Knowing Your AGI
Once you’ve figured out your annual gross income, you’ll need to calculate your adjusted gross income, or AGI. You do that by subtracting adjustments, or certain amounts you have spent, from your gross income. The most common adjustments include contributions to IRAs or self-directed retirement plans (like Keoghs or SEPs), half of any self-employment tax you paid, qualified moving expenses, and alimony you’ve paid.
If your AGI is higher than the limit set by Congress, you won’t be allowed to deduct your IRA contribution, and your total exemptions and itemized deductions may be limited.
Exemptions and Deductions
After you calculate your AGI, you can figure your taxable income by subtracting certain exemptions and deductions to which you’re entitled.
Each exemption is a fixed dollar amount, and typically increases from year to year. Unless your income is more than the government limit, you get one personal exemption as a single taxpayer and two as a married couple. You also get one exemption for each dependent.
Each exemption is a fixed dollar amount.
You can also subtract the standard deduction—again, a fixed dollar amount—or itemize all of the qualifying payments you’ve made during the year and subtract that total. Some itemized deductions include home mortgage interest, real estate taxes, and state and local income taxes.
Your Refunds and Payments
Your refund or tax payment depends on what you’ve paid versus what you owe in income taxes. Basically, if you paid more than you owe, you’ll receive a refund. Otherwise, you’ll have to pay whatever the balance is.
If you’re getting a refund, you can either get a check from the IRS for the amount you’re owed, or apply part or all of the refund to your taxes for the coming year.
If, on the other hand, you owe a payment to the IRS, you must pay it by April 15. Otherwise, you will most likely have to pay interest and a late-payment penalty.
If you file a simple return (such as a 1040EZ, or a 1040 with no itemized deductions and with an income below $100,000) and send it in by April 15, the IRS will calculate your refund or payment for you.
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