Income Tax Calculator
The Income Tax Calculator estimates the refund or potential owed amount on a federal tax return. It is mainly intended for residents of the U.S. and is based on the tax brackets of 2017 and 2018 (Tax Cuts and Jobs Act or Trump's Tax Plan). The 2018 tax values can be used for 1040-ES estimation, planning ahead, or comparison.
In order to find an estimated tax refund or due, it is first necessary to determine a proper taxable income. It is possible to use the W-2 forms to help fill out the inputs. Relevant W-2 boxes are displayed to the side if they can be taken from the form. Taking gross income, subtract deductions and exemptions such as contributions to a 401(k) or pension plan. The resulting figure should be the taxable income amount.
Other Taxable Income
Interest Income—Most interest will be taxed as ordinary income, including interest earned on checking and savings accounts, CDs, and income tax refunds. However, there are certain exceptions such as municipal bond interest, and private-activity bonds.
Short Term Capital Gains/Losses—profit or loss from the sale of assets held for less than one year. Taxed as normal income.
Long Term Capital Gains/Losses—profit or loss from the sale of assets held for one year or longer. Taxation rules applied are determined by ordinary income marginal tax rate.
Ordinary Dividends—All dividends should be considered ordinary unless specifically classified as qualified instead. Ordinary dividends are taxed as normal income.
Qualified Dividends—there are many stringent measures in place for dividends to be legally defined as qualified in order for them to be taxed at lower rates than ordinary dividends. The range of taxation can be as high as 23.8% for the highest tax bracket to tax-free for the lowest tax bracket.
Passive Incomes—Making the distinction between passive and active income is important because taxpayers can claim passive losses. Passive income generally comes from two places, rental properties or businesses that don't require material participation. Any excessive passive income loss can be accrued until used or deducted in the year the taxpayer disposes of the passive activity in a taxable transaction.
Broadly speaking, exemptions aim to reduce or even eliminate tax liability. For instance, charities and religious organizations are generally exempt from taxation. On a more personal level, starting in 2018, personal and dependent exemption deductions are eliminated.
Tax deductions arise from expenses and help lower tax bills by reducing how much of gross income is subject to taxes. The following descriptions are basic summaries, please consult the official IRS website for more detailed information regarding precise calculations of tax deductions.
Examples of deductions include:
State and local tax—Federal deductions of state and local tax can be either income tax or sales tax, but not both. Taxpayers in states that don't have income tax are probably better off using their sales tax for deduction.
Mortgage interest—This can apply to a regular mortgage up to a certain limit, which is $750,000 (or $375,000 if married filing separately), for a main residency, a second mortgage, a line of credit, or a home equity loan. Loans that aren't secured debt on a home are considered personal loans, which are not deductible. The IRS defines a "home" as anything from a house, condo, co-op, mobile home, boat, or RV.
Charitable donations—Only donations to qualified charities can qualify as tax deductions. Handouts to the homeless or payments to local organizations that aren't classified as a nonprofit by the IRS cannot be tax deductible.
Business expenses—These involve many different rules and are a bit complex. As a result, it may be a good idea to consult official IRS rules relating to the deduction of business expenses. To summarize, any cost that is associated with carrying on a business or trade can usually be deductible if the business operates to make a profit; however, it must be both ordinary and necessary. Try to make the distinction of business expenses from other capital or personal expenses, and expenses used to determine the cost of goods sold.
Medical expenses—Any expense paid for the prevention, diagnosis, or medical treatment of physical or mental illness or any amounts paid to treat or modify parts or functions of the body for health can be deducted. Medical expenses for cosmetic purposes do not qualify.
If premiums are paid with after-tax dollars, deductions are limited only to the expenses that exceed 10% of adjusted gross income, and 7.5% for anyone 65 and older.
