It's also important to realize that the tax brackets for 2017 tax returns are very different than the tax brackets that will be applied to 2018 returns, so be sure you're looking at the correct tax year.Īs far as qualified dividend and long-term capital gains taxes go, they are taxed at different, more favorable rates of 0%, 15%, or 20%, depending on the taxpayer's marginal tax brackets. Be sure to use the correct bracket for your filing status. Using the formula in the left column tells us that this taxpayer would have a total federal income tax of $10,351.25 for the 2017 tax year.įor reference, here are complete guides to the 2017 tax brackets and 2018 tax brackets. What this means is that the 10% tax rate will always be applied to the first $9,325 of income, regardless of how much a taxpayer made.įor our example of a single taxpayer with 2017 taxable income of $58,450, the chart shows that they would fall into the 25% tax bracket. For example, consider the single tax brackets for 2017. They're called marginal tax brackets because not all of your taxable income is taxed at the same rate. Next, your taxable income will be applied to the marginal tax brackets. Of course, if you're reading this in preparation for your 2018 tax return (the one you'll file in 2019), ignore this section. So, in our example, this single filer would subtract a personal exemption of $4,050, finally arriving at their taxable income of $58,450. The personal exemption is disappearing after the 2017 tax year as part of the Tax Cuts and Jobs Act, but for 2017 returns, each taxpayer and their dependents are entitled to a $4,050 personal exemption (although this phases out for high-income taxpayers). There's one more step to determine taxable income for the 2017 tax year - the personal exemption. Step four: Apply your personal exemptions (for 2017 returns only) So, they would use the higher figure, resulting in $62,500 in remaining income. This adds up to $7,500, higher than the $6,350 standard deduction for 2017. The majority of Americans use the standard deduction, but it's often a good idea to calculate your taxes using both methods to see which is most advantageous.įor example, let's say that in our hypothetical example with an AGI of $70,000 in 2017, this taxpayer is single and has the following deductions: Mortgage interest, charitable contributions, state and local taxes, and certain medical expenses are some of the most common ones, but there are many other possible deductions. You can choose to take your corresponding standard deduction, or take all of your actual tax deductions, whichever is higher. For the 2018 tax year, the standard deduction is increasing to $12,000 and $24,000 for single and joint filers, respectively. They can add up all of the tax deductions to which they're entitled, or they can choose to take the standard deduction.įor the 2017 tax year (the return you filed or will file in 2018), the standard deduction is $6,350 for single filers, and $12,700 for married couples filing jointly. Step three: Apply deductions to find your taxable income These would be subtracted from your gross income to arrive at an adjusted gross income of $70,000. Traditional IRA contributions of $3,000.If any of these apply to you, subtract them from your gross income to arrive at your AGI.Ĭontinuing our example, let's say that your gross income is $75,000 and that you have the following adjustments for 2017: Tuition and fees - Up to $4,000 if you qualify and don't also claim the American Opportunity Credit or Lifetime Learning Credit.Bad debts - if you're owed money and can't collect.Alimony paid, although it must be claimed as income by the recipient (discontinued for divorces after December 31, 2018).Moving expenses, if your move was connected to a new job (discontinued for the 2018 tax year).Student loan interest, up to a maximum of $2,500.Deductible retirement contributions to a traditional IRA or to a self-employed retirement plan such as a SEP-IRA (Note: 401(k) and similar plan contributions are generally already excluded from the income listed on your W-2).These are also known as "above the line" deductions, because you can use them regardless of whether you itemize deductions or take the standard deduction. Next, certain adjustments are applied to your gross income to determine - you guessed it - your adjusted gross income, or AGI. Step two: Determining your adjusted gross income (AGI)
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