Final answer:
To determine taxable income, calculate AGI and then subtract itemized deductions. Consult the tax schedule to determine the tax owed based on taxable income. Subtract the tax amount from taxable income to get after-tax income.
Step-by-step explanation:
To determine the taxable income for taxpayers who itemize deductions, one must first calculate their adjusted gross income (AGI). The AGI includes income from various sources such as wages, interest income, and unemployment compensation.
Taxpayers who choose to itemize deductions instead of taking the standard deduction must then subtract these deductions from their AGI. Itemized deductions can include mortgage interest, property taxes, medical expenses, and charitable contributions, among others.
After subtracting the sum of the itemized deductions (and exemptions, if applicable), the resulting figure is the taxpayer's taxable income.
With the taxable income figured out, the tax owed can be determined by looking at the tax schedule, which shows tax rates and brackets. For example, a single taxpayer with a taxable income of $20,000 in 2010 would fall into a specific bracket where they owe 837.50 + 0.15 × (20,000 - 8,375), which amounts to $2,581.25.
The tax schedule can be progressive, meaning that as income increases, both the amount and the percentage of tax paid also increase.
After calculating the tax owed, the after-tax income is found by subtracting the tax amount from the taxable income. This gives individuals an idea of their net income after fulfilling tax obligations.