Computing and Paying Income Tax

In this section we'll explain how to compute your income taxes, and we'll also discuss a couple of other types of tax you may have to report and pay on your tax return: the alternative minimum tax (AMT), and payroll taxes on household employees.

To review what we've covered so far, the basic formula for federal income taxes is:

total income - adjustments = adjusted gross income

AGI - deductions and exemptions = taxable income

Taxes are then calculated based on the amount of your taxable income. From this initial tax bill, your allowable credits are subtracted, and any additional taxes (like AMT, self-employment taxes, and payroll taxes on household help) are added, to arrive at the amount of taxes you actually owe for the year.