How Taxes Actually Work
Now that it’s the beginning of the new year — for some of you, you might already be thinking about what your taxes will look like for this past year, so you can plan accordingly as it gets closer to April 15th.
And if you’re like most Americans, you’ll likely be looking to your tax accountant or at least a tax preparation software, like turbo tax, to process your filings.
But have you ever wondered exactly how your taxes are calculated and why some people end up getting refunds and others end up paying hefty tax payments at the end of the year?
Well, if you have, then you’re in luck — because I built this very simple tax calculator on excel that outlines the exact process by which the IRS determines how much taxes you owe or should get back. And in this article, I’ll be walking you guys through that spreadsheet, step by step, so you can get a clear understanding of how this works.
But remember, I’m not a licensed accountant and this is only a high level exercise to explain the concepts of federal tax calculations — so read till the end where I’ll also talk a little bit about why it’s a good idea for you to speak to a certified CPA when filing your taxes or at least utilize tax preparation software like TurboTax.
So let’s dive right into the simple tax calculator that I built in excel.
When you are doing your taxes, there are 5 basic steps:
1) Gross Income. First you’ll have to figure out what your gross yearly income is — and typically when you are filing your taxes with TurboTax or an accountant, you’ll enter in all of your sources of income individually to get to an aggregated total.