How to Calculate Income Tax

Tax is a source of revenue for the government which is used for the benefit of the people, and every corporation or earning individual should pay taxes to the government. Income tax calculation can be a tedious task for most people since there are various types of tax systems which are prevalent like regressive, proportional and progressive, to add to this there exist certain tax credits and deductions that may reduce the total taxable income. Hence, it becomes vital to calculate the amount of taxes you have to pay, which is not very difficult if you know the tax brackets which are prevalent at present. Here, we give a couple of instances of how to calculate income tax and the IRS tax rates in the U.S. In case of any difficulty or you or need help, visit the IRS website or contact your local IRS office for more information.

Income Tax Calculation in the U.S.

The tax deduction rates in the United States vary with the income of the individual. Another criterion for deciding the tax deduction for individuals is whether you are filing your returns as a married person (filing jointly), as a single, head of household or a married person filing separately. Here are the different IRS tax brackets prevalent in the U.S.A.

Income Tax for Singles
The income tax rate for a Single person is:

• 10%, if the annual income is less than $8,500.
• If the income is between $8,500 - $34,500 then the tax rate is 15% for the amount over $8,500. So total tax is 10% of $8,500, i.e., $850 plus 15% of amount over $8,500.
• For an income between $34,500 - $83,600 the tax rate is 25%.
• If your annual income is between $83,600 - $174,400 then the rate is 28%.
• If the total annual income exceeds $174,400 and is below $379,150 the tax rate is 33%.
• If you earn more than $379,150 then the rate of income tax applicable to the amount over $379,150 is 35%.

If you are paying your tax for the first time, let me simplify this thing a bit. Say you are Single and your income is $400,000 for 2011-2012. Let us go step by step to calculate your income tax.

A = 10% of $8,500 = $850
B = 15% of difference between $8,500 and $34,500 = 15% of $26,000 = $3,900
C = 25% of difference between $34,500 and $83,600 = 25% of $49,100 = $14,600
D = 28% of difference between $83,600 and $174,400 = 28% of $90,800 = $25,424
E = 33% of difference between $174,400 and $379,150 = 33% of $204,750 = $67567.50
F = 35% of difference between $379,150 and $400,000 = 35% of $20,850 = $7297.50

Total Income Tax on $400,000 = A + B + C + D + E + F

Total Income Tax = $850 + $3,900 + $14,600 + $25,424 + $67567.50 + $7297.50 = $119,639

Let us consider a case for the benefit of an individual whose income falls between $83,600 and $174,400. Let us say it is $100,000. Calculate difference between $100,000 and $83,600 which is $16,400. 28% of this amount comes to $4,592. To calculate your total tax, use amount represented by A, B, C. Amounts represented by the E and F will not come into the picture as your income is below $174,400.

Total Income Tax on $100,000 = $850 + $3,900 + $14,600 + $4,592 = $23,942

In reality your tax would be less than this as there are so many tax deductions you can claim in the tax filing. These calculations will give you a rough estimate of the tax amount you need to pay.

Married Couple Filing Returns Jointly
For a married couple filing returns jointly or a qualified widow the rates for 2011-12 are expected to be:

• 10%, if the annual income is less than $17,000.
• If the income is between $17,000 - $69,000 then the tax rate is 15% for the amount over $17,000. Total tax is addition of 10% of $17,000 and 15% of amount over $17,000.
• For an income between $69,000 - $139,350 the tax rate is 25%.
• If your annual income is between $139,350 - $212,300 then the rate is 28%.
• If the total annual income exceeds $212,300 and is below $379,150 the tax rate is 33%.
• And, if you earn more than $379,150 then the tax rate applicable to the amount over $379,150 is 35%.

Married Couple Filing Returns Separately
For a person who is married but is filing the return separately the tax rates are

• 10%, if the annual income is less than $8,500.
• If the income is between $8,500 to $34,500 then the tax rate is 15%.
• For an income between $34,500 to $69,675 the tax rate is 25%.
• If your annual income is between $69,675 to $106,150 then the rate is 28%.
• If the total annual income exceeds $106,150 and is below $189,575 the tax rate is 33%.
• If you earn more than $189,575 then the rate of income tax applied to the amount over $189,575 is 35%.

Income Tax for Heads of Households
If you are filing tax as the heads of households then your tax rates are

• 10%, if the annual income is less than $12,150.
• If the income is between $12,150 to $46,250 then the tax rate is 15%. Total tax is addition of 10% of $12,150 and 15% of amount over $12,150.
• For an income between $46,250 to $119,400 the tax rate is 25%.
• If your annual income is between $119,400 to $193,350 then the rate is 28%.
• If the total annual income exceeds $193,350 and is below $379,150 the tax rate applied is 33%.
• If you earn more than $379,150 then for the amount over $379,150 tax rate applied is 35%.

These are the tax rates for the financial year 2011-12 which are subject to change in the financial year 2012-13. In addition to the income tax levied by the Federal government, you also have to pay state and local income taxes. If you reside in a state that do not collect individual state income tax, well and good, otherwise get to know about it from the authorities.

As a society or community grows, it needs effective administration which can provide amenities and to carry out welfare activities. The expenses for these activities are raised by collecting taxes from the community members. The same concept applies at the level of a country. To provide effective medical, defense and law and order, taxes such as personal income tax help a lot. Tax rates vary in different countries and among different income groups, and various methods are used to calculate them.