1. Gross income includes all earned income and unearned income. Adjustments are made to reduce taxable income and include things like retirement contributions and student loan interest. Adjusted gross income is gross income minus adjustments. 2. Deductions, either standard or itemized, are then subtracted from adjusted gross income to determine taxable income. Exemptions for dependents are also subtracted to determine tax liability. 3. Tax liability is reduced by credits dollar for dollar. A refund is issued if withholdings and credits exceed the tax liability. Otherwise, additional tax may be due.

1. 1

2. US Tax Calculations
and REFUND
1

3. 2

4. GROSS INCOME
Gross income includes wages and tips, interest
and dividend earnings, unemployment
compensation, and all other types of income not
exempt from tax, before deductions and expenses
2

5. 3

6. ADJUSTMENTS
Adjustments help you reduce the income on which you will be
taxed. In fact, adjustments play a larger role in reducing taxes
(or increasing credits) than deductions and exemptions.
You can make adjustments for expenses such as:
‣ Putting money into a retirement plan
‣ Paying for self-employed health insurance
‣ Paying interest on student loans
‣ Contributing to a medical savings account
‣ Paying moving expenses or alimony
‣ Teaching supplies for qualified educators
‣ Tuition and fees for qualifying educations
ADJUSTED GROSS INCOME (AGI)
3

7. DEDUCTIONS
Deductions reduce your Adjusted Gross Income, lowering your
taxable income, and therefore reducing the taxes you must pay.
You can take a standard deduction, based on your filing status,
or itemized deductions, wherein, you can claim deductions for
state and local income taxes paid, real estate taxes, personal
property taxes, mortgage interest, medical expenses, education
expenses and charitable contributions.
Allowing deductions is the government’s way of encouraging
certain types of spending such as charitable contributions, home
ownership, entrepreneurship, environmental protection, and
education.
4

8. DEDUCTIONS
Deductions reduce your Adjusted Gross Income, lowering your
taxable income, and therefore reducing the taxes you must pay.
You can take a standard deduction, based on your filing status,
or itemized deductions, wherein, you can claim deductions for
state and local income taxes paid, real estate taxes, personal
property taxes, mortgage interest, medical expenses, education
expenses and charitable contributions.
Allowing deductions is the government’s way of encouraging
certain types of spending such as charitable contributions, home
ownership, entrepreneurship, environmental protection, and
education.
4

9. How much is my standard tax deduction?
2005 2006
Filing Status Standard Deduction
Single $5,000 $5,150
Married filing a joint tax
return or Qualifying $10,000 $10,300
Widow(er)
Married filing a separate
$5,000 $5,150
tax return
Head of Household $7,300 $7,550
5

10. How much is my standard tax deduction?
2005 2006
Filing Status Standard Deduction
Single $5,000 $5,150
Married filing a joint tax
return or Qualifying $10,000 $10,300
Widow(er)
Married filing a separate
$5,000 $5,150
tax return
Head of Household $7,300 $7,550
Individuals who are 65 or older
increase the above amounts by $1,250
($1,000 if married or a qualifying
widow(er)) and by another $1,250 or
$1,000 if they are blind.
5

11. 6

12. EXCEPTION ALLOWANCE
An exemption is an amount of money you can subtract from your
Adjusted Gross Income, just for being you, or having
dependents. Exemptions, then, reduce the amount of income on
which you will be taxed.
You get to take a personal exemption for yourself or your spouse,
and you may get to take additional exemptions for people who
are your dependents. For 2006, for example, each exemption is
worth $3,300.
6

13. TAXABLE INCOME
7

14. TAXABLE INCOME
Taxable income = Adjusted Gross Income
- Standard Deduction (or Itemized
Deduction) - Personal Exemptions.
7

15. FILING STATUS
Everyone who files a federal tax return must determine which
filing status applies to them. It’s important you choose your
correct filing status as it determines your standard deduction, the
amount of tax you owe and ultimately, any refund owed to you.
8

16. FILING STATUS
Everyone who files a federal tax return must determine which
filing status applies to them. It’s important you choose your
correct filing status as it determines your standard deduction, the
amount of tax you owe and ultimately, any refund owed to you.
Your marital status on the last If more than one filing status
day of the year determines applies to you, choose the
your marital status for the one that gives you the lowest
entire year. tax obligation.
8

17. FILING STATUS
9

18. FILING STATUS
Single filing status generally applies to anyone who is
unmarried, divorced or legally separated according to
state law.
9

19. FILING STATUS
10

20. FILING STATUS
A married couple may file a joint return together. The
couple’s filing status would be Married Filing Jointly.
If your spouse died during the year and you did not
remarry within the same year, you may still file a joint
return with that spouse for the year of death, provided
the joint return election is not revoked by a personal
representative for the deceased spouse.
10

