Income tax is one of the types of taxes that the government imposes on the income of individuals and companies within the limits of its authority. Income tax is one of the fairest taxes, as it is levied on a person or company that has access to taxable income, and therefore its impact on the poor is very small.

How to calculate income tax ?

How to calculate income tax, the following steps must be followed:

First: determining the registration status of the taxpayer

The first step in calculating taxable income for an individual tax return is to determine your registration status, that is, if you are married or unmarried, if you have a qualified person for whom you pay support and housing costs, such as a family member, or if you are the head of a family.

Second: gathering information on all sources of income

After determining the taxpayer’s registration status, the next step is to collect all of the taxpayer’s income sources, including the wife’s income if the taxpayer is married or their dependents if one of them has a private business, where all of those income sources are collected.Under the name of “gross income,” there are also many tax forms for the process of collecting information in order to determine the value of gross income.

Third: Determining the value of the total income that has been adjusted

Adjusted gross income is income for which certain adjustments have been made. Examples of such adjustments are contributions to an individual retirement account, student loan interest, or certain educational expenses. These adjustments contribute to reducing income before making any specific permitted deductions or standard deductions.

Fourth: Determine the value of the discounts.

In this step, the value of the income deductions must be determined, whether these deductions are standard or detailed, and is as follows:

Standard Discount

A standard deduction is defined as a set amount that is claimed by taxpayers when they do not have enough itemized deductions to be claimed. From a trust fund or if you are a real estate agent, you will be eligible for a “qualified business income” discount that gives taxpayers the ability to deduct up to 20% of the profits from gross business income, real estate investment funds, or income from a publicly traded partnership.

Itemized discount

If you want to detail the discounts instead of choosing the standard discount, a set of records is required, including:

Real estate taxes paid and mortgage interest: These taxes and interests appear on the mortgage statement, which is obtained from the mortgage lender, and it should be noted that if you do not have a mortgage or escrow account through which real estate taxes are paid, you must keep a record of the payments.
Local taxes paid: If you are employed by an employer, the local taxes paid will appear on your W-2 form; if you are an independent contractor, you must bring a record of the estimated tax payments you have made for every three months (“quarter”) throughout the year.
Charitable donations: Charitable donations are a tax-deductible expense, so the amount claimed is set as a percentage of your adjusted gross income in most years.
Educational expenses: These expenses refer to expenses for student loans, as they must be claimed in the year in which the expenses for the loan are paid and not in the year in which the loan is paid or received.
Unpaid medical expenses: a percentage of the adjusted total income is deducted to calculate the unpaid medical expenses, and the percentage of these expenses usually ranges from 7.5% to 10% of the adjusted total income in any normal tax year.

Fifth: Calculating the value of taxable income

In the final step of how to calculate income tax process, you will take your adjusted gross income and subtract all applicable deductions in order to determine the amount of taxable income and then calculate the income tax based on its percentage.

Example – How to calculate income tax ?

For example, if the residual income after deductions is $50,000 annually, the tax rate for the income bracket that is equal to 25% is investigated if we assume that his income falls into the category: ($37,951 – $91,900), and therefore the person will pay tax on an amount equal to 25% of his adjusted income.

How to calculate income tax?