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Income Tax Calculator: How to Calculate Income Tax

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November 22, 2017 in Economics


There are many reasons you may want to know how to calculate your income tax without doing a full tax return. One reason to do a quick calculation of your tax is to determine when you should do your actual tax return. If you are going to get a big tax return, you probably want to do your taxes as soon as possible. If you are going to owe the IRS money, you probably want to wait until the last minute or even request an extension. If you are trying to figure out how to calculate income tax easily read on. When you are ready to do your taxes, check the link at the bottom for a tax software review site including sites that will do your taxes for free.

The first thing you need to know to calculate income tax is how much money you made and how much you have paid in taxes. This information can be found on your pay stub or your W2.. Your pay stub should show you how much money you have made. You need to look at the “net” number because you don’t have to pay taxes on certain things like 401K contributions. The other number you need is how much tax you have paid. Write these 2 numbers down as we will need them later.

Next, you need to figure out all your deductions. This includes charitable contributions, (like to your church), mortgage interest, your deductions per person in your household, and anything else that is tax deductible. Just add all these numbers up. Don’t worry about being exact because you are just getting an estimate right now.

Now that you have your income and deductions, I will show you exactly how to calculate income tax. All you do is subtract your deductions from your income and look up how much tax you owe for that amount. You can go to the IRS site and look up the tax table or check out my article on tax tables (see links below). Based on your filing status and net income, you will see how much you owe. Compare that to the amount of tax that was taken out of your paycheck and you have your return amount or how much you owe.

What is Gross Salary?

Basic Pay

+ House Rent Allowance (HRA)

+ Dearness Allowance (DA)

+ Transport Allowance (TA)

+ Special Allowance

+ other Allowance

+ Leave Encashment

+ Gratuity Received

= Gross Salary

What are the Deductions from Salaried Income?

You can claim deductions from your salaried income under the following heads:

HRA Exemption based on the below three:

- the actual amount of HRA

- 50% of your basic pay (employees living in metro cities) or 40% (employees living in non-metro cities)

- Additional rent paid above 10% of salary

LTA Exemption

The LTA exemption is given to a certain extent of the LTA paid by the employer to the employee for his vacation in India. An employee has to submit bills in order to claim LTA.

Exemption on Encashment of Leaves

Encashing the unavailed leaves is exempted from income tax and hence can be claimed under exemptions.

Income Tax Deductions from Section 80C to 80U

There are various investment instruments like PPF, Life Insurance, Tuition Fees paid (upto two children), fixed deposit, etc which are exempted from Income Tax.

Interest on Home Loan

If you have a home loan running, then you can claim tax exemption upto an extent from the amount you have paid as interest on home loan.

Professional Tax

Professional Tax is allowed as a deduction from your gross salaried income.

Entertainment Allowance

Any income received under this head is exempted from income tax.

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