You get more in your paycheck by using the correct filing status when calculating income tax liability.
In 2013, a married couple has a total household income of $250,000, they are filing jointly and have one child. They have a qualified home mortgage on their main residence and make a monthly mortgage payment.
You can figure their household income tax liability on their home mortgage interest and mortgage interest tax. You can also find more information on the steps to claim the personal exemption, which we will explain in a moment.
The IRS has an income tax formula. We often think of the tax formula as simply the total of your income tax and the standard deduction. But, there is much more to it. The formula includes the standard deduction, the tax bracket, the personal exemption, and how much your total household income and the tax liability of the household total is compared to the total amount of your deductible mortgage interest and mortgage interest tax.
Standard Deduction
The standard deduction is a set amount you may deduct from your taxable income. There are four tax brackets depending on your household income. If your household income is $90,000 or less, your tax bracket is 0%. If your household income is between $90,000 and $135,000, your tax bracket is 12%. If your household income is between $135,000 and $160,000, your tax bracket is 25%. And if your household income is $160,000 or more, your tax bracket is 28%. In the example above, you can take the $9,500 standard deduction if your household income is between $90,000 and $135,000.
Tax Bracket
The tax bracket is based on your household income. A higher income tax bracket means a larger tax bite at the end of the year. You pay income tax on a set percentage of your household income. The IRS has provided the percentage on their website. The tax bracket is the percentage of the income you pay tax on for that year. The tax bracket is determined by your income.
Personal Exemption
Personal exemptions may be taken if you are a dependent and claim a dependent for income tax purposes. A dependent may be a child, a spouse, a stepparent, a legal guardian, or another taxpayer who meets certain criteria. Any amount you deduct from your taxable income will count toward the Personal Exemption. It may also reduce the Standard Deduction.
Example
Tax Bracket – 28% = $30,560 Income Amount = $105,000 Income Tax Liability = $28,640
If you claim the personal exemption, your Standard Deduction is reduced by $4,000 (personal exemption minus Standard Deduction). To be in the 28% tax bracket, you can deduct $4,000 from your taxable income. Tax Liability = $28,640 ($105,000-$4,000=$100,640)
The tax bracket begins at 0% and increases as income increases. The tax brackets increase gradually and add more money at each step. As you get closer to the highest bracket, the tax you pay increases and decreases as your income increases.
Standard Deduction
The IRS also provided the formula to calculate the Standard Deduction, which is:
Tax Liability – Personal Exemption = Standard Deduction
If your tax liability is $28,640 and you have a Personal Exemption of $4,000, your Standard Deduction is $24,640.
You can see how many of these deductions reduce your taxable income in the example above.
Standard Deduction Formula
For an additional look at how the Standard Deduction and Personal Exemption will affect your taxes in 2014, you can take a look at this handy standard deduction worksheet.
Other Deductions
In addition to the Standard Deduction and Personal Exemption, there are additional standard deductions to consider.
- Earned Income Credit
This deduction is only available for people that qualify as “Earned Income Credit”. In 2014, those earning $15,300 or less are considered to be able to make a qualifying payment. Payments made are calculated by dividing your earned income ($15,300) by 45 and that is your earned income credit.
Earned Income Credit worksheet
Another example of this is that if your income is $15,300 (earnings after standard deductions and personal exemptions) and your EIC is $1,000, the percentage is 45:1000 or 45% of your earnings. Therefore, you will be able to claim a $450 reduction in your taxes. The income must be earned though, i.e. you cannot get a refund if you earn a $1000 bonus (unless the bonus is included in the EIC calculation).
- Dependent Care Credit
Again, this deduction is only available for people that qualify as a dependent. The deduction is claimed on your federal tax return based on how much child care you incur during the year and how many months you were eligible to claim a dependent.
Dependent Care Credit worksheet
- Medical Expense Deduction
While this deduction is available for all filers, it is most beneficial to those people that have the income to incur the cost of medical expenses that are normally claimed. If you claim this deduction you can write it off up to $2,600.
Medical Expense Deduction worksheet
What I hope I have shown here is that there are many standard deductions that you can take, and they can vary in which income bracket they are available for. They don’t give you any breaks (no refunds) and they are there to help you meet your federal tax obligation.
For more details about tax liability help. call (888)489-4889 for a free consultation.