In the federal income tax framework, what is the step after calculating taxable income?

• A. Subtracting adjustments.
• B. Applying tax rates.
• C. Filing a tax return.
• D. Applying tax rates and credits to determine tax due.

Answer: (D)

After you’ve arrived at taxable income, the next step is to turn that amount into your actual tax liability by applying the tax rates, and then reduce that liability with any tax credits to determine the tax due. The tax rates determine how much tax you owe on your taxable income, and credits subtract from that amount, potentially lowering or eliminating your tax bill. Subtracting adjustments happens earlier in the process to reach AGI, filing a return is the final step after calculating tax due, and applying rates alone isn’t complete because credits must also be taken into account to arrive at the final amount owed. For example, if the tax computed from rates is $6,000 and you have $1,500 in credits, your tax due would be $4,500.