taxpayer should consider any relevant deductions. Common deductions include state sales taxes, reinvested dividends, out-of-pocket charitable contributions, student loan interest and work-related moving expenses. A taxpayer should consult the Internal Revenue Code to ensure that he is eligible for specific deductions.

After the deductions are determined, the taxpayer arrives at income before taxes. This income is the basis used to calculate the tax obligation. The taxpayer then applies the relevant tax rate, as provided on the individual income tax rate and filing status table in the current year tax instructions or on the IRS.gov website. Taxpayers also may use standard tax tables in the current year tax instructions.

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