I’m Better Off With A Personal Tax Software

software-personal-income-tax-01Let’s face it … paying personal taxes is much easier than calculating it. It’s just so complicated to calculate it. We never know what numbers to put in. At the end of the day, we just want to pay it off with the hope that all the numbers are right.

A Quick Glance At Personal Income Taxes

I came across this video (scroll down to the middle of this article) about personal income taxes. I found it very useful. In my opinion, it’s good to have a good overview even if most of us are already using some kind of personal income tax software.

The video visually explained how a personal income tax return is calculated.  It’s a great overview and I think it’s must that we all know what the common calculations are in our personal income tax returns.

Where The Money Goes

Soon as we receive our take-home pay, our employer had already deducted a portion of our income for the following:

The total amount of our take-home pay is, no doubt, less than our total salary. At the end of the year, we will receive a tax form. This tax form will show our withholding tax.

“… receives a tax form that shows how much money was taken from his salary and sent to the IRS. That amount is called withholding.”

The Calculations Start

This is when the calculations start. We start calculating as to how much we actually owe the IRS. Then we compare the amount of withholding that was deducted from our salary.

“These amounts are often different because each person has a unique financial situation.”

If we owed the IRS more than what our employer had deducted from our salary, then we would have to pay the difference. But if we had owed the IRS a much smaller amount compared to what was deducted from our salary, then we would receive a refund.

There are specific calculations involved in this stage.

“Now, let’s take a closer look at the specific calculations that determine the amount of income tax that we owe.”

Here are all the exclusions from the income we had received during the year:

“These items are not considered in calculating your income tax.”

Excluding all that, we get our gross income.

The Taxable Income

“First you’ll take deductions for AGI. For example, you can subtract 401K Contributions and expenses of a business that you own. This will give you your AGI or Adjusted Gross Income.”

After taking deductions for AGI, we then take deductions from AGI.  We choose between Standard Deduction or Itemized Deduction; whichever amount is greater.

“Itemized deductions are those items that you specifically list. You can subtract charitable contributions, medical expenses. and mortgage interest. You will provide information about your spouse children and other dependents. Then you will subtract your personal dependency exemptions based on how many people you care for in your household. You have arrived at a number called taxable income.”

Determining Our Personal Income Tax

The computation at this point is determined by the marginal tax rate. This means that the tax rate varies in each level of our income. The higher the income, the higher the marginal tax rate is.

We can reduce our taxes by taking credits. These credits are following;

At this point, we can get the amount that we owe the IRS. We should compare this amount to the amount our employer had withheld from our pay. This determines if we should pay more taxes or if we should get a refund.

At a glance, those are the calculations needed to come up with the right number for our personal income tax. While it’s good to know how to calculate it, I would much rather rely on some kind of personal income tax software that can guide through each step. Honestly, I feel more comfortable and secured in using a personal income tax software to monitor my financial responsibilities. I’m just better off with it.