Tax brackets are set by Congress and the standard deductions and exemptions are adjusted annually for inflation. These numbers change year to year, affect all taxpayers, and should be taken into consideration in any tax estimate or tax planning scenario. At the end of this post, you will be able to quickly calculate your personal taxes owed and estimate your refund. We’ve also inserted an example of how you can increase a refund of up to 50 percent.
Calculate Your Effective Tax Rate for 2017
Standard Deduction & Personal Exemptions
This year the standard deduction for single taxpayers is $6,350, up $50 from $6,300 in 2016 – meaning that in 2017 the IRS will allows everyone to deduct an extra $50 off their income tax free money. A married couple filing jointly receives a standard deduction of $12,700, up $100 from 2016 (or $50 each).
The personal exemption, which is an allowance for all members in your household, remained flat at $4,050. This is another taxable income “freebie,” which you can exclude from taxable income. Personal exemptions are provided for yourself and any dependents you can claim. If you’re married filing jointly, each spouse receives an exemption for a minimum exemption of $8,100 (2 x $4,050). If you have children, you are allowed $4,050 from taxable income for each child. For many parents, you know this doesn’t exactly offset the cost of kids (I’ve personally spent that much on one of my kid’s summer camps.)
What this all means: the sum of these numbers, the standard deduction and in addition to your total exemptions, are the income tax “freebie” that all taxpayers receive at a minimum. Assuming you’re taking the standard deduction (as opposed to the itemized deduction), you should be able to quickly calculate a quick, conservative estimate for your taxable income.
The Back-of-Envelope Method: Quick Income Tax Calculator for ‘Sandy’ (Single No Dependents or “SND”)
|Total Reductions to Income||(d) = (b) + (c)||10,400|
|Taxable Income||(e) = (a) – (d)||$49,600|
As the above example illustrates, with the “freebie” alone, a single taxpayer with no dependents gets the first $10,400 of his or her income tax free. In the situation of a married couple, the “freebie” is double that at $20,800.
For a more complete list of standard deductions based filing status, see our table below. For the below example, we assume one child dependent for non-single filing types to show the total reductions to income, or income tax “freebie.”
|Filing Type||Standard Deduction||Exemption(s)||Total Freebie|
|Head of Household||$9,350||$8,100||$17,450|
|Married Filing Jointly||$12,700||$8,100||$20,800|
|Married Filing Jointly||$9,350||$12,150||$24,850|
|Married Filing Separately||$6,350||$4,050||$10,400|
To calculate your Total income tax “freebie”, simply take your standard deduction then multiply it by the number of people in your home. Deduct this from your wages and salary or business income for your taxable income. Either run this number in our tax calculator or cross-check it with the IRS’ tax table, for your taxes owed. This is the quick way to calculate taxable income and taxes owed. For a more specific number, you should first calculate adjustments to income and then subtract the income tax “freebie”, explained further below.
Adjustments to Income
Adjusted Gross Income is a very common measure of income that is used by many U.S. financial, educational, and government institutions, and is determined before taxable income of Form 1040: U.S. Individual Income Tax Return (on page 1 as shown below).
Adjusted Gross Income (AGI) is calculated as earnings less allowed adjustments to gross income (see below). Earnings include wages, dividends, and any profits or losses from business. AGI is often a main factor in considering eligibility for a personal loan, financial assistance for higher education (FAFSA), and for other government aid.
Typical adjustments to income include:
- Student loan interest deduction
- Health savings account deduction
- IRA deduction
- Moving expenses
- Educator expenses (for teachers)
For a more complete list on adjustments to income see the IRS’ guidance here.
These items reduce taxable income dollar for dollar and should be a part of most people’s financial and tax plan. Having a health savings account (“HSA”) for example, is a great way to put away cash for spending on medical items that you would spend anyway, in an account that is tax deductible. You can set an HSA up with a third-party provider if you have a high deductible plan. IRA deductions are also beneficial. You have money put away for retirement and you can deduct your contributions to realize tax savings today.
Once you add your adjustments to income, subtract the total from total income for Adjusted Gross Income (AGI). This number will also be referenced by other government entities or financial institutions if you seek a loan or other financial products.
