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A Simple Guide to Understanding the 2024 Individual Income Tax Formula in the USA

Filing your taxes can feel overwhelming, but understanding the basic formula can make the process much smoother. In this blog, I’ll break down the individual income tax formula for 2024 in simple terms, so you can approach tax season with confidence.

Start with Your Total Income

Your total income is the sum of everything you earn during the year. This includes wages, salary, bonuses, tips, interest, dividends, and other sources of income.

Example: If you earned $70,000 in 2024, this is your starting point.

Subtract Adjustments to Income

Before you start applying deductions, you’ll need to subtract any adjustments to your income. These are often referred to as “above-the-line” deductions and include things like contributions to retirement accounts (e.g., 401(k) or IRA), student loan interest, and health savings account (HSA) contributions.

Example: If you contributed $5,000 to a traditional IRA, your income is now reduced to $65,000.

Apply Deductions

Next, you’ll apply deductions. You have the option to take the standard deduction or itemize your deductions—whichever is higher. For 2024, the standard deduction is $13,850 for single filers and $27,700 for married couples filing jointly.

Example: If you’re a single filer, you can subtract the standard deduction of $13,850, leaving you with $51,150 in taxable income.

Calculate Your Taxable Income

Taxable income is what remains after you’ve applied all your deductions. This is the amount the IRS will use to calculate your tax liability.

Example: With $51,150 in taxable income, you’re now ready to determine how much tax you owe.

Apply the Tax Rates

The U.S. tax system is progressive, meaning different portions of your income are taxed at different rates. The 2024 tax brackets range from 10% to 37%.

Example: For the first $11,000 of your taxable income, you’ll pay 10% in taxes. The next portion, up to $44,725, is taxed at 12%. Anything above that, up to $95,375, is taxed at 22%, and so on.

Subtract Tax Credits

Tax credits are powerful tools that directly reduce your tax liability. Common credits include the Child Tax Credit and the Earned Income Tax Credit (EITC).

Example: If you qualify for a $2,000 Child Tax Credit, you subtract that from the amount of tax you owe.

Determine Your Final Tax Liability

After applying all your credits, you’ll arrive at your final tax bill or refund amount.

Example: If your calculated tax is $5,000 but you’ve already paid $4,500 through withholding, you’ll owe an additional $500.

Final Thoughts

By understanding these key steps, you can better navigate your tax filing process. Everyone’s situation is unique, so the specifics may vary, but these basics will help you make sense of the numbers.

If you need personalized assistance or have questions about your specific tax situation, feel free to reach out. I’m here to help make tax season as stress-free as possible!