How Is a Tax Refund/Balance Due Calculated?

For the purposes of this article we will explain how a federal tax refund/balance is calculated. One of the easiest ways to find all of the information you need is by navigating to the Tax Summary Page.

1. To calculate a tax refund you begin with Total Income on the return. This is all income entered on the return added together. You can find this number on the Tax Summary as pictured or on 1040 Line 9.

2. Next, adjustments to income are made from SCH 1 (1040 Line 10) to arrive at Adjusted Gross Income (1040 Line 11).

3. Subtract Itemized Deductions or the Standard Deduction (1040 Line 12) from Total Income (1040 Line 9). This generates taxable income (1040 Line 15).

4. Multiply Taxable Income (1040 Line 15) by the customers Effective Tax Rate (blended tax rate determined by the bracket the taxpayers falls into through each of the tax brackets).

This generates Tentative Tax (1040 Line 16).

5. Add additional taxes from SCH 2 Part I AMT or PTC repayments (1040 Line 17) to Tentative Tax (1040 Line 16).

6. Subtract Child Tax Credit and Credit for Other Dependents (1040 Line 19) and other nonrefundable credits, such as Retirement Saver's Credit, Adoption Credit, credits from Form 5695, etc (1040 Line 20) from Tentative Tax (1040 Line 16).

Keep in mind these credits are nonrefundable so you can only subtract to the point of zero and not create a refund with these types of credits.

7. Add additional taxes from SCH 2 Part 2 (1040 Line 23).

8. Finally net withholding, estimated payments, Earned Income Credit, Additional Child Tax Credit, and other payments/refundable credits (1040 Line 32) against Total Tax.

If withholding, payments, and refundable credits are greater than Total Tax then the taxpayer is due a refund (1040 Line 34). If they are less than Total Tax then the customer owes the balance (1040 Line 37).