The Big Picture
Federal income tax follows a straightforward flow. Every dollar you earn goes through these steps before you know what you owe:
Income → Adjustments → AGI → Deductions → Taxable Income → Tax → Credits → Refund or Amount Owed
Step by Step
1. Total Income
Add up everything: wages (W-2), freelance income (1099-NEC), interest (1099-INT), dividends (1099-DIV), capital gains (1099-B), and any other income. This is your gross income.
2. Adjustments (Above-the-Line Deductions)
Certain deductions reduce your income before AGI is calculated. These include student loan interest, HSA contributions, and half of self-employment tax. They appear on Schedule 1.
3. Adjusted Gross Income (AGI)
Gross income minus adjustments. AGI is the number that determines eligibility for many credits and deductions.
4. Deductions
You choose the higher of the standard deduction or itemized deductions:
| Filing Status | 2025 Standard Deduction |
|---|---|
| Single | $15,000 |
| Married Filing Jointly | $30,000 |
| Head of Household | $22,500 |
Itemized deductions include mortgage interest, state and local taxes (capped at $10,000), and charitable contributions.
5. Taxable Income
AGI minus your deduction. This is the amount that actually gets taxed.
6. Tax Calculation
The U.S. uses marginal tax brackets — you don't pay one rate on everything. Each chunk of income is taxed at its bracket rate. For example, a single filer with $50,000 taxable income pays 10% on the first $11,925, 12% on the next portion, and 22% on the rest.
7. Credits
Credits reduce your tax dollar-for-dollar. Some are refundable (you get money back even if your tax is zero), like the Earned Income Credit. Others, like the Child Tax Credit, are partially refundable.
8. Refund or Balance Due
Your final tax minus what was already withheld (from W-2 Box 2) and any estimated payments. If withholding exceeds your tax, you get a refund. If not, you owe the difference.