650 / What are the basic steps in computing an individual’s tax liability?

The computation is made up of these basic steps:

…Determine gross income for the taxable year (see Q 651 to Q 710).

…Subtract certain deductions from gross income to arrive at adjusted gross income (see Q 715, Q 716).

…Prior to 2018 and after 2025, determine the number of personal and dependency exemptions (multiplied by the personal exemption amount and deducted from adjusted gross income) (see Q 728, Q 729).

…Compute total amount of itemized deductions (subject to certain limitations) (see Q 731 to Q 745)) and compare that amount to the standard deduction (see Q 752), and (generally) the greater amount, is also deducted (in addition to exemptions, which were suspended from 2018-2025) to arrive at taxable income.

…The proper tax rate is applied to taxable income to determine the tax.

…The following amounts are subtracted from the tax to determine the net tax payable or overpayment refundable: (1) credits (see Q 758), and (2) prepayments toward the tax (e.g., tax withheld by an employer and/or estimated tax payments).

The computation of the alternative minimum tax is explained in Q 777.