How to Calculate Tax Liability

Calculating tax liability is not exactly a very difficult task. After all, the calculation is nothing but a simple arithmetic computation. In addition to that, the rules that are laid down by the Internal Revenue Service also play a very important role in the actual calculation. You need to understand certain concepts to know how to calculate tax liability.

Vital Information

Tax liability can be termed as the total monetary amount that a person or a corporation is legally obliged to pay to the government. The same term is also used in the context of unpaid taxes that are carried forward to the next financial year. Thus, it can be concluded that this term is the total amount of taxes payable to the agencies, departments and bodies. This total figure basically contains the total amount of taxes that are payable for the current year and the ones that have not been paid previously. In some cases, you will also need to calculate Federal tax and State tax separately. Also, in some cases, the collection agency may also notify a rate of interest that has been levied on the total unpaid tax of previous years.

Procedure

Computing tax liability for a corporation can be a difficult affair and has to be done with the help of a certified chartered accountant. However, for personal or individual returns, this value is relatively easy to calculate.

Step 1

The official interface of Internal Revenue Service is the IRS portal. This interface is capable of solving all possible queries regarding taxation. Another merit of this interface is that it provides instructional forms for taxation. Most of these forms operate as calculators. In order to calculate personal or individual tax liability, you will need to download two documents, namely IRS Form 1040 and Form 1040 Instructional. The form is the one that is supposed to be filed and the instructional can be used as a reference for the same.

Step 2

The next step is to calculate your total income for the year. There are various factors that are to be considered while

doing so. Here's a checklist that you may follow.

  • Wages
  • Salaries
  • Interest received
  • Capital gains
  • Rent received
  • Dividend
  • Returns over investment
  • Any amount that is categorized as an inward cash flow and is not to be repaid or paid to another party
In case you are an employed person, you may refer to W-2 forms that are issued by your employer. In addition to that, you will also need to have a look at 1099 filings for further adjustments.

Step 3

The next step is to start the calculation of your adjusted gross income. The adjusted gross income is calculated by making legitimate adjustments and tax deductions from your general gross income (a total of all your incomes). There are several deductions that are specified within the lines 22 to 35 of the 1040 Form. In addition to that, the Schedule A of the same form includes many different deductions that are common for all people irrespective of their age, marital status and employment status. You will need to subtract these from your adjusted gross income. This will give you your taxable income.

Step 4

The form will specify a particular monetary figure that changes every year, with the number of deductions that you have claimed in the form (For example: in 2008 this figure was USD 3,500). The resultant figure is the total value of your exemption. The value is deducted from your income and you will receive your taxable income.

Step 5

In the last step, you may calculate your total taxable income. For this, multiply the applicable tax rate (specified in the tax bracket for which you qualify for) with the taxable income. This gives you your tax liability, that is the amount that you need to pay to the IRS.

The form 1040 is also very easy to operate and will give you precise instructions that will help you in your calculation.

Disclaimer. This article is for reference purposes only and does not directly recommend any specific financial course of action.

Source: www.buzzle.com

Category: Taxes

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