01/12/2026
Understanding How a Tax Return is Calculated
Everybody wants a refund at tax time, but most people don’t really understand how that refund is calculated or why they might not get one. So let’s break it down.
1. It Starts With Your Income
You have two types of income:
Earned Income (like wages, self-employment, etc.)
Unearned Income (like unemployment, investments, Social Security, etc.)
Depending on what type of income you have (and how much of it), that determines what deductions and credits you may qualify for.
💡 You might also have losses—like a business loss or rental property loss—that adjust your income down.
2. Adjustments & AGI
Once we know your total income, we check if you qualify for any “above-the-line” deductions (like student loan interest, retirement contributions, etc.).
After those are subtracted, you now have your AGI (Adjusted Gross Income).
3. Standard vs. Itemized Deduction
Next comes the standard deduction (what I call the “government gimme”). This amount depends on your filing status.
If your itemized deductions (like mortgage interest, property taxes, medical expenses, etc.) are more than the standard, we’ll use those instead.
That gives us your taxable income—which is the number the IRS uses to calculate your tax bill.
4. Deductions from the OBBBA
With recent tax changes, there are new deductions available after the standard deduction—these reduce your taxable income even more.
5. Calculating Your Tax Liability
Once we know your taxable income, the IRS uses that number to figure out how much tax you owe—this is called your tax liability.
Once we know your tax liability then this is where tax credits come in to help you out.
6. Non-Refundable vs. Refundable Tax Credits
Non-refundable credits help reduce the amount you owe. But if they reduce it to zero, that’s it. You now will qualify to get any payments you made back. But you can't get any overages from the non-refundable tax credits.
Refundable credits (like EITC, ACTC, etc.) are different. They can create a refund even if you don’t owe any taxes.
7. Payments & Refunds
If you had federal taxes withheld from your paycheck or paid estimated taxes, we now add those payments together with any refundable credits.
If that total is more than what you owe, that’s your tax refund.
If it’s less, you owe the IRS the difference.
So now you know—your refund isn’t just based on how many kids you claim or how much money you made. It’s a full formula. And this is exactly why it’s so important to file correctly and not try to guess your way through it.
✅ Need help calculating it all the right way? File with us
