Detail the tax formula for calculating federal income tax liability for the individual. Be sure to include examples of the items included in the formula. Discuss deductions for the individual taxpayer and be certain to include the following topics:
Formula for calculating federal income tax liability
| Particulars | Amount |
| Gross Income | |
| Less: Deductions for AGI | |
| Adjusted gross income | |
| Less: Higher of itemised deductions or standard deduction | |
| Less: Exemptions | |
| Taxable income | |
| Multiplied by Tax rate (using appropriate tax tables or rate schedules) | |
| Gross Tax liability | |
| Less: Tax credits | |
| Net tax liability | |
Deduction for and deduction from AGI
Gross income for federal tax formula is computed by considering income from all tax sources such as wages, interest, dividend, capital gains, etc. On this income, the deduction for AGI is provided such as business expenses and individual deductions. In order to compute final tax liability, individuals have the option either to claim itemised deductions or the standard deduction (Rosen, 2005). These deductions are deductions from AGI while business expenses and individual deductions are a deduction for AGI. Each of these two deductions has a definite line in the Form 1040 (for example line 34 is for student loan interest for deduction).
In accordance with the provisions of US taxation, federal income tax has seven brackets which are 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. The tax rate is applied on the basis of filing status and income level.
Itemized versus standard deductions
The standard deduction can be termed as fixed amount allowed on the basis of filing status for which additional documents are not required. For the tax year 2015 or filing season for 2016, the standard deductions adjusted from inflation are as follows:
| $12,600 | Married filing together or surviving spouses |
| $6,300 | Single tax filers or married filing discretely |
| $9,250 | Tax filers in the head of household |
On the other hand, individuals have the option to itemise their reduction as per provisions of Revenue Act of 1913 (P.L. 63-16). An example of such deduction is interest paid or unexpected casualty losses. These deductions are reduced or restricted on the basis of eligibility, supreme notably with TRA86 (Chirelstein & Zelenak, 2015). For this aspect example of TRA86 can be considered in which consumer interest are eliminated, and more complex rules are enacted for providing a deduction of interest on investment.
References
Books and Journals
Rosen, S. H. (2005). Public Finance, 7th ed. New York, NY: McGraw-Hill Irwin. p. 360.
Chirelstein, M., & Zelenak, L. (2015). Federal Income Taxation, 13th (Concepts and Insights Series). West Academic.
Online
Federal Tax Rates, Personal Exemptions, and Standard Deductions, (2016). [Online]. Available through < https://www.irs.com/articles/2016-federal-tax-rates-personal-exemptions-and-standard-deductions>. [Accessed on 17th March 2017].
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