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