- Determine gross income, adjustable gross income, taxable income and calculate federal income tax
- Apply exemptions, deductions, and credits to basic income tax calculations
- Calculate federal income tax
- Determine social security and Medicare taxes
Gross, Adjusted Gross, and Taxable Income
The Main Idea
Gross income refers to the total amount of income or earnings a person receives before any deductions or taxes are taken out. It includes all sources of income, such as wages, salaries, tips, bonuses, commissions, rental income, and any other forms of earnings.
Adjusted Gross Income, commonly referred to as AGI, is the total income earned by an individual or household after certain deductions have been subtracted from their gross income.
Tax deductions are specific expenses, contributions, or allowances that individuals can subtract from their total income, thereby reducing the amount of income that is subject to taxation.
Adjusted gross income = Gross income – Deductions
Tax exemptions reduce the taxable income of individuals or households.
Taxable income is the portion of an individual’s income that is subject to taxation. It is determined by subtracting deductions, exemptions, and other adjustments from the adjusted gross income (AGI). Taxable income is the basis on which income tax is calculated, and it is used to determine the tax rate and the amount of tax owed to the government.
Taxable income = Adjusted gross income – Exemptions
You can view the transcript for “Adjusted Gross Income, Explained in Four Minutes | WSJ” here (opens in new window).
Tax Credits
The Main Idea
Tax credits are direct reductions in the amount of tax liability owed to the government.
You can view the transcript for “Tax Deductions vs. Tax Credits” here (opens in new window).
Calculating Your Income Tax
The Main Idea
U.S. income tax is based on taxable income, following a progressive system with marginal rates, meaning higher income brackets are taxed at higher rates.
The five filing statuses provided by the IRS are: Single, Married filing jointly, Married filing separately, Head of household, and Qualifying surviving spouse.
Taxable income is categorized into brackets, each having different tax rates, and is also influenced by your filing status. Below are the 2023 marginal tax rates for individuals filing with statuses single, married filing jointly, and head of household.
| Tax Rate | For Single Filers | For Married Individuals Filing Joint Returns | For Heads of Households |
|---|---|---|---|
| [latex]10\%[/latex] | [latex]$0\text{ to } $11,000[/latex] | [latex]$0\text{ to } $22,000[/latex] | [latex]$0\text{ to } $15,700[/latex] |
| [latex]12\%[/latex] | [latex]$11,000 \text{ to }$44,725[/latex] | [latex]$22,000 \text{ to }$89,450[/latex] | [latex]$15,700 \text{ to }$59,850[/latex] |
| [latex]22\%[/latex] | [latex]$44,725 \text{ to }$95,375[/latex] | [latex]$89,450 \text{ to }$190,750[/latex] | [latex]$59,850 \text{ to }$95,350[/latex] |
| [latex]24\%[/latex] | [latex]$95,375 \text{ to }$182,100[/latex] | [latex]$190,750 \text{ to }$364,200[/latex] | [latex]$95,350 \text{ to }$182,100[/latex] |
| [latex]32\%[/latex] | [latex]$182,100 \text{ to }$231,250[/latex] | [latex]$364,200 \text{ to }$462,500[/latex] | [latex]$182,100 \text{ to }$231,250[/latex] |
| [latex]35\%[/latex] | [latex]$231,250 \text{ to }$578,125[/latex] | [latex]$462,500 \text{ to }$693,750[/latex] | [latex]$231,250 \text{ to }$578,100[/latex] |
| [latex]37\%[/latex] | [latex]$578,125[/latex] or more | [latex]$693,750[/latex] or more | [latex]$578,100[/latex] or more |
Calculating tax liability involves determining taxable income, identifying applicable tax brackets, calculating tax for each bracket, and summing these amounts to find total tax liability.
Computing FICA Taxes
The Main Idea
FICA (Federal Insurance Contributions Act) taxes fund Social Security (or Old Age Survivors, and Disability Insurance – OASDI) and Medicare, and are distinct from federal income tax.
OASDI consists of Old Age Insurance (retirement benefits), Survivors Insurance (benefits for family members of deceased workers), and Disability Insurance (financial assistance for individuals with disabilities).
Medicare taxes fund the federal health insurance program, primarily for individuals aged 65 and older or certain individuals with disabilities.
A total of [latex]7.65\%[/latex] of your gross pay is withheld for FICA taxes, equally matched by your employer. This is divided into [latex]6.2\%[/latex] for OASDI and [latex]1.45\%[/latex] for Medicare.
The OASDI program has a contribution and benefit base, limiting the amount of earnings subject to taxation. For 2023, this limit is [latex]$160,200[/latex], meaning an individual earning at or above this would contribute [latex]$9,932.40[/latex] to OASDI. Medicare tax applies to all gross income, without a limit. Rates differ for self-employed individuals.
| Individual (Employee) Rates | Employer Matching Rates | Self-Employed Rates | |
|---|---|---|---|
| OASDI Tax Rates | [latex]6.2\%[/latex] on wages below [latex]$160,200[/latex], any wage above [latex]$160,200[/latex] is charged a OASDI tax fee of [latex]$9,932.40[/latex] | [latex]6.2\%[/latex] on wages below [latex]$160,200[/latex], any wage above [latex]$160,200[/latex] is charged a OASDI tax fee of [latex]$9,932.40[/latex] | [latex]12.4\%[/latex] |
| Medicare Tax Rates | [latex]1.45\%[/latex] on all wages | [latex]1.45\%[/latex] on all wages | [latex]2.90\%[/latex] |
You can view the transcript for “Who Is FICA And Why Is He Getting All My Money?” here (opens in new window).
You can view the transcript for “FICA tax | American civics | US government and civics | Khan Academy” here (opens in new window).
Note: This video references the base limit of OADSI tax from 2011 of [latex]$106,800[/latex]. It is now [latex]$160,200[/latex].