You're almost there! You've calculated your AGI and your Taxable income. Now, after you apply any tax credits you are entitled to, you will know your tax bill for the year. Your tax liability for the year can be found by the following:
Taxable Income – Tax Credits = Tax Liability
The final step in the process is to determine whether you’re eligible for a tax refund, or you’ll have to make an additional tax payment to meet your tax liability. The taxes that are taken out regularly throughout the year from your paycheck go towards meeting this tax liability. If you’ve overpaid your taxes, then you’ll be eligible for a refund. If you’ve underpaid your taxes, then you’ll need to make an additional tax payment. This is represented by the following formula:
Tax Liability – Taxes Already Paid = Taxes Due (a positive number indicates you’ve underpaid your taxes)
Once your total tax bill has been determined, you have one final opportunity to reduce that expense in the form of ‘tax credits.’ Some tax credits you might be eligible for include:
Tax Credits:
Taking the time to search for tax credits is vitally important because Tax Credits can reduce your tax bill on a dollar-for-dollar basis. In fact, some of the “tax credits” can reduce your tax below zero. Yes, for example, if you are eligible for the Earned Income Credit, you will actually get more back than you paid.
