The formula for calculating income tax is the product of the total amount of taxable income multiplied by the tax rate, according to the Internal Revenue Service. The formula to account for multiple marginal tax rates requires multiplying the total amount of money earned in each successive bracket by the tax rate and adding the values together.
While the above formula provides a raw number for income tax based on income level, a more complex formula is needed to account for deductions, adjustments, exemptions, credits and withholding, according to the financial advice company BALANCE. Adjustments are subtracted from the total gross taxable income and may result from IRA contributions, interest on student loans and the cost of health insurance premiums. Deductions are also subtracted from the gross taxable income. Deductions may be made for medical expenses, state and local taxes and interest on a home mortgage. Exemptions are most often used for dependents of the taxpayer.
Credits are subtracted directly from the taxpayer's tax liability rather than from the gross adjusted taxable income. Commonly used credits include the American Opportunity Tax Credit, the Earned Income Tax Credit, the Lifetime Learning Credit, the Child and Dependent Care Credit and the Savers Tax Credit, according to TurboTax.
