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Figuring Your Tax

Form 1040 Lines 43 through 46

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Taxable income (Line 43)

Taxable income is calculated in two steps. First, take your adjusted gross income (line 38) and subtract your deductions (line 40), with the result put on line 41. Second, take the amount on line 41 and subtract your personal exemptions (line 42), with the result put on line 43. This is your taxable income. This represents the amount of income that will be taxed.

Tax planning tip: Calculate the difference between your total income (line 22) and your taxable income (line 43). The difference is your non-taxable income. This represents the amount of income that is not being taxed because of various tax preferences you took advantage of. The more you can shift your taxable income into non-taxable income, the lower your taxes will be.

Figuring your tax (Line 44)

Use the tax tables or the Tax Computation Worksheet to calculate your tax. You find the Tax Tables in the Instructions for Form 1040 (PDF) on pages 63-74. Use the tax tables if your taxable income (line 43) is less than $100,000. If your taxable income is $100,000 or more, you must use the Tax Computation Worksheet, found in the Instructions for Form 1040 (PDF) on page 75.

If you have qualified dividends (line 9b) or capital gain distributions (line 13), calculate your tax using the worksheet on page 35 of the 1040 Instructions.

If you had to fill out a Schedule D, you calculate your tax on the worksheet on page D-10 of the Instructions for Schedule (PDF). You need to use these other worksheets so that your qualified dividends and long-term capital gains are taxed at lowered capital gains tax rates.

Tax Rates

The marginal tax rates for 2007 range from 10% to 35%. Tax rates vary depending on your level of taxable income and your filing status.

Alternative minimum tax (Line 45)

Alternative Minimum Tax (AMT) adjusts your tax liability to recapture some tax benefits. AMT is an alternative method for calculating your taxes. The regular income tax uses your adjusted gross income (AGI), then subtracts your standard deduction or itemized deductions, and then subtracts your personal exemptions, to arrive at taxable income. To calculate AMT, you start with your AGI, and then add or subtract any adjustments allowed under AMT rules, to arrive at taxable income for AMT purposes. You then calculate your AMT tax at a 26% or 28% tax rate.

Because AMT does not allow the standard deduction, personal exemptions, or certain itemized deductions, your tax under AMT rules may be higher than your tax under regular tax rules.

Generally, AMT may apply to individuals earning more than $33,750 ($45,000 for married couples). AMT also applies to people who have a large amount of itemized deductions, personal exemptions, exercised incentive stock options, who take a net operating loss deduction, who have certain other types of income, or claimed certain business-related tax credits. AMT is calculated using Form 6251 (PDF) and the Instructions for Form 6251 (Website).

For an excellent discussion of AMT, read Chapter 23 of J.K. Lasser's Your Income Tax, Chapter 23. If you are facing the AMT, you will want to read this chapter thoroughly.

Tentative Total Tax (Line 46)

Add the figures on Lines 44 (regular tax) and 45 (alternative minimum tax). The total is your tentative total tax. This represents your federal tax liability before computing any tax credits.

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