How to Calculate Income Tax – Complete Guide to Income Tax Calculations

If you decide to do your own taxes this year, the main thing you will need to know is how to calculate income tax to determine how much you owe.

Income tax calculation can be time-consuming, and most people dread having to do it each year. However, it’s not as difficult as you might expect. With a little knowledge and tools such as free income tax calculators, you can save a lot of money and prepare your own return this year.

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Who Should File Their Own Taxes?

Every tax season, countless businesses offer to prepare income tax returns. They set up in stores and empty storefronts, even on sidewalks, and they advertise constantly. You wouldn’t be alone if you thought you needed one of those professionals to calculate income tax, but the truth is that a lot of people can do their own income tax calculations.

If you have a business or complicated investments, you will probably want to use a professional. However, if you are one of the estimated 60 million people who file a 1040EZ or a 1040A, there is no reason to avoid calculating income taxes yourself.

The average cost of hiring a professional to calculate income tax is $273. Think about how far that money could go. If you have one job and just one or two documents to list on your tax return, then at least consider doing the work yourself. If you get stuck, you can always go to a tax professional. It’s worth giving it a shot.

The IRS has partnered with companies that offer tax return software; if you earn less than $62,000 a year, or if your family’s combined income is less than $62,000, you can use the software offered by these companies for free. Their programs make calculating income tax a painless and simple task.

If you earn more than $62,000 a year, there are still free options, though they will require a bit more effort. We will cover those below, too.

Who Doesn’t Need to Calculate Income Tax?

Certain people do not need to file their income taxes. This depends on age, type of income, and filing status. Typically, if you earned less than the minimum income for your age plus one deduction, you won’t have to file. This could be anywhere from $1,000 to $10,000 depending on the circumstances.

The specific rules on who must file can get complicated and confusing. The easiest way to determine who must calculate income tax is to use an interactive tool from the IRS. You can find it on the website, and it should take less than 15 minutes to complete.

Even if you don’t have to file based on income, you will need to file if you meet certain conditions or want to claim certain tax credits. The IRS recommends filing for the following reasons:

You worked and had federal tax withheld, you made estimated tax payments or made an overpayment that was applied to this year’s taxes.
You want to claim work-related tax credits, such as the Making Work Pay Credit and the Earned Income Tax credit, which must be claimed on a tax return.
You have one or more children and want to claim them as dependents to reduce your taxes.

Other credits that require the filing of a return are the American Opportunity Credit for college students, the First Time Homebuyers Credit, and the Health Coverage Tax Credit which helps pay for health insurance under the Affordable Care Act. You can see a full list on the IRS website. Note that many companies offer better deals if you go to their site directly rather than linking through the IRS.

If you don’t want to claim a tax credit or get a refund, and you are otherwise excused from the filing requirement, then you need not file a return. However, some credits are worth thousands of dollars. Look at how much you may be owed before you decide to skip preparing your taxes.

What Do I Need to Do to Prepare to Calculate My Income Tax?

Once you’ve decided to try doing your taxes on your own, you’ll have to gather together all the necessary paperwork. It will be a much easier process if you have everything together before you begin. The Internal Revenue Service provides a comprehensive list of what you will need in order to calculate income tax on your own. Its suggestions include:

A copy of last year’s tax return
Bank statements from the past year
An e-filing PIN or your adjusted gross income in the previous tax year
Your Social Security number and those of your spouse and dependents, if applicable
Social Security benefits statement
Statements from any unemployment income
Small business receipts, if applicable
Income receipts from rental property, real estate, royalties, partnerships, S corporations and trusts, if applicable
W-2s (or 1099s) from all of your employers
If applicable: Forms 1099-INT; Form 1099-G, showing any refund, credit or offset of state and local taxes; Forms 1099-DIV and Forms 1099-R, showing dividends and distributions from retirement; and other plans paid to you during the year.
If applicable, the following ACA forms: Form 1095A, Health Insurance Marketplace Statement; Form 8962, Premium Tax Credit; and Form 8965, Health Coverage Exemption and ECN
A valid email address

You’ll also want some quiet uninterrupted time and a clean area to work. Nothing will cause frustration faster than losing a W-2 in a pile of unrelated papers or digging through piles of mail just to find the one form you need.

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Which Free Online Income Tax Calculators Should I Use?

If you (plus your spouse and any other household members, if filing jointly) earn less than $62,000 per year, you can calculate income taxes and file the Federal returns for free online. The companies who have partnered with the IRS to offer this service include:

TaxACT® Free File
ezTaxReturn.com
FileYourTaxes.com
eSmart Free File Edition
Free1040TaxReturn.com
Jackson Hewitt
Online Taxes at OLT.com
FreeTaxUSA® IRS Free File Edition
1040NOW.NET
1040.com Free File Edition
TurboTax ® All Free(℠)
H&R Block’s Free File
TaxSlayer

Note that while the IRS works with each of these companies to ensure certain standards are met, it does not recommend one service over another. Make sure to check the requirements before you begin, as each company has different rules as to who qualifies for free services.

The free income tax calculator websites that are partnered with the IRS all offer some online services equivalent to paying a CPA or other professional. The programs are kept up-to-date with all the tax laws. The question-and-answer style of gathering information makes the tax process simple to understand. Each company has been reviewed by the IRS, and each program has been deemed acceptable for preparing tax returns.

One of the best reasons to use an online income tax calculator is to familiarize yourself with the basics of tax deductions. As you complete various sections of the tax forms, you will learn what can and can’t be deducted.

