MODULE 5: Computing Tax Liability

Taxpayer's Tax Liability Calculation

• Understanding Tax Rate Schedules:

  • Different tax rate schedules are used based on filing status (e.g., single, married filing jointly).

  • For 2024 tax year, ensure the correct filing status is applied to compute tax liability.

  • Surviving spouse or qualifying widow/widower with dependent child uses the same schedules as married filing jointly.

Example Calculation for Married Filing Jointly

• Scenario: A married couple with a taxable income of $150,000 in 2024.

• Steps to compute their tax liability:

  • Check the 2024 tax rate schedules, specifically for married filing jointly.

  • Determine the applicable tax bracket based on their income:

    • Taxable income of $150,000 places them in the 22% marginal tax rate bracket (income over $94,300 but not more than $201,550).

  • Formula for calculating federal income tax liability:

    • Tax liability = $10,852 + 22% of (Taxable Income - $94,300)

    • Calculation: $10,852 + 0.22 * ($150,000 - $94,300)

    • Result: Tax liability = $23,106

• After computing the tax liability:

  • Subtract any tax credits and withholding from their total tax to determine the tax due or refund.

Taxpayers with Taxable Income Below $100,000

• Tax Liability Calculation:

  • Taxpayers earning under $100,000 use IRS provided tax tables instead of rate schedules.

  • Current reference to the 2023 tax tables as the 2024 tables are not yet available.

Example Calculation for $35,000 Income

• Scenario: A married couple with $35,000 in taxable income.

  • Locate their income on the tax tables:

    • Income falls between $35,000 and $35,050.

  • Tax liability according to the tables:

    • Married filing jointly tax liability = $370.

• No calculations are required when using tax tables.

Example Calculation for Head of Household

• Scenario: A head of household taxpayer with a taxable income of $36,108.

  • Locate income on the tax table:

    • Income falls between $36,100 and $36,150.

  • Tax liability according to the tables:

    • Tax liability = $4,021.

• For all taxpayers with income below $100,000, the tax liability is determined using tax tables, straightforward look-up without computation.

Summary

• Taxpayers with taxable income over $100,000 calculate tax liability using rate schedules, while those under $100,000 must refer to tax tables for their liabilities.

• Accuracy in utilizing the correct year’s tables and schedules is critical in determining the correct taxpayer liability.