The 5-Step Formula
US federal income tax calculation follows a strict sequence:
Step 1: Gross Income Every dollar from every source: W-2 wages, freelance income, investment gains, rental income, alimony, prize winnings.
Step 2: Subtract Adjustments (Above-the-Line Deductions) These reduce gross income to Adjusted Gross Income (AGI) — you get them regardless of whether you itemize:
- Traditional 401(k) and IRA contributions
- HSA contributions
- Student loan interest (up to $2,500)
- Half of self-employment tax
- Self-employed health insurance
Step 3: Subtract Standard Deduction or Itemized Deductions
| Filing Status | 2026 Standard Deduction |
|---|---|
| Single | $15,000 |
| Married Filing Jointly | $30,000 |
| Head of Household | $22,500 |
Itemized deductions include: mortgage interest, state/local taxes (capped at $10,000), charitable donations, medical expenses >7.5% of AGI.
Step 4: Apply Tax Brackets Progressively
Tax brackets are marginal — each rate only applies to income within that band:
| Bracket | Rate | Single Filer Range |
|---|---|---|
| 1st | 10% | $0 – $11,925 |
| 2nd | 12% | $11,926 – $48,475 |
| 3rd | 22% | $48,476 – $103,350 |
| 4th | 24% | $103,351 – $197,300 |
| 5th | 32% | $197,301 – $250,525 |
| 6th | 35% | $250,526 – $626,350 |
| 7th | 37% | Over $626,350 |
Step 5: Subtract Tax Credits Credits reduce tax owed dollar-for-dollar:
- Child Tax Credit: up to $2,000 per child
- Earned Income Credit: up to $7,830 (3+ children)
- Child and Dependent Care Credit: up to $2,100
- American Opportunity Credit: up to $2,500 for college
Worked Example: $85,000 Single Filer
| Calculation | Amount |
|---|---|
| Gross income | $85,000 |
| 401(k) contribution | −$5,000 |
| AGI | $80,000 |
| Standard deduction | −$15,000 |
| Taxable income | $65,000 |
| Tax on first $11,925 @ 10% | $1,193 |
| Tax on $11,926–$48,475 @ 12% | $4,386 |
| Tax on $48,476–$65,000 @ 22% | $3,635 |
| Total federal income tax | $9,214 |
| Effective rate | 11.5% |
| Marginal rate | 22% |
Plus: FICA taxes (6.2% Social Security + 1.45% Medicare = 7.65%) on $65,000 = $4,973
Total federal tax burden: $14,187 (16.7% effective rate)
Use our US Salary Tax Calculator for your personalized calculation.