Taxpayers use the IRS tax table or the tax computation worksheet to determine any tax liability.
An IRS tax table, or tax schedule, is used in the computation of tax liabilities. The general tax table, found on the Internal Revenue Service (IRS) website, is used for taxable income up to $100,000. For those tax returns with taxable income over $100,000, the taxpayer will use the tax computation worksheet included in the tax return instructions for each year. Additionally, the Earned Income Credit (EIC) Table, also located in the tax return instructions, is used to determine allowable tax credit based on the EIC worksheet.
The general tax table is used to determine the tax on taxable income. The table is divided into brackets and the tax primarily increases for every $50 of additional taxable income. The indicated tax for each bracket depends on the filing status of the tax return; therefore, the table has columns for single persons, married filing jointly, married filing separately and for head of household.
The incremental tax changes between income brackets increase as income levels go up. For example, at an income level of $31,000, the tax for a single person increases $7 or $8 for each $50 income increment. At an income level of $33,000, a single person's tax increases $12 or $13. Someone at the bottom of an income increment pays disproportionately more tax than someone at the top. For example, a single person with taxable income of $41,650 will fall in the next income increment and pay $13 more in taxes than a single person with taxable income of $41,649; that $1 of extra income costs $13 in extra tax. At most income levels, married persons filing jointly and heads of household pay a lower tax than single persons or married persons filing separately.
Once a tax is determined from the proper column in the table, it is put in the tax line of the tax return form. Taxable dividends and long-term capital gains are taxed at a lower tax rate than other income, so the worksheet in the tax return instructions should be used in conjunction with the tax table to determine the tax on one or both of these sources of income. Some taxpayers using the tax table may also be subject to the Alternative Minimum Tax (AMT), which must be computed separately on Form 6251, Alternate Minimum Tax-Individuals.
When taxable income is over $100,000, the Tax Computation Worksheet is generally used to compute tax liability. The worksheet is included in IRS Publication 17 and also in the tax return instructions. The tax computation worksheet is broken down into sections based on filing status: Section A is single taxpayers, Section B is married filing jointly, Section C is married filing separately and Section D is for head of household. The worksheet has five columns for computing the tax. First, the taxable income is put into the appropriate filing status section and on the appropriate taxable income line under column (a). The taxable income in column (a) is then multiplied by the factor in column (b) to arrive at a preliminary amount in column (c). The amount in column (d) is then subtracted from the column (c) amounts to arrive at the tax amount.
If there are qualified dividends or capital gains, this worksheet may be required to compute the tax on the Qualified Dividends and Capital Gain Tax Worksheet, which is included in the instructions. As in the case of taxable income under $100,000, the taxable income over $100,000 may also require the use of Form 6251, Alternative Minimum Tax, as part of the overall tax computation.
The earned income credit (EIC) can result in a tax refund even if there is no tax owed. According to IRS Publication 596, a working taxpayer must earn less than the following adjusted gross income (AGI) limitations to qualify for the credit:
There are two EIC worksheets that can be used to determine the credit: One is used if a tax return is being filed with at least one qualifying child and the other if a return is filed without a qualifying child. A qualifying child must be under 19 years old (or under 24 years old if a student). After earned income is determined on the worksheet, go to the EIC table and check where the earned income fits into the schedule. Then, select the applicable credit for the tax return filing status and the number of qualifying children, if any. The EIC will be added to tax payments on the tax return and will reduce the tax due or increase a tax refund. According to IRS Publication 967, the IRS will compute the EIC by entering EIC on the appropriate line of the tax return.
With requirements changing yearly, filing taxes can be tricky. Having the right sources of information and proper instructions will make for an easier time when filing.