The Federal Tax Formula: Step by Step
- Start with Gross Income: all income from all sources
- Subtract Above-the-Line Deductions (401k, HSA, student loan interest, etc.) = Adjusted Gross Income (AGI)
- Subtract either Standard Deduction OR Itemized Deductions (choose the larger) = Taxable Income
- Apply the progressive tax brackets to Taxable Income = Tentative Tax
- Subtract Tax Credits (dollar-for-dollar) = Federal Income Tax Owed
- Compare to withholding from W-2 = Refund or Amount Due
Gross income: $85,000. Above-the-line: $6,000 (IRA) = AGI $79,000. Standard deduction $15,000 = Taxable $64,000. Tax: $1,193 (10% on $11,925) + $4,386 (12% on $36,550) + $3,378 (22% on $15,525) = $8,957. No credits. Federal tax owed: $8,957. Effective rate: 10.5% of gross income.
The 2025 Federal Tax Brackets
2025 Federal Income Tax Brackets
| Bracket | Single Filer | Married Filing Jointly | Rate |
|---|---|---|---|
| 10% | $0–$11,925 | $0–$23,850 | 10% |
| 12% | $11,926–$48,475 | $23,851–$96,950 | 12% |
| 22% | $48,476–$103,350 | $96,951–$206,700 | 22% |
| 24% | $103,351–$197,300 | $206,701–$394,600 | 24% |
| 32% | $197,301–$250,525 | $394,601–$501,050 | 32% |
| 35% | $250,526–$626,350 | $501,051–$751,600 | 35% |
| 37% | Over $626,350 | Over $751,600 | 37% |
Why Deductions Are Worth More at Higher Income
A $1,000 deduction in the 12% bracket saves $120. The same $1,000 deduction in the 37% bracket saves $370. This is why high earners benefit dramatically more from identical deductions than moderate earners. And why tax-advantaged accounts (401k, IRA, HSA) are worth pursuing regardless of income — but particularly valuable in higher brackets.
See the Formula Applied to Your Numbers
Enter your income and deductions — see the step-by-step calculation of your exact tax liability.