How Does the IRS Calculate Tax?


Quick Answer

Tax is calculated by using the tax tables provided by the Internal Revenue Service. Different tax tables apply to different forms of tax. For example, the tax tables for income tax differ from the tax tables for estate and gift tax.

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Full Answer

Individual income tax is among the most common forms of tax in the United States. Individual income tax is calculated by taking gross income, or total income, and subtracting above the line deductions, such as IRA contributions, alimony payments and student loan interest, to reach adjusted gross income. In order to calculate taxable income, a taxpayer must further subtract below the line deductions, which include the standard deduction, itemized deductions and the personal exemption.

Once taxable income has been calculated, a taxpayer can use the current year's tax rate table to calculate personal income tax owed. For example, if the taxpayer is an unmarried individual with taxable income of $15,000 in 2014, the tax due is calculated by finding the appropriate tax bracket and applying the given percent to taxable income. In this example, the taxpayer would fall into the 15% bracket, which applies to taxable income between $9,076 and $36,900. Most taxpayers in the United States use software to prepare their returns, which performs these calculations automatically.

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