Simple Tax Formula

Inevitably at this time of year, while attending a social gathering, someone brings up that dreaded word. Taxes. Then eyes roll, groans start and someone says "I just give it all to my tax preparer" and the subject changes. I have to giggle at myself because I was guilty of the same some time ago. I was like most people, didn't want to understand how they work nor did I want to take the time to.

Here is a simple 40,000-foot view of the tax structure.

Gross Income
Subtract: For AGI (“above the line”) Deductions
Equals: Adjusted Gross Income
Subtract: From AGI (“below the line”) Deductions
1. The Greater of:
a. Standard Deduction or
b. Itemized Deduction
2. Qualified Business Deduction
Equals: Taxable Income
Multiply: Appropriate tax bracket incremental rate
Equals: Income Tax Liability
Add: Other taxes
Equals: Total Taxes Owed
Subtract: Credits
Subtract: Prepayments
Equals: Taxes Owed or Refund


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