21. FILING STATUS
11

22. FILING STATUS
A married couple may elect to file their returns
separately. Each person’s filing status would
generally be Married Filing Separately.
11

23. FILING STATUS
12

24. FILING STATUS
Head of Household generally applies to
taxpayers who are unmarried. You must also
have paid more than half the cost of maintaining
a home for you and a qualifying person to qualify
for this filing status.
12

25. FILING STATUS
13

26. FILING STATUS
You may be able to choose Qualifying Widow(er)
with Dependent Child as your filing status if your
spouse died during 2004 or 2005, you have a
dependent child and you meet certain other
conditions.
13

27. Schedule X — Single
If taxable income
But not over-- The tax is:
is over--
$0 $7,550 10% of the amount over $0
$7,550 $30,650 $755 plus 15% of the amount over 7,550
$30,650 $74,200 $4,220.00 plus 25% of the amount over 30,650
$74,200 $154,800 $15,107.50 plus 28% of the amount over 74,200
$154,800 $336,550 $37,675.50 plus 33% of the amount over 154,800
$336,550 no limit $97,653.00 plus 35% of the amount over 336,550
Schedule Y-1 — Married Filing Jointly or Qualifying Widow(er) with dependent child
If taxable income
But not over-- The tax is:
is over--
$0 $15,100 10% of the amount over $0
$15,100 $61,300 $1,510.00 plus 15% of the amount over 15,100
$61,300 $123,700 $8,440.00 plus 25% of the amount over 61,300
$123,700 $188,450 $24,040.00 plus 28% of the amount over 123,700
$188,450 $336,550 $42,170.00 plus 33% of the amount over 188,450
$336,550 no limit $91,043.00 plus 35% of the amount over 336,550
14

28. Schedule Y-2 — Married Filing Separately
If taxable income But not The tax is:
is over-- over--
$0 $7,550 10% of the amount over $0
$7,550 $30,650 $755.00 plus 15% of the amount over 7,550
$30,650 $61,850 $4,220.00 plus 25% of the amount over 30,650
$61,850 $94,225 $12,020.00 plus 28% of the amount over 61,850
$94,225 $168,275 $21,085.00 plus 33% of the amount over 94,225
$168,275 no limit $45,521.50 plus 35% of the amount over
168,275
Schedule Z — Head of Household
If taxable income But not The tax is:
is over-- over--
$0 $10,750 10% of the amount over $0
$10,750 $41,050 $1,075.00 plus 15% of the amount over 10,750
$41,050 $106,000 $5,620.00 plus 25% of the amount over 41,050
$106,000 $171,650 $21,857.50 plus 28% of the amount over
106,000
$171,650 $336,550 $40,239.50 plus 33% of the amount over
171,650
$336,550 no limit $94,656.50 plus 35% of the amount over
336,550
15

29. CREDIT
Credit reduces the tax you owe, dollar for dollar. For
each dollar of credit, your tax is reduced by one dollar.
Because each credit whittles away your actual tax
liability, credits are more valuable than deductions. For
instance, if you are in the 25% bracket, and you get a
$100 deduction, you may be able to knock $25 off
your taxes, but a $100 credit saves you $100.
You may qualify for a credit for college tuition and fees,
retirement savings contributions, or foreign taxes paid.
Other credits aim to help children in school, adopted
children, the elderly, and the disabled.
16

30. CREDIT
Credit reduces the tax you owe, dollar for dollar. For
each dollar of credit, your tax is reduced by one dollar.
Because each credit whittles away your actual tax
liability, credits are more valuable than deductions. For
instance, if you are in the 25% bracket, and you get a
$100 deduction, you may be able to knock $25 off
your taxes, but a $100 credit saves you $100.
You may qualify for a credit for college tuition and fees,
retirement savings contributions, or foreign taxes paid.
Other credits aim to help children in school, adopted
children, the elderly, and the disabled.
Income Tax Actual Tax
16

31. REFUND Tax Withheld
Taxpayers will get a tax refund, a refund
on their US income tax, if the tax they
+
owe is less than the sum of: Refundable Credits
 The total amount of refundable tax -
credits that they claim.
-
Taxes
 The total amount of withholding that -
they paid, whether it’s income tax
withheld or estimated tax payments.
Tax Refund
17

32. REFUND Tax Withheld
Taxpayers will get a tax refund, a refund +
on their US income tax, if the tax they Refundable Credits
owe is less than the sum of:
-
Taxes
 The total amount of refundable tax
credits that they claim.
-
 The total amount of withholding that -
they paid, whether it’s income tax
withheld or estimated tax payments.
Tax Due
17