How to Calculate Your Net Income Tax Liability on a 1040
- 1). Obtain a copy of the instructions for Form 1040. The Internal Revenue Service (IRS) publishes this document every year, outlining specific instructions for completing your 1040 and highlighting changes from previous years. Although you should find answers to all of your 1040 questions within, the document is lengthy and can be confusing for those unfamiliar with tax law.
- 2). Gather all relevant year-end tax documentation. If you work for a company, you will normally receive a W-2 at year-end, while if you are an independent contractor, you should receive a 1099 from anyone who paid you for work. You should also receive 1099s if you made any investment transactions or took any retirement distributions. A K-1 will be issued to you if you have any partnership investments.
- 3). Compute your total income. Lines 7 through 21 of Form 1040 allow you to list your income from all sources, including wages, tips, commissions, retirement income, dividend and interest payments, capital gains, alimony, business income, farm income, rental real estate income, unemployment compensation in excess of $2,400, and taxable social security benefits. When in doubt, refer to the IRS instructions for Form 1040. Enter your total income on line 22.
- 4). Compute your adjusted gross income. Lines 23 through 35 of Form 1040 allow you to adjust your total income downwards based on approved deductions. The most common adjustments to total income include IRA contributions, student loan interest payments, one-half of the self-employment tax, self-employed health insurance premiums, and alimony payments. Enter your adjusted gross income on line 37.
- 5). Choose standard or itemized deductions. The standard deduction, which is adjusted for inflation annually, can be deducted from your adjusted gross income, but you can also choose to itemize deductions. Common itemized deductions include interest on mortgage payments, payments made for state and local taxes, and excess medical expenses. If your itemized deductions exceed the standard deduction, use the larger amount. Subtract this amount from your adjusted gross income and enter on line 41.
- 6). Subtract exemptions. You are entitled to one exemption for yourself, your spouse, and any dependent children in your household, and this number is found on line 6d. For 2009, multiply this number by $3,650 to compute your total exemption amount. Subtract this number from line 41 and you have your taxable income.
- 7). Compute your net tax liability. Use your taxable income figure to compute your tax from the IRS tax table. Add in any additional taxes as instructed, such as self-employment tax and any additional tax on retirement distributions. Subtract any amounts already paid to the IRS, either through estimated taxes or tax withholding, and you have your net income tax liability or overpayment.
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