Standard vs. Itemized Deductions
Instead of painstakingly itemizing many of the possible deductions listed above, there is an option for all taxpayers to choose the simpler standard deduction - which 70% of the population opts to do. The annual standard deduction is a static amount determined by Congress, usually to best keep up with inflation. In 2018, it is $12,000 for single taxpayers and $24,000 for married taxpayers filing jointly. The calculator automatically determines whether the standard or itemized deduction (based on inputs) will result in the largest tax savings and uses the larger of the two values in the estimated calculation of tax due or owed.
Congress formulates and hands out tax credits to taxpayers they deem are making decisions that are beneficial to society. For taxpayers, they help to lower tax bills by directly reducing the amount of tax owed. For instance, a $1,000 tax credit will reduce a certain tax liability of $12,000 to $11,000. It is important to make the distinction between nonrefundable and refundable tax credits. Nonrefundable credits can reduce total tax liability to $0, but not beyond $0. Any unused nonrefundable tax credits will expire and cannot be carried over to the next year. On the other hand, refundable tax credit amounts give taxpayers entitlement to the full amount, whether their tax liability drops all the way down to below $0 or not. If below $0, the difference will be given as a tax refund. Refundable tax credits are less common than nonrefundable ones.
Due to the complexity of income tax calculations, our Income Tax Calculator only includes input fields for certain tax credits for the sake of simplicity. However, it is possible to enter these manually in the "Other" field. Just be sure to arrive at correct figures for each tax credit using IRS rules. Also, the following descriptions are basic summaries. Please consult the official IRS website for more detailed information regarding precise calculations of tax credits.
Examples of some common tax credits are separated into the four categories below.
Earned Income Tax Credit—This is one of the most prominent refundable tax credits around and is generally only available to low or moderate-income households making up to around $50,000 depending on situations. For the most part, these are refundable.
Foreign Tax Credit—This is a non-refundable credit reduces the double tax burden for taxpayers earning income outside the U.S.
Child Tax Credit—It is possible to worth up to $2,000 per child for 2018, within which $1,400 is refundable. The child tax credit start to phase out once the income reach $200,000 ($400,000 for joint filers).
Child and Dependent Care—About 20% to 35% of allowable expenses up to $3,000 for each child under 13, a disabled spouse or parent, or another dependent care cost can also be used as a tax credit. Like many other tax credits, this one is also based on income level.
Adoption Credit—The non-refundable tax credit for qualified expenses to certain level for each child adopted, whether via public foster care, domestic private adoption, or international adoption.
Education & Retirement
Saver's Credit—Non-refundable credit incentivize low and moderate income taxpayers to make retirement contributions to qualified retirement accounts. 50%, 30%, or 10% of retirement accounts contributions up to $2,000 ($4,000 if married filing jointly) can be credited, depending on adjusted gross income. Must be at least 18, not a full-time student, nor claimed as a dependent on another person's return.
American Opportunity Credit—Generally for qualified education expenses paid for an eligible student in their first four years of higher education. There is a maximum annual credit of $2,500 per student. If the credit brings tax liability down to $0, 40% of the remainder (up to $1,000) can be refunded.
Lifetime Learning Credit—Unlike the education tax credit right above it, this one can be used for graduate school, undergraduate expenses, and professional or vocational courses. Can be up to $2,000 for eligible students, but is entirely nonrefundable.
It is possible to claim either the American Opportunity credit or Lifetime Learning credit in any one year, but not both.
Residential Energy Credit—Residential properties powered by solar, wind, geothermal, or fuel-cell technology can qualify. However, generated electricity from these sources must be used inside the home.
Non-business Energy Property Credit—Equipment and material that meet technical efficiency standards set by the Department of Energy can qualify. The first type is defined as any qualified energy efficiency improvements, and examples include home insulation, exterior doors, exterior windows and skylights, and certain roofing materials. The second type is defined as residential energy property costs, and examples of these include electric heat pumps, air conditioning systems, stoves with biomass fuels, and natural gas furnaces or hot water boilers.
Plug-in Electric Motor Vehicle Credit—It is possible to receive a tax credit for up to $7,500 for buying an environment-friendly electric vehicle. It must be acquired brand new for use or lease and not resale, and used predominantly within the U.S.