Tax Calculator Methodology and Glossary


The Urban-Brookings Tax Policy Center designed the tax calculator to help users understand how four proposals that would substantially simplify the income tax (and in some cases create a value-added tax) while maintaining the same level of overall revenue would affect the level and distribution of tax burdens and filing requirement across all tax filing units. To make the calculations feasible while minimizing users’ time, the calculator presents stylized versions of the four reforms and (especially) of the current income tax system. By contrast, commercial tax preparation software packages indicate the full amount of information that users need to provide to enable a precise calculation of tax liability under current law. Although the calculator’s results may not fully represent all the law's details, they should give users a good sense of how the reform plans would affect taxes and filing requirements.

To be clear, however, the calculator is not a tax preparation tool. For ease of use, many items that would be included on actual tax returns are omitted. Numbers generated cannot be applied to specific tax returns.

For a quick summary of the proposals, see here. For a more detailed analysis, see here.

Inputs – Income Sources

Long-term capital gains

Capital gains and losses are classified as long term if the asset was held for more than one year, and short term if held for a year or less. Taxpayers in the pre-TCJA 10 and 15 percent tax brackets pay no tax on long-term gains on most assets; taxpayers in the pre-TCJA 25, 28, 33, or 35 percent income tax brackets face a 15 percent rate on long-term capital gains; and those in the pre-TCJA top 39.6 percent bracket pay a 20 percent rate. Short-term capital gains are taxed at the same rate as ordinary income and should be entered as “other income.”

Other income

Income from all other taxable sources, including short-term capital gains, business income net of expenses, gambling winnings net of losses, and others. Include the value of nonqualified dividends in other income; the tax calculator assumes all income included in “dividends” comes from qualified dividends and therefore faces the preferential long-term capital gains tax rate. Since 2013, the net investment income tax (defined below) has imposed a 3.8 percent tax on investment income for high-income taxpayers. Income subject to that tax includes interest, dividends, annuities, royalties, rents, income from passive businesses, and net capital gains. Income from those sources should be included in the taxable interest category to ensure the calculator includes it in calculating tax liability.

Pension and retirement

Regular payments during retirement from plans tied to previous employment. Pension income is generally taxable. If recipients contributed to their regular payments during retirement from plans tied to previous employment, including taxable withdrawals from defined-contribution retirement accounts, such as individual retirement accounts or 401(K)s. Pension income is generally taxable. If recipients contributed to their pensions, however, their contributions are not taxable. Contributions are prorated over the expected duration of pension receipt, and that amount of each year's pension payment is exempt from tax.


Dividends paid by corporations that are generally subject to federal income tax. Qualified dividends (which include most but not all dividends) face the same preferred tax rates as long-term capital gains. Nonqualified dividends are taxed at ordinary tax rates. The tax calculator assumes all dividends are qualified and therefore face the preferential long-term capital gains tax rates. To include nonqualified dividends, add their value to “taxable interest.”

Social Security benefits

All benefits for retirees, survivors, and dependents. Only part of Social Security benefits is taxed; the percentage subject to income tax depends on the taxpayer’s income.

Tax-exempt interest

Interest on instruments such as municipal bonds that is exempt from the federal individual income tax. Interest on private-purpose municipal bonds, the funds from which support private activity, is generally taxable under the alternative minimum tax (AMT), even if it is tax exempt under the regular income tax.

Taxable interest

Interest paid on savings accounts and other financial investments, other than tax-exempt interest.

Wages and salary

For the principal taxpayer, all income from paid employment, including tips, bonuses, and the like.

Wages and salary of spouse

For the spouse of the taxpayer, all income from paid employment, including tips, bonuses, and the like.

Business income

Net income from a trade or business. All net income will be treated as earned by the primary taxpayer and subject to self-employment payroll taxes.

Professional services business

Pass-through income earned in a “specified service trade or business” is not eligible for the qualified business income deduction for single taxpayers with taxable income above $157,500 ($315,000 for married couples filing jointly). Specified service is defined as “any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees.”

Inputs – Deductions and Expenses

Charitible contributions

Contributions to qualified charities that taxpayers may itemize as deductions on their federal tax returns. The amount of contributions a taxpayer can deduct in a given year depends on the nature of the contributions and the taxpayer's income. Deducting contributions reduces taxable income and tax liability and therefore lowers the after-tax cost of donations. Because the tax reduction depends on the marginal tax rate, taxpayers in higher tax brackets incur lower net-of-tax costs of giving than taxpayers in lower tax brackets.

Child care expenses

Total amount paid for care of children under age 13 while the taxpayer (and spouse, if any) works (or for one spouse to attend school while the other spouse works). Taxpayers may claim the child and dependent care tax credit for some or all of these expenses.

Medical expenses

Qualifying medical expenses include out-of-pocket medical expenses on preventive care, treatment, surgeries, and dental and vision care. Only medical expenses that exceed a certain amount (10 percent under pre-TCJA law and 7.5 percent under the TCJA in tax year 2018) of adjusted gross income (AGI) are deductible.

