Taxes

How are taxes calculated? Everyone has to start with the famous Form 1040 (or one of its two similar alternatives). Form 1040 is very detailed with over 79 lines, but broadly here's what's happening on that form:

Income
- Adjustments
Adjusted Gross Income
 
Adjusted Gross Income
- Deductions
- Exemptions
Taxable Income
 
Taxable Income x Tax Rate = Tax

Adjustments

Let's take the first item mentioned above below Income named "Adjustments". The most common adjustments are alimony paments, school tuition, or contributions to an IRA (an individual retirement account). This section doesn't regularly apply to tech workers as we normally take advantage of 401k's, employer-provided retirement accounts (as opposed to IRAs).

 

Deductions

Your Adjusted Gross Income (AGI) is probably the same as your Income, so the next important section is Deductions.

 

And this is only the first of two ways taxes are calculated. The other is called the Alternative Minimum Tax.