US federal income tax follows a clear sequence, even though the terminology (AGI, MAGI, taxable income) can be confusing at first. Here's the process the IRS actually uses.
Add up your gross income
Wages, interest, dividends, business income, capital gains, and other taxable income sources all get added together to form your gross income.
Subtract adjustments to get AGI
Certain "above the line" adjustments — traditional IRA contributions, student loan interest, HSA contributions — reduce gross income to get your Adjusted Gross Income (AGI). This number matters beyond just your tax bill; it affects eligibility for many credits and deductions.
Subtract the standard (or itemized) deduction
Most filers take the standard deduction — $15,000 for single filers, $30,000 for married filing jointly (2025). If your itemizable expenses (mortgage interest, state/local taxes up to the SALT cap, charitable donations) exceed the standard deduction, itemizing saves more.
Apply the marginal tax brackets
What's left is your taxable income. Federal tax brackets run from 10% to 37%, and — like most countries with progressive systems — only the income within each bracket is taxed at that bracket's rate, not your whole income at your top rate.
Subtract credits
Tax credits (Child Tax Credit, Earned Income Tax Credit, education credits) reduce your tax bill dollar-for-dollar — more powerful than deductions, which only reduce taxable income.
Worked example (single filer)
| Item | Amount |
|---|---|
| Gross income (wages) | $85,000 |
| Standard deduction | − $15,000 |
| Taxable income | $70,000 |
| Federal tax (2025 brackets) | ≈ $10,900 |
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Most states also levy their own income tax on top of federal tax, with entirely separate brackets and rules — and a few states have no income tax at all. This guide covers the federal calculation only.
This is a simplified walkthrough of the general federal calculation — it doesn't cover every credit, phase-out, or edge case (like the Alternative Minimum Tax). For your exact figure, use our calculator or consult a CPA.