How Federal Income Tax is Calculated
Step-by-step process:
1. Gross Income = Wages + Self-Employment + Other Income
2. Adjusted Gross Income (AGI) = Gross Income − Above-the-Line Deductions
3. Taxable Income = AGI − (Standard or Itemized Deduction, whichever is larger)
4. Tax Liability = Apply progressive tax brackets to Taxable Income
5. Final Tax = Tax Liability − Tax Credits
6. Refund/Owed = Final Tax − Taxes Already Withheld
Standard Deduction (2026 Estimates)
- Single: ~$15,000
- Married Filing Jointly: ~$30,000
- Head of Household: ~$22,500
Key Concepts
- Marginal Tax Rate: The rate you pay on your next dollar of income.
- Effective Tax Rate: Total tax paid divided by total income (usually much lower than marginal rate).
- Tax Credits vs Deductions: Credits reduce your tax dollar-for-dollar. Deductions reduce the income that gets taxed.
- Standard vs Itemized: The calculator automatically uses whichever gives you a lower tax bill.
Important Notes
- This is a simplified estimator. It does not include state taxes, AMT, or all possible credits/deductions.
- Self-employment income is subject to Self-Employment Tax (Social Security + Medicare).
- Tax laws change frequently. Always verify with IRS.gov or a tax professional for your specific situation.