Taxes are complicated. I think we can all agree on that. However, we hope this article can help explain things a bit and make taxes easier to understand. Do note this explanation is not all encompassing as there are always exceptions to the rules.
Getting started
To start calculating your taxes, you first need to determine the type of income you are reporting how much income is going to be taxed. Once you know how much money you made during the tax year, we can start the calculations.
Once you know your total income, you subtract any income adjustments you made. Typical adjustments include student loan interest and IRA contributions.
The number you have after subtracting your adjustments from your total income is called your Adjusted Gross Income, or AGI.
How tax liability is determined
Now that you know your AGI, you want to subtract your standard or itemized deduction amount from your AGI to find what is called your "taxable income."
If you did not report capital gains or qualified dividend income, you next use the IRS tax tables to plug in your taxable income to find your tax liability. If you reported capital gains or qualified dividend income, you will typically use the Qualified Dividends and Capital Gain Tax Worksheet to calculate your tax liability.
Tax liability is essentially the amount of taxes you are required to pay based on the amount and type of income you report.
Figuring if you overpaid and are due a refund or still owe taxes
Once you know your tax liability for the year, you want to subtract your nonrefundable credits from your tax liability. Now, take the difference and add any additional taxes like self-employment tax, early retirement distribution penalties, etc. to calculate your total tax for the year.
Your total tax is what's left to be paid after incorporating your additional tax and nonrefundable credits. The final step is to subtract your tax payments and refundable credits from your total tax. Tax payments are just that, they are payments made to the IRS. The most common tax payment are federal withholdings.
If your tax payments and refundable credits are greater than your total tax, you overpaid your taxes and are due a refund.
If your tax payments and refundable credits are less than your total tax, you must pay the difference by the payment deadline or be subject to interest and penalties.