How to Estimate Federal Taxes

calculator pen and paper to estimate federal taxes

With the end of the year quickly approaching, you might be wondering how to estimate federal taxes. This information will also help you going into a new year so that you can withhold more money from your paychecks if needed so you can avoid having to pay more. The Tax Crisis Institute can help you figure out your taxes and ensure you don’t pay more than you have to.

How to Estimate Federal Taxes

When it comes to your taxes, you can pay two different types depending on the state: federal and state. Below, you’ll find out everything you need to know about federal taxes. These are administered by the IRS and typically speaking, they are paid throughout the year in the form of paycheck withholdings.

Figure Out Your Income Tax Rate

Your tax rate can be anywhere from 10%-37% and can be lowered by claiming deductions and credits. The United States uses a progressive income tax called “marginal tax rates”. This means that your tax rate depends on your level of income but only within a certain range (otherwise known as tax brackets).

Your tax rate is also determined by whether or not you’re filing a joint return, single return, or head of household. Most married couples choose to file a joint return but sometimes it can make sense to file separately. Your financial advisor will be able to tell you the best filing status to use. The tax rate is capped out at $500,000 in which everyone above this income pays 37% regardless of how high their income is. 

Example of How to Estimate Federal Taxes

Let’s say you have a person filing as “single” status and they make $75,000 per year. They wouldn’t pay one percent on the entire amount they make. Instead, they would pay 10% on the first $9,525, then 12% on the next $38.700, and so forth until they reach $75,000. 

That’s because the 22% listed for their tax bracket is the top marginal rate. So the single person who makes $75,000 would pay $13,582.50 in federal taxes. This is essentially a tax rate of 18%.

Calculate Your Taxable Income

This seems pretty easy but for the average person, you also have to calculate in deductions and exemptions. This is called your taxable income which is different from your total income (otherwise known as gross income). You first need to figure out your adjusted gross income by subtracting your deductions from your total income. 

Most people claim the standard deduction, which for our example above of a single person, would be $12,000. Some people choose to itemize their deductions instead of claiming a standard one. In this case, you’ll always be given the larger sum so if you itemize but it’s smaller than the standard deduction, you’ll use the standard deduction. Using the standard deduction, our example person above now has a taxable income of $63,000.

Calculate Federal Tax Credits

Deductions reduce the income level that you are taxed on. Credits reduce your overall tax liability, which means it reduces the amount of taxes you pay. Let’s say you owe $6,000 in taxes but can claim a $2,000 tax credit, you now only owe $4,000 to the IRS.

Here are a few of the most common federal tax credits:

  • Earned Income Tax Credit: This is for those with an income below a certain level and can be up to $6,431 for those with 3 or more children. The credit will be lower for those with fewer or no children
  • Child and Dependant Care Credit: This is a nonrefundable credit (which means this credit can reduce your taxes to nothing lower than $0 while a refundable credit can still give you a refund even if your tax liability is $0) is up to $6,000 for childcare expenses
  • Adoption Credit: This is another nonrefundable credit equal to the cost of adopting a child
  • American Opportunity Credit: A partially refundable credit up to $2,500/year for college expenses 

There are other tax credits you can receive for health insurance payments, installing energy-efficient appliances, etc. Your financial advisor will be able to make sure you take advantage of all applicable tax credits for your situation.

Calculate Your Refund

This can be the fun or not so fun part! Many people do qualify for a tax refund depending on how many taxes that were withheld from their paychecks. If the amount of taxes you paid is greater than the amount of taxes you owe (based on your tax liability as calculated above) then you’ll receive a check for the difference. This is called a refund. You can also pay no taxes during the year but still get a refund if you qualify for refundable credits.

How to Pay Your Taxes

If the amount you owe is greater than the amount you paid throughout the year then you’ll have a tax liability that still needs to be paid. You should contact the IRS right away to avoid any late filing fees. They can work with you to set up a payment plan if you can’t afford to pay them in one lump sum. Keep in mind, if you do pay with installments, you’ll likely be required to also pay interest on what you owe.

Speak with A Financial Professional Today

Tax Crisis Institute can help you with your overall financial goals and planning around your taxes. Our team wants to see you have a successful financial future. We have offices located in Bakersfield, Burbank, and Huntington Beach, California as well as Las Vegas, Nevada. Call us today so we can help you this tax season.

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