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 W-2 forms as a reference for filling out the input fields. 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. Ordinary dividends are taxed as normal income.
Qualified Dividends– these are taxed at lower rates than ordinary dividends. There are many stringent measures in place for dividends to be legally defined as qualified. 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, tax exemptions are monetary exemptions with the aim of reducing, or even entirely eliminating taxable income. They do not only apply to personal income tax; for instance, charities and religious organizations are generally exempt from taxation. In some international airports, tax exempt shopping in the form of duty free international shops is available. Other examples include state and local governments not being subject to federal income taxes.
A personal tax exemption is an amount deductible from adjusted gross income (AGI) depending on taxpayers and the number of dependents claimed on a tax return. A person claimed as a dependent on one tax return cannot be claimed again on another tax return.
Starting in 2018, personal and dependent exemption deductions have been eliminated.
Tax deductions arise from expenses. They help lower tax bills by reducing the percentage of adjusted gross income that is subject to taxes. There are two types of deductions, above-the-line (ATL) and below-the-line (BTL) itemized deductions, which reduce tax based on marginal tax rate. The "line" in question is the adjusted gross income (AGI) of the taxpayer and is the bottom number on the front of Form 1040.
Modified Adjusted Gross Income (MAGI)
MAGI is mainly used to determine whether a taxpayer is qualified for certain tax deductions. It is simply AGI with some deductions added back in. These deductions are:
- Student loan interest
- One-half of self-employment tax
- Qualified tuition expenses
- Tuition and fees deduction
- Passive loss or passive income
- IRA contributions, taxable Social Security payments
- The exclusion for income from U.S. savings bonds
- The exclusion under 137 for adoption expenses
- Rental losses
- Any overall loss from a publicly traded company
ATL deductions lower AGI, which means less income to pay taxes on. They include expenses that are claimed on Schedules C, D, E, and F, and "Adjustments to Income." One advantage of ATL deductions is that they are allowed under the alternative minimum tax. ATL deductions have no effect on the BTL decision of whether to take the standard deduction or to itemize instead. Please consult the official IRS website for more detailed information regarding precise calculations of tax deductions. Below are some common examples of ATL deductions.
- Traditional IRA contributions–Most people are eligible to make contributions to a traditional IRA, but these contributions aren't necessarily tax deductible. If Modified Adjusted Gross Income exceeds annual limits, the taxpayer may need to reduce or eliminate their IRA deduction. Note that this deduction is for traditional IRA contributions, not Roth IRA contributions!
- Student loan interest–The amount of interest accrued from federal student loans should be apparent in box 1 of Form 1090-E, which should be sent by lenders after the first year. Those who are married but file separate returns cannot claim this deduction. This deduction also cannot be claimed by single, head-of-household, or qualifying widower filers who have incomes above $75,000; for joint filers, the cap is $150,000.
- Qualified tuition and fees–Must be qualified education expenses based on IRS definitions. This deduction cannot be claimed by those who are married but filing separate returns. This deduction cannot be claimed in conjunction with an educational tax credit.
- Moving expenses–The costs of transporting household items from one residence to another for work or business purposes are usually fully deductible, as long as they are not reimbursed by the taxpayer's employer. The taxpayer's new place of employment must be at least 50 miles away from the previous residence.
BTL deductions refer to the Standard Deduction or Itemized Deductions from Schedule A and personal exemptions. A BTL deduction is always limited to the amount of the actual deduction. For example, a $1,000 deduction can only reduce net taxable income by $1,000. Please consult the official IRS website for more detailed information regarding precise calculations of tax deductions. Examples of common BTL deductions are listed below along with basic information.
- Mortgage interest–This can apply to a regular mortgage up to a certain limit; $750,000 (or $375,000 if married filing separately) in 2018, 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, to a 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.
- 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. Note that health savings account contributions are ATL deductions.
- Sales and local tax–Sometimes referred to as SALT (state and local tax), this federal deduction can be either income tax or sales tax, but not both. Taxpayers who live in states that don't have an income tax are probably better off using their sales tax for deduction. In 2018, this deduction cannot exceed $10,000.
Most BTL deductions are the run-of-the-mill variety above, including several others like investment interest or tax preparation fees. However, the IRS allows the deduction of certain costs that can reduce tax bills. Examples are given below, though they are not the entire package. For further information, visit the official IRS website.
- Out-of-pocket charitable contributions–Not only are donations to charitable organizations deductible, out-of-pocket expenses for charitable work can also be deducted. For example, buying paint to paint the walls of a cathedral, or buying ingredients to cook for a homeless shelter.
- Tax savings for teachers–This deduction allows K-12 educators to deduct up to $250 a year for school materials.
