How to Estimate Your Yearly Taxes Based on Your Income

By Staff WriterLast Updated Jun 24, 2020 6:48:08 PM ET
Receipts, tax manuals and a calculator stacked on a desk.

Tax deadline dates rarely change, but the rules that determine how much you pay in taxes change from time to time. In 2017, Congress passed a tax reform bill. The Tax Cuts and Jobs Act made some sweeping changes to the tax law that affect every taxpayer in the country. If you're curious about what you're going to owe the government, you can estimate your income taxes if you understand how the tax system works.

Tax Changes From the Tax Cuts and Jobs Act

The 2017 tax law adjusted both the tax brackets and marginal tax rates. There are still seven brackets, but the income ranges that define them changed slightly. A more significant change affects the marginal tax rates. Five of the seven rates decreased from one to three percentage points.

Another important adjustment is the standard deduction increase to $13,000 for single filers and $24,000 for married couples. The child tax credit also goes up, and taxpayers can take advantage of a new credit for dependents. However, the new law eliminates personal and dependent exemptions.

Understand How the Government Calculates Taxes

In the U.S. taxes follow a progressive tax system. This means that your taxes increase as you make more money. However, you don't pay a flat rate on your total income. Each dollar you earn has a different tax rate. For example, if you’re single and make $50,000 in 2018, the first $9,525 you earn gets taxed at 10 percent. Your tax rate for the next $29,174 is taxed at 12 percent. The remainder of your income is taxed at 22 percent.

Taxpayers can use deductions and credits to reduce their tax liability. You subtract deductions from the total amount of money you earn in a year. This reduces the amount of income that the government can tax. You subtract credits from the actual tax bill. This lowers the amount of money you owe in taxes. The person in the above example can take a standard deduction of $13,000. This lowers the taxable income to $37,000, which reduces the top tax rate from 22 percent to 12 percent. Say, for example, this person owes $4,400 in taxes but qualifies for a $1,000 education credit. The tax bill then goes down to $3,400.


Estimate Your Taxable Income

You can estimate your taxable income by adding up everything you earned over the course of the year and subtracting the standard deduction. If you're a salaried employee, count the number of paychecks you receive in a year. Then, find the gross income listed on a paystub and multiply that figure by the number of paychecks you expect to receive.

Hourly employees who work the same number of hours each week can follow the same steps to estimate their income. Those who have inconsistent schedules can estimate the number of hours they expect to work each month and multiply that number by 12. If you’re single, subtract $13,000 from this amount to estimate your taxable income. Married couples who file together can subtract $24,000 from their combined income.


Identify Your Tax Bracket

The IRS lists the tax brackets and marginal tax rates on its website. After you estimate your taxable income, refer to these tax brackets. You pay the marginal rate only for the income you earned that falls within that bracket, and you will likely have at least two different tax rates. The median annual income in 2017 was $61,372, which can have either two or three tax rates depending on the taxpayer's filing status.

Use an Online Calculator

Fortunately, you don't have to estimate your taxes by hand. You can also use any number of free online calculators. Most tax preparation companies have an estimator on their websites. You enter your information and let the software do the work for you. However, some of these calculators are not set up to calculate self-employment taxes. You may need to find a different calculator if you earn money as a self-proprietor.