In our Sandy example, let’s assume she has $2,500 in student loan interest, $3,400 in an HSA account, and $5,500 in an IRA contribution for a grand total reduction of $11,400. Her AGI will look as follows:
|Wages & Income||(a)||$60,000|
|Adjustments to Income||(b)||$11,400|
|Adjusted Gross Income (AGI)||(c) = (a) – (b)||$48,600|
Next, you will want to subtract the reductions from the standard deduction (or itemized deduction, see below if you want to check if you’ll benefit from the itemized deduction) and exemptions. Sandy has no dependents and is Single therefore her reduction will be an additional $10,400.
|Adjusted Gross Income (AGI)||(a)||$48,600|
|Taxable Income||(d) = (a) – (b) – (c)||$38,200|
|Tax According to Tax Table||(e)||$5,328|
This is the number you’ll want to run against the IRS’s tax brackets to determine the dollar amount of taxes owed. At $38,200, taxes owed come out to $5,328. To see how this is calculated, we can review tax brackets below. Each column represents a separate filing status, with the first column for “Single”, the second for “Married Filing Jointly”, the third for “Married Filing Separately”, and lastly “Head of Household.”
The Itemized Deduction
While the standard deduction is a fixed dollar amount, the itemized deduction is based on certain expenses or taxes incurred during the tax year.
By the numbers, most taxpayers take the standard deduction rather than itemizing their deductions. However, many taxpayers can save money by itemizing their tax deductions, especially if they have a mortgage or home equity loan. Even if you don’t own a home, itemizing deductions can pay off if you pay high state, city, or county taxes, or if you’ve incurred certain types of expenses.
The taxpayers that can generally benefit from itemizing their deductions and should do so, who:
- Have itemized deductions totaling more than the standard deduction you would receive
- Paid property taxes or mortgage interest on your home
- Have incurred large, uninsured medical or dental expenses
- Incurred large, unreimbursed expenses as an employee at your job
- Experienced a large, uninsured casualty (natural disaster) or losses from theft
- Made large contributions to qualified charities
- Incurred large, unreimbursed miscellaneous expenses
According to the most recent IRS data, for the 2013 tax year, 30.1 percent of households elected to itemize their deductions (a total of 44 million tax returns). While the majority of American taxpayers take the standard deduction, households with incomes over $75,000 generally prefer to itemize their deductions. IRS data finds that the more income a household earns, the more likely they are to itemize deductions on their returns.
This is because these households are generally more likely to pay higher amounts in state and local taxes, have larger mortgages, and make larger donations to charities, each of which could result in sizeable deductions. The greater income also gives these households a stronger incentive to maintain more careful records, which are needed in order to itemize their deductions.
The limitation for itemized deductions hits households with incomes of $287,650 or more ($313,800 for married couples filing jointly). As a result, there are a significant number of higher earning households that fall into the category of taxpayers who are more likely to itemize.
In fact, it is a good idea to become an itemized filer if possible by looking at itemized deductions and making conscious decisions to change how you invest your money to maximize the deduction during the tax year.
Calculate your Effective Tax Rate Formula
Calculating your tax can be done on the back of a napkin while you’re out at lunch or drinks with friends. While tax professionals would like to believe you’re thinking about tax planning throughout the day, the reality is that we don’t think about tax planning very often but when we do, we want very simple ways to think about tax. So here is the simplified version of the formula to calculate tax liability. Simply follow the following steps.
(1) Take your total salary plus any other earnings or 1099 earnings. If you’re a small business owner, plug in your net income (earnings less deductions) that will come from a Schedule C, or a K-1 (partnership income).
(2) Subtract allowed adjustments to income including:
- Health savings account deductions for high-deductible insurance plans,
- Moving expenses when relocating for work when relocation is more than 55 miles,
- Student loan interest of up to $2,500, and
- IRA contributions up to $5,500.
This will calculate your AGI.
(3) Subtract the standard deduction for your tax profile and the appropriate number of personal exemptions you can claim from AGI. This is your taxable income.
(4) Compare this number to the income tax table above. This is your federal income tax due for the year.
For (1) and (2), follow steps (1) and (2) above.
