Personal Finance Insider’s free federal income tax calculator estimates how much you may owe the IRS, or recover as a refund, when you file your 2021 tax return. Our estimate is based on information you you provide regarding your filing status, income, pension contributions, tax withholdings, deductions and dependents.
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How to use the tax calculator
Here’s what you’ll need to estimate your refund or income tax bill using our calculator:
- Personal informations: Your filing status and age.
- Income: Your gross income for the tax year, as well as the amount of your contributions to a 401(k) or traditional IRA. (Note: We’ve included these top deductions because they’re common. When you prepare your tax return, you may also be eligible to deduct other items, such as student loan interest or half of your self-employment taxes, this will ultimately reduce your taxable income).
- Dependents : How many dependents you are claiming. (Note: We considered dependents to be children 17 and under who are eligible for the Child Tax Credit. When you enter a dependent in this calculator field, it triggers a tax credit of 3 $000. If you have already received a portion of your child tax credit from 2021 monthly advance payments, you will need to subtract that amount from your total refund).
- Deductions: This field will be pre-populated with the standard deduction after you select your filing status. If your total itemized deductions — this includes things like mortgage interest and medical expenses — is higher, enter that amount.
- Payments: If you were an employee, check your last payslip of the year to see what part of your income was withheld for income tax and enter that figure in this field. If you had more than one job, add the amount withheld for taxes by each employer. If you were self-employed, add up your estimated quarterly payments.
In addition to estimating how much you’ll receive as a refund or how much you’ll owe, the calculator shows your effective tax rate, or the percentage of your income you pay in taxes overall.
How a tax calculator can help you
Our tax calculator, like others, can only estimate your federal tax liability. To get the exact figure, you need to complete your tax return.
However, using a tax calculator before tackling your taxes has several advantages:
- Estimate your refund or tax bill. By entering basic information about your annual income, filing status, and deductions, you can find out if you overpaid or underpaid taxes throughout the year and prepare your budget accordingly for an invoice. or a refund.
- Decide if you need professional help. If your tax bill is higher or your refund is less than expected, consider consulting a tax professional on how to change the outcome for next year.
- Determine if you have the correct amount deducted from your paycheck. If you end up with a large tax bill, you may need to review your W-4. Ideally, the amount of money your employer withholds from each of your paychecks for taxes will be as close as possible to what you actually owe. However, if you like to get a big refund, you can ask your employer to withhold more of your pay for income tax.
- Estimate your effective tax rate. Calculating your tax payable will allow you to determine what overall percentage of your income goes to federal income tax.
How federal income taxes are calculated
The United States applies a progressive income tax system. Rather than all of your income being taxed at the same rate, it is divided into brackets – called tax brackets – and taxed at rates ranging from 10% to 37% for the highest income.
This method may seem unnecessarily complex. But it’s good for low-income taxpayers, who end up paying a smaller portion of their total income in taxes than those who earn more.
Calculating federal tax payable is a multi-step process that begins by adding up all of your income for the year from jobs, investments, retirement accounts, and other sources.
From here, you can take a selection of “above the line” deductions – such as contributions to a qualified pension plan or the amount of interest you paid on a student loan – to arrive at your income. adjusted gross, or AGI.
Then you can reduce your AGI by taking the standard deduction or itemizing your deductions. The standard deduction is a fixed amount for your filing status. Most people are better off taking the standard deduction because it’s more than the total of their itemized deductions.
Finally, you have arrived at your taxable income. This is the amount you apply to the tax brackets to calculate your federal tax payable. You can claim tax credits to further reduce your bill, or even generate a refund. If that all sounds like a lot of legwork, that’s what a tax calculator is for.
How to lower your tax bill
- Adjust your tax withholding or quarterly remittances. Employees must complete a new W-4 at least once a year, and more often if their filing status or dependent status changes. Having more money withheld from your paycheck during the year means you’re more likely to cover your liability and not owe more by the tax deadline. Self-employed people must send their own income taxes to the IRS in four instalments – larger payments usually mean a smaller outstanding bill (or even a refund) when you file your annual return.
- Benefit from tax credits. Tax credits will not put you in a lower tax bracket. Instead, they apply directly to your tax bill, which can be extremely beneficial. For example, this year’s child tax credit is fully refundable and is worth up to $3,000 per child over the age of six for the 2021 tax year. Say you earn $75,000 a year and claim a child, you can reduce your tax bill by $3,000. If your tax bill drops below zero, you get the remaining credit as a refund. Other popular credits include the Earned Income Tax Credit and the US Opportunity Credit.
- Contribute to pre-tax accounts. The money you contribute to 401(k)s, traditional IRAs, and health savings accounts is pre-tax. Every dollar you save means less taxable income.
- Pay attention to your marginal tax rate. Your marginal tax rate refers to the tax bracket where your last dollar of income falls. If you are near the top of a tax bracket, deferring income from investments or retirement accounts to next year may prevent you from moving to the next bracket and incurring a higher tax rate longer. raised.
- Collect losses. Capital gains – net gains from the sale of an investment, such as stocks – are reported as income on your tax return (unless it’s a tax-deferred retirement account). In a year when you know you will be reporting a lot of capital gains, check your investments to see if you can sell holdings at a loss. This loss can be used to offset your capital gains. If there are excess capital losses, you can offset your ordinary income up to $3,000 per year.
- Claim business deductions if you are self-employed. It can be expensive to work for yourself. But the cost of office supplies, vehicles, a home office, travel, and inventory can all be deducted from your business income. This results in a lower net profit, which puts you in a lower tax bracket.
Many of these strategies are best used well before tax day. Review your situation at the start of the year so you have enough time to contribute to tax-deferred accounts or reorganize your income to reduce your tax bill.