What is income tax?
Income tax is a percentage of your taxable income. You figure your taxable income by subtracting
either your standard deduction or your itemized deductions and your exemption amounts from your adjusted gross
income or AGI. If you have no adjustments to inocme, your AGI is the same as your total income on line 22 of
the tax form 1040.
For most taxpayers, the exemption amount is determined by multiplying $3,400 by the number of
exemptions (Personal exemptions plus dependent exemptions) entered on line 6d (total number of exemptions claimed).
Enter your taxable income on line 43 of the tax form 1040.
How to calculate income tax?
There are various methods for computing your income tax. The method that applies to you usually
depends on the amount of your taxable income and whether you are required to use Schedule D, Capital Gains and
Losses, to report a capital gain. If you are not reporting capital gain income or qualified dividends, you
generally will use either:
the Tax Table or
the Tax Rate Schedules
to determine your income tax liability to the IRS.
What is federal income tax?
The federal income tax is a pay-as-you-earn tax, which means you owe tax on income as you earn
or receive it during the year. under the tax law. you must pay the tax you owe as you receive the income. You
cannot wait until the end of the tax year to pay. Most federal income tax is paid in one of two ways:
it is withheld from your wages and other types of income, or
you make estimated tax payments.
If you do not pay enough tax during the year, you may owe a penalty in addition to the tax that
is still due. Estimated payments and penalties will be discussed in Chapter 18.