Final answer:
Income tax is calculated on gross income minus deductions. Deductions can include a standard deduction and itemized deductions, which, after being subtracted from your adjusted gross income, result in your taxable income.
Step-by-step explanation:
Income tax is calculated based on D. gross income minus deductions. To determine the taxable income, one must subtract any deductions and exemptions from their adjusted gross income (AGI). Your AGI consists of various income sources such as wages, interest, and sometimes unemployment compensation. Deductions can include a standard deduction, exemptions, or itemized deductions such as home mortgage interest or property taxes.
After determining your taxable income, the tax rate that applies to various income levels is used to calculate the amount of income tax owed. Some individuals may also be eligible for various tax credits or need to calculate alternative minimum tax. The basic formula that remains constant is that taxable income equals adjusted gross income minus deductions and exemptions.
It is important to understand the meaning of national income and taxes, where national income minus taxes gives you the after-tax income. The overall process of calculating income tax, while can be complex, is grounded in understanding these basic principles.