Home mortgage interest deduction

Interest paid on home mortgages for a primary residence, qualifying second home, or vacation property. Taxpayers may itemize such interest as deductions on their federal tax return, but the deduction of mortgage interest is limited based on the amount of debt. Under pre-TCJA law, interest on up to $1,000,000 of acquisition debt was eligible for the deduction. The TCJA lowered that limit to $750,000 for mortgages originated after December 15, 2017.

State and local property taxes

Taxpayers can claim either the income or sales tax payments they make to state and local governments as an itemized deduction on their federal tax returns. Under the TCJA, the combined deduction for state and local taxes is limited to $10,000 for both single and joint filers. Taxpayers may not deduct these taxes in calculating their AMT.

College expenses

Total amount of tuition and fees expenses paid for all family members attending college.

Student loan interest

Interest paid on student loans.

Interest on home equity loan

Under pre-TCJA law, homeowners can deduct interest paid on up to $100,000 of home equity loans. Under the TCJA, such interest is no longer eligible for a deduction.

State and local income or sales taxes

Taxpayers can claim property tax payments to state and local governments as an itemized deduction on their federal tax returns. Under the TCJA, the combined deduction for state and local taxes is limited to $10,000 for both single and joint filers. Taxpayers may not deduct these taxes in calculating their AMT.

Outputs – Taxes

Adjusted gross income

Total income subject to tax after adjustment for exclusions and additions. In the tax calculator, AGI equals cash income less the employer's contributions share of payroll taxes, contributions to deductible retirement plans, some or all Social Security benefits, and tax-exempt interest. The tax calculator does not incorporate other adjustments to income.

Standard deduction

A deduction that each tax filer may claim that differs by filing status and is indexed annually for inflation. In 2023, the standard deduction was $13,850 for single filers and married people filing separately, $20,800 for heads of household, and $27,700 for married couples filing jointly. An additional standard deduction is allowed if the taxpayer and/or spouse are age 65 or older and/or if either of them is blind; in 2023, the additional deduction was $1,500 for married filers and $1,850 for individuals and heads of household. One additional deduction is allowed for each elderly taxpayer and for each blind taxpayer. Thus, a couple in which both spouses are over 65 and blind would get four additional deductions.

Itemized deductions

A deduction that allows taxpayers to itemize allowed expenses and deduct the total value in lieu of claiming the standard deduction. Common deductible expenses include state and local income and property taxes (or sales taxes for residents of states with no income tax) up $10,000, mortgage interest (with limits), medical expenses (in excess of a certain percentage of AGI), and contributions to charitable organizations. Itemized deductions would be eliminated under the reform proposals.

Taxable income

Adjusted gross income minus (a) the standard or itemized deductions and (b) under current law, qualified business income deductions.

Income tax before credits

Income tax liability calculated by applying the tax rate schedule to taxable income, before subtracting allowed tax credits.

EITC/Work credit

A tax credit for income earned up to a certain level. The earned income credit equals a percentage of earnings up to a maximum that depends on the number of children and the taxpayer’s marital status, then begins to phase out as income increases. Benefits are ultimately based on a complex set of rules (18 pages in 2023) on issues like what sort of income and which types of dependents qualify. The work credit replaces the EITC with a simpler credit administered based on individual income. This decouples the EITC from child benefits, simplifying both systems, and makes it possible to administer the credit based on payroll tax receipts without requiring low-income taxpayers to file a tax return. Both credits are fully refundable; that is, taxpayers can get the full credit even if it exceeds their positive tax liability.

Child credit/Personal credit

Under current law, the Child Tax Credit allows certain taxpayers with eligible dependent children to claim a tax credit equal to $2,000 for each dependent child under age 17. The credit phases out for high-income taxpayers, and is only partially refundable; that is, only part of the credit can reduce total income tax liability below zero. The refundable portion equals 15 percent of earnings over $2,500 up to $1,600. Current law also provides a $500 nonrefundable credit for other dependents that do not qualify for the child credit. The personal credit replaces this complex system with a credit providing a fixed dollar amount for each family member - child or adult - regardless of family income. The amount is $1,000 under the “simplified” plan, $2,000 under the “modified simplified” plan, $2,800 under “back to the future”, and $3,900 under the “UBI” plan. (In the “modified simplified” plan, the credit phases out beginning at $36,000 for unmarried and $72,000 for married filers.)

Other credit

Other credits under current law include credits for child and dependent care, attending or having a dependent attend college or graduate school, and various other activities. These credits would be eliminated under a simplified tax system.

Income tax after credits

The amount of tax owed to the government or, if it is negative, the payment from the government unless the AMT applies. “Tax after credits” equals “tax before credits” minus all applicable credits. Nonrefundable credits can only reduce “tax after credits” to zero; any additional nonrefundable credits are lost. Refundable credits can result in negative “tax after credits,” in which case the tax filer receives a net payment from the government.


A value-added tax (VAT) taxes the "value added" in each stage of producing goods and services. For example, if a baker buys wheat for $40, turns it into bread, and sells it to consumers for $100, their value added is $60 - the difference between sales and purchases. Typically, this amount is the sum of wages, other labor compensation (such as health insurance), interest payments, and the profits businesses earn. The VAT is the world's most common form of consumption tax, with one in place in every economically advanced nation except the United States.