Many people today have no idea how the tax return works. This is probably because many people today (including me) use either a computer program or an accountant to prepare their tax returns rather than calculating it by hand.

This is probably much faster and more accurate but, in some ways, it’s a loss because very few people understand the structure and flow of the 1040.

Today, I try to lay it out for you in a quick and interesting way. Enjoy!

Individual Tax Formula

gross income
minus for AGI deductions
equals Adjusted Gross Income (AGI)
minus from AGI deductions (the greater of [either the standard deduction or itemized deducations] plus [the personal and dependency exemptions])
equals taxable income
times the tax rates
equals tax liability
plus other taxes
equals the total tax
minus credits
minus prepayments
equals taxes due or refund

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