- Paying babysitters–Believe it or not, if a person performs volunteer work at a non-profit while a babysitter takes care of their kids at home, any payment to the babysitter for childcare can be deducted!
- Job searching–By itemizing expenses of costs associated with searching for a new job, If the expenses accrued when searching for a new job exceed two percent of adjusted gross income, the qualifying expenses over the threshold can be deducted. Examples of such out-of-pocket expenses can include the mileage of driving to interviews, printing resumes or business cards.
- Smoking cessation–Participating in a smoking cessation program can be considered a medical tax deduction. The deduction can also apply to prescription drugs used to ease nicotine withdrawal.
- Disaster recovery–If a taxpayer's home is affected by a natural disaster and the taxpayer requires federal aid, uninsured costs of recovery can be deducted
Any cost that is associated with carrying on a business or trade can usually be deducted if the business operates to make a profit. However, it must be both ordinary and necessary. Try to make the distinction between business expenses from other capital or personal expenses, and expenses used to determine the cost of goods sold. Any business expense incurred under the operation of a sole proprietorship is considered ATL because they are deducted on Schedule C then subtracted to calculate AGI. Business-related expenses involve many different rules and are complex. Some can be considered ATL deductions, while many will be BTL. As such, it may be a good idea to consult official IRS rules relating to the deduction of business expenses.
Standard vs. Itemized Deductions
To visualize the difference between standard and itemized deductions, take the example of a restaurant with two options for a meal. The first is the a la carte, which is similar to an itemized deduction, and allows the consolidation of a number of items, culminating in a final price. The second option is the standard fixed price dinner, which is similar to the standard deduction in that most items are already preselected for convenience. Although it isn't as simple as it is portrayed here, this is a general comparison of itemized and standard deductions.
Most people that choose to itemize do so because the total of their itemized deductions is greater than the standard deduction; the higher the deduction, the lower the taxes paid. However, this is generally more tedious and requires saving a lot of receipts. Instead of painstakingly itemizing many of the possible deductions listed above, there is an option for all taxpayers to choose the standard deduction - which 70% of the population opts to do. Some people go for the standard deduction mainly because it is the least complicated and saves time. The annual standard deduction is a static amount determined by Congress. In 2018, it is $12,000 for single taxpayers and $24,000 for married taxpayers filing jointly; this is twice as much as it was in 2017. Due to this drastic increase, there is more incentive to take the standard deduction.
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 such as those who adopt environmentally-friendly practices, or those who are saving for retirement, adopting a child, or going to school. 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 tax liability of $12,000 to $11,000. This is unlike deductions, which only reduce taxable income. As a result, a tax credit is generally more effective at reducing the overall tax bill when compared to a dollar-equivalent deduction.
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 below $0 or not. If below $0, the difference will be given as a tax refund. Refundable tax credits are less common than nonrefundable tax credits.
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 and is generally only available to low or moderate-income households making up to a little over $50,000, and is further dependent on other specifics. The credit is equal to a fixed percentage of earnings from the first dollar of earnings until the credit reaches its maximum. The maximum credit is paid until earnings reach a specified level, after which it declines with each additional dollar of income until no credit is available. Families with children receive a much larger credit than those without qualifying children. For the most part, this credit is refundable.
Foreign Tax Credit–This is a non-refundable credit that reduces the double tax burden for taxpayers earning income outside the U.S.
Child Tax Credit–It is possible to claim up to $2,000 per child, $1,400 of which is refundable. The child tax credit starts to phase out once the income reaches $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–This is a non-refundable tax credit for qualified expenses up to a 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 incentivizes low and moderate-income taxpayers to make retirement contributions to qualified retirement accounts. 50%, 30%, or 10% of retirement account 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, and cannot be 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 of up to $7,500 for buying an environmentally-friendly electric vehicle. It must be acquired brand new for use or lease and not resale, and used predominantly within the U.S.
Alternative Minimum Tax (AMT)
The AMT is a mandatory alternative to the standard income tax. The AMT amount is calculated without the standard deduction or personal exemptions. It also doesn't allow most itemized deductions, such as state and local income tax, business expense, mortgage interest, property taxes. If taxpayers make more than the AMT exemption amount, they are required to pay the higher amount of either the AMT or their standard income tax. The AMT affects many in higher tax brackets since it eliminates many of the deductions. The AMT brings in about $60 billion a year in federal tax revenue from the top 1% of taxpayers. However, there are ways to try to avoid paying the AMT:
- Lower adjusted gross income by maxing out contributions to retirement accounts such as 401(k), IRA, or a health savings account.
- Reduce itemized deductions
- Increase charitable contributions
Generally, only taxpayers with adjusted gross incomes that exceed the exemption should worry about the AMT. The IRS provides an online AMT Assistant to help figure out whether a taxpayer may be affected by the AMT.