Getting The Most From Income Tax Calculators

Reviewed: July 31, 2014
By FinanceWeb

How do Income Tax Calculators Work?

Income tax calculators work essentially like automated spreadsheets. They provide questions that indicate the information needed for each line on the federal tax forms. Once entered, the calculators perform mathematical functions to give results as if entered on the actual tax forms. For example, mortgage expense deductions are permitted by the tax codes, but only if they exceed a minimum threshold amount. The income tax calculators perform that function and indicate the taxpayer’s eligibility. The tax codes and Internal Revenue Service tax forms provide the basic structure of income tax calculators

Using Tax Calculator Results

The calculators provide important financial information. One can determine eligibility for benefits such as earned income tax credits, healthcare premium subsidies, and deferred taxation on particular classes of income for retirement. One can determine capital gains treatment of certain income that can offer lower tax rates. An important use of tax calculators is for tax planning; one can adjust withholding rates, and estimate tax liability from self-employment or businesses. Calculators help determine payments due for business owners and self-employed persons including payments for Social Security and Medicare.

Who Offers Income Tax Calculators?

Many private companies and non-government organizations provide income tax calculators. The Internal Revenue Service provides calculators for special purposes such as estimating withholding. The private companies offer calculators as an entry portal to attract customers for tax preparation and filing services, including electronic online filing. Non-governmental organizations are often advocacy groups for public policy. They provide tax calculators as a public service; they use the service to promote public support.

Tips For Using Income Tax Calculators

Income tax calculators are excellent for estimating tax liability. One can know the likely amount of taxes owed or refunds due by putting annual income and expense items into the forms. One can try various ways of presenting information to determine which might yield the more favorable result. It is important to gather information and use accurate figures for income, qualified expenses, deductions, and credits. One can use income tax calculators for current and past year periods. Same sex couples must sometimes use federal income tax calculators to file state returns in jurisdictions that do not recognize their unions.

Strengths and Weaknesses Of Income Tax Calculators

Income tax calculators work well with individual or joint married filings. They do not work as well for corporate and business filings, as they have complex rules and require decisions on classifying income and expenses. The number of calculators for corporate taxpayers is low when compared to those for business owners, proprietors, and individual and married joint filers. Calculators may fail to provide the most advantageous results for some taxpayers such as those with high-end incomes, complicated arrangements of passive income, or trusts and investments. One should note that both public and private calculators state disclaimers and do not purport to take the place of professional advice. Tax codes change in subtle ways such as in announced decisions or rulings by the Internal Revenue Service. These can affect the outcome of tax computations by ruling on the permissible ways assets, income, or expenses may be determined. Calculators may not reflect the current interpretations of statutes, codes, and Internal Revenue Service rules. Further, Court decisions also interpret tax statutes and codes. Many taxpayers gain important information by consulting tax attorneys and other tax professionals.

Impact Of Related State Laws

Federal taxation is only part of the equation for United States taxpayers, and state laws can have a substantial impact. While a few states have no income taxes, notably Texas and Florida, state laws govern many aspects of taxation including marital status, and official place of residence. Same sex couples must pay particular attention to state laws because federal tax laws rely upon the law of the state in which licensed the marriage. When filing state tax returns, taxpayers must comply with the laws of the state where they reside to determine filing status. Thus, same sex couples must often file state returns as single taxpayers.

Sources:

Internal Revenue Service Withholding Calculators
http://www.Internal Revenue Service.gov/Individuals/internal revenue service-Withholding-Calculator

Internal Revenue Service Calculators for Self-employed persons
http://www.Internal Revenue Service.gov/Individuals/Self-Employed

The Brookings Institution Tax Policy Center
http://calculator2.taxpolicycenter.org/