(3) Next, calculate your itemized deduction by following the below steps:
- Gather your receipts and supporting paperwork for itemized items such as medical expenses, mortgage interest (Form 1098), property taxes, and state income taxes (W2). While you won’t need to submit the proof of your expenses to the IRS, you’ll need this information in case of an audit and practically, it’s easier to add up with the numbers in front of you.
- Pull up Form 1040 Schedule A, for a checklist of deductible items to consider.
- Add up your Medical Expenses then subtract 10% of your AGI from this number. This is your medical expense deduction. Medical expenses include insurance premiums as well as out-of-pocket expenses for doctor visits, procedures, and tests are typically included. Additionally, you should consider smaller expenses for medical necessities such as purchases from pharmacies (band-aids, ointments, cold medicine, and other health remedies do count). Typically we see medical expenses limited by the 10% of AGI exclusion.
- Add State and Local Income Taxes from your W2 or year-to-date paycheck.
- Deduct Property Taxes, you should find the amount you paid on your tax bills.
- Next, calculate all of the Other Taxes that you have paid. If there are taxes that don’t fit into defined categories on Schedule A, you can enter the total amount on line 8. Make sure to also identify the type of tax, e.g., “Sales Tax.”
- To deduct Mortgage Interest, look at Form 1098 from your mortgage lender. If you have not received by January 31 of the year following that tax year, call your mortgage lender. You can usually download Form 1098 online from your bank.
- Add up your Charitable Contributions to a qualified organization (contributions to individuals are not deductible). You must have receipts, bank records, or written acknowledgment of the contribution from the organization or your deduction may be disallowed.
- Add any Unreimbursed Business Expenses. Now subtract 2% of AGI from total expenses. We recommend recording business expenses on Schedule C to maximize the deduction, however, this depends on whether there is a separate business to file a Schedule C. As a regular employee, you would use the Schedule A, otherwise as an entrepreneur or business owner, our view is that taxpayers should try to keep these expenses on the Schedule C.
- Finally, sum all the items above, and this is your itemized deduction.
(4) Determine whether the itemized deduction or the standard deduction is larger and subtract the larger of the two from your adjusted gross income calculated in Step (2). This is your taxable income.
(5) Similar to the above, compare this number to the income tax table above. This is your federal income tax due for the year.
Back to our original example with Sandy, let’s say she has itemized deductions of $5,000 after everything is added. She spent $4,000 in medical expenses which she could not deduct because of limitations. she had $500 worth of unreimbursed business expenses and unfortunately did not have another business to move her expenses to. As a result, she lost these deductions as well. She did have $2,500 in mortgage interest, $1,000 in property taxes, and $1,500 in state and local taxes. Consequently, her total itemized deduction is $5,000. This deduction is less than the Standard Deduction, so she will not take the itemized deduction.
Projected Tax Liability
We’ve now established that tax liability is $5,328. Sandy looks at her year-to-date pay stub to see that she’s withheld approximately $7,000 in federal income tax. Therefore Sandy currently expects to get the difference as a refund, or $1,672. Now assume that Sandy also had a Schedule C business “paper” loss of $5,000, meaning she identified at least $5,000 worth of expenses related to her side business venture that she just started.
With the loss, her taxable income would decrease by $5,000 to $33,200. By checking the tax table, I can see that the taxes owed on $33,200 of taxable income is $4,520. Since she still paid in $7,000 from her paycheck, her refund is now up to $2,480.
This is just one example of a scenario where making a smart investment can increase a refund. By seeking out a side-hustle or venture, you can invest in a brighter financial future. Futhermore, this can also carry a positive tax impact — in this case increasing the refund by about 50%!
Next time you speak with a financial advisor, ask them where they can find a strategy with 50% return in one year. Ask your tax professional, Chances are there are more tax strategies to get you the kind of return in the short term.
In conclusion, that’s how you can quickly calculate taxes and refund in less than 5 minutes.
What This All Means
- Tax brackets change every year. Consequently, you should monitor where you expect to fall in the tax brackets as the year goes on.
- Manage your tax actively to increase adjustments and impact your standard deduction vs. itemized deduction calculation.
- Check on your tax liability versus tax withheld BEFORE the end of the year and see where you fall.
- Don’t wait until tax filing season to come up with a tax strategy. It will usually be too late to impact your taxes owed.
To estimate your taxable income using our workbooks, sign up for our educational content course.