It may not seem like much help now, but if you use the software provided, then as time goes by, you’ll start to recognize what can be deducted. You will be better prepared in subsequent years as you determine what paperwork must be saved and what expenses absolutely have to be tracked. As your knowledge grows and your organization skills improve over time, tax time will get easier.

How to Use a Free Income Tax Calculation Service

With more than a dozen IRS-associated companies competing for business, it is impossible to give step-by-step instructions for each one. Fortunately, the companies have all worked to make the process as painless as possible, and certain basic information is applicable to all of them.

First, make sure you qualify for the free solutions offered. Double-check to be sure you won’t have to pay for tax preparation at the end because your income was higher than you thought, you decided to take an unexpected deduction or you have an investment that requires a more complicated tax return. If you find you have to pay at the end, you can abandon the work and start elsewhere, but you will have wasted a lot of time.

After you are organized and ready to begin, start entering your information into the online income tax calculator. Most services use a question and answer format, and all have comprehensive help databases. The programs all show you where on your paperwork you can locate the numbers to be entered into the software, and most programs offer extra help with particularly complex subjects.

Although taxes can be tricky, the software providers compete on customer service. This means you will have access to help beyond the IRS instruction manuals. Each company tries to make it as painless as possible to complete the tax forms, and all offer support. Some companies require payment for phone or online assistance while others offer it for free.

Other useful features of most of the tax prep programs available include:

The ability to skip irrelevant sections
The ability to go back and change answers
The ability to import paper documents directly from the financial institutions
A running total of your refund (or balance due)
An option to file federal taxes online
An option (usually not free) to file a state tax return at the same time

It’s important to remember to give yourself plenty of time to calculate income tax. You will probably be motivated if you know you are receiving a big refund. However, if the refund is minimal, or if you owe money, you may be tempted to leave filing to the last minute. Especially if this is the first time you’ve done your own tax calculations, leave at least a full weekend for the task.

If you run into problems just before the filing deadline, you may have to hold for hours to get help over the phone. If you decide you need outside help, you probably won’t be able to find a CPA or other professional at the last minute. And, if you encounter trouble, you run the risk of missing the filing deadline and suffering penalties.

Calculating Income Tax Without Using a Free Service

If you don’t qualify for the free income tax calculators, or if you object to using them, you can complete the IRS forms by hand. These days, the IRS provides versions of every form with automatic updates; as you enter numbers, totals are calculated in their respective boxes and columns. It won’t be as painless as using software, but it’s still easier than it used to be.

The first thing you need to do in this situation, after gathering your paperwork together, is to find out what forms you will need. This might be a 1040EZ if you are single or married and filing jointly, have no dependents, and earn less than $100,000 a year. Self-employed individuals who pay estimated taxes must file a 1040ES. Itemized deductions require a Schedule A while capital gains and losses require a Schedule D.

Fortunately, the IRS provides clear instructions for every form. It may take a few hours to read through everything and figure out which documents are needed, but it’s not as difficult as it first looks.

Once you have all the required forms, it becomes a tedious matter of reading instructions and filling in boxes. The IRS instructions are comprehensive, and they address almost every question that could conceivably be asked. In fact, often the instructions are longer than the forms.

Feel free to call the IRS for help, too. Its phone lines are open during tax season, and the agents will answer basic questions. The closer it gets to April 15, though, the longer the hold times. It’s always best to get an early start on the process.

When Should I Ask a Professional to Calculate My Income Tax?

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Under certain conditions, low-income individuals can qualify for free one-on-one tax preparation services. People who qualify can bring all their paperwork to a professional who will run their own income tax calculators and file the return.

The Volunteer Income Tax Assistance program from the IRS offers help to those who earn less than $54,000 a year as well as to people with disabilities or limited English proficiency. A similar program provides help to taxpayers who have questions about pensions and other issues related to retirement.

If you don’t qualify for help under a program through the IRS, you may still want to pay a professional to calculate income taxes for you. In fact, there are some circumstances where it would be a mistake to try and calculate taxes on your own. Some examples are:

You don’t know whether you and your spouse should file jointly or separately
You have a large number of unreimbursed expenses; for example, as a freelancer
You have a large number of investments, retirement contributions, tax-exempt donations or similar items that will impact your income or your deductions
You spent time last year living or working in a foreign country

If you decide to hire a professional, choose with caution. Some tax preparation jobs require little more than a high school diploma; if you have lot of assets, you don’t want to hire someone working off of a card table at Wal-Mart. Similarly, a person who earns less than $100,000, doesn’t own a home, and has no income from sources other than employment probably does not need to pay the rates for a graduate-school-educated CPA.

For guidance in choosing a tax calculation service, you can start at the IRS website. There, it maintains a database of certified tax preparers who have voluntarily provided their credentials. The list does not contain the names of every professional. However, if a name is on the list, that person has, at the very least, proven that he/she meets the minimum standards set forth by the government

Conclusion

Most people dread tax time. In the past, the season meant hours spent adding and subtracting, double- and triple-checking numbers, and going cross-eyed from the fine print of the forms. Today, though, there are many more options.

Calculating income tax does not need to be painful. Very few people must spend weekends indoors with a calculator, erasing figures, finding forms, and generally feeling miserable. Whether you hire a pro, use the IRS forms or use an online service, don’t avoid calculating income taxes. At least give it a try and see if it’s as scary as you thought.

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