Tax Calculator

How Tax Brackets Work (~75 words)

The U.S. uses a progressive tax system. Your income is divided into ranges, and each range is taxed at its rate. This means higher earnings are taxed in steps, not all at one rate.

Standard vs. Itemized Deductions

You can choose between the standard deduction (a fixed amount) or itemizing specific deductions like mortgage interest, charitable donations, and state/local taxes. Choose whichever gives you the larger deduction.

Taxable Income

To estimate your taxes with our income tax calculator, the first step is finding taxable income. Taxable income is not simply your gross wages; it is what remains after subtracting deductions and exemptions from your total income. For many workers, this begins with information found on a W-2 form, which shows wages, taxes withheld, and other adjustments. If you contribute to retirement plans like a 401(k) or traditional IRA, those amounts reduce your gross income. The same applies to certain pre-tax benefits such as health savings account contributions or pension plans. After subtracting these adjustments and the applicable deduction (standard or itemized), you are left with taxable income. This figure determines how much federal income tax you owe, based on IRS tax brackets. Accurately calculating taxable income is essential because it serves as the foundation for refund estimates or taxes owed.

Exemptions

Exemptions reduce taxable income, though personal exemptions were eliminated under recent tax law changes. However, some income sources remain exempt from taxation. For example, certain municipal bond interest is excluded from federal tax. Charitable and nonprofit organizations are exempt from paying income tax on their activities. Additionally, state and local governments do not pay federal income tax. Some exemptions apply internationally, such as duty-free shopping in airports. For individuals, the most common exemptions now appear as credits or deductions rather than personal exemptions. While exemptions are less prominent today, they still play a role in reducing overall taxable income. When using a taxable income calculator, exemptions ensure that not all gross income is subject to tax.

Tax Deductions

Overview

Tax deductions are expenses that reduce taxable income, lowering the percentage of your adjusted gross income (AGI) subject to tax. They come in two types: Above-the-Line (ATL) and Below-the-Line (BTL).

Above-the-Line (ATL) Deductions

ATL deductions directly lower AGI. These include contributions to IRAs, student loan interest, tuition, certain business expenses, and half of self-employment tax. They apply before choosing the standard or itemized deduction. Benefits of ATL deductions include being available even if you don’t itemize and applying under the alternative minimum tax.

• Traditional IRA contributions (deductible if income is under set limits)
• Student loan interest (capped annually, with income phase-outs)
• Tuition and qualified education expenses
• Moving expenses (for qualified job-related relocations)
• Self-employment health insurance premiums

Business Expenses

For self-employed individuals and small businesses, business expenses are critical. The IRS allows deductions for “ordinary and necessary” expenses — those common and helpful for running a trade or business. Examples include office supplies, professional services, advertising, utilities, travel, and business insurance. Sole proprietors typically report business expenses on Schedule C, reducing adjusted gross income. Business deductions may include partial home office costs, mileage, and depreciation on equipment. Expenses tied directly to making a profit are deductible, while personal costs are not. For example, buying supplies for client projects qualifies, while personal living costs do not. Business expenses can be complex, especially when distinguishing between capital expenditures and deductible costs. While our free tax calculator provides estimates, self-employed taxpayers may benefit from consulting IRS guidance to ensure compliance.

Tax Credits

Overview

Unlike deductions, which lower taxable income, tax credits reduce your tax liability dollar-for-dollar. They are often more valuable than deductions.

• Refundable Credits – Can reduce liability below zero, resulting in a refund.
• Non-Refundable Credits – Reduce tax to zero but not beyond.

• Earned Income Tax Credit (EITC) – Refundable credit for low-to-moderate income households, based on income and dependents.
• Foreign Tax Credit – Prevents double taxation on income earned abroad.

• Child Tax Credit – Up to $2,000 per child, partially refundable.
• Child & Dependent Care Credit – Covers a percentage of childcare or dependent expenses, subject to income limits.
• Adoption Credit – Helps offset costs of adopting a child.

• Saver’s Credit – Non-refundable credit encouraging retirement contributions.
• American Opportunity Credit – Up to $2,500 annually for eligible higher education expenses.
• Lifetime Learning Credit – Up to $2,000 for education beyond the first four years.

• Residential Energy Credit – For solar, wind, or geothermal home improvements.
• Electric Vehicle Credit – Up to $7,500 for eligible new EV purchases.
• Energy Efficiency Credits – For qualified home upgrades like insulation or efficient HVAC systems.

Other Taxable Income