---
title: How Grantd Calculates Federal and State Income Tax
description: Understand the 8-step process Grantd uses to calculate federal and state income taxes, including regular tax, AMT, and FICA.
---

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November 12, 2025

# How Grantd Calculates Federal and State Income Tax

## Understand the 8-step process Grantd uses to calculate federal and state income taxes, including regular tax, AMT, and FICA.

### Grantd Tax Calculation Methodology

The Grantd tax engine follows the same sequential calculation process as the IRS Form 1040, applying current federal tax law at each step:

### Step 1: Calculate Total Income

Grantd aggregates all income sources entered into the system:

| Income Type | How It's Treated |
| --- | --- |
| W-2 Wages | Ordinary income taxed at marginal rates |
| RSU Vesting | Ordinary income (gross value at vest, currently shown pre-withholding) |
| NSO Exercise Spread | Ordinary income (FMV minus exercise price) |
| ISO Exercise | No regular tax impact; creates AMT adjustment |
| Capital Gains | Short-term (ordinary rates) or long-term (preferential rates) |
| Self-Employment Income | Subject to both income tax and self-employment tax |
| Other Income | Interest, dividends, rental income, etc. |

### Step 2: Apply Adjustments to Income

These "above-the-line" deductions reduce your Adjusted Gross Income (AGI):

- HSA contributions
- Traditional IRA/401(k) contributions (pre-tax)
- Student loan interest deduction
- Self-employment tax deduction (50% of SE tax)
- Other qualified adjustments you've entered

**AGI = Total Income - Adjustments**

### Step 3: Apply Deductions

Grantd automatically uses whichever deduction is greater:

- **Standard Deduction** (amount varies by filing status and tax year)
- **Itemized Deductions** (state/local taxes, mortgage interest, charitable contributions, etc.)

**Note:** See updated references under One Big Beautiful Bill Act.

**Taxable Income = AGI - Deduction**

### Step 4: Calculate Regular Federal Income Tax

Grantd applies the current year's federal tax brackets to your taxable income:

- Ordinary income is taxed at marginal rates (10%, 12%, 22%, 24%, 32%, 35%, 37%)
- Long-term capital gains and qualified dividends are taxed at preferential rates (0%, 15%, 20%)
- The calculation respects bracket thresholds based on your filing status

### Step 5: Calculate Alternative Minimum Tax (AMT)

AMT is calculated in parallel using different rules:

1. Starts with regular taxable income
2. Adds back certain deductions and "preference items"
3. **Key for equity comp:** ISO exercise spread is added as an AMT adjustment
4. Applies AMT exemption (which phases out at higher incomes)
5. Taxes the result at 26% or 28% rates

**Your federal tax is the HIGHER of regular tax or AMT.**

The Grantd platform displays both calculations side-by-side so you can see when AMT applies and plan accordingly.

### Step 6: Apply Tax Credits

Credits directly reduce your tax liability dollar-for-dollar:

- Child Tax Credit / Additional Child Tax Credit
- Education credits (American Opportunity, Lifetime Learning)
- Energy credits
- AMT credit carryforwards (from prior years)
- Other credits you've entered

### Step 7: Estimate State Income Tax

State tax is calculated based on:

- The average state tax rate you enter in the baseline Tax Model
- Applied to your total income (or AGI, depending on state methodology)

### Step 8: Calculate FICA Taxes

FICA (Federal Insurance Contributions Act) taxes include:

- **Social Security Tax:** 6.2% on wages up to $176,100 (2025 limit)
- **Medicare Tax:** 1.45% on all wages, plus 0.9% Additional Medicare Tax on wages exceeding $200,000 (Single) or $250,000 (MFJ)

Grantd calculates FICA taxes separately from income tax, as FICA applies only to earned income (W-2 wages), not investment income or capital gains. Self-employment income is subject to both the employer and employee portions of FICA (15.3% total), with 50% deductible as an adjustment to income.

### Transparency Within Complexity

#### What You Can See:

- 5-year federal tax projection (regular + AMT)
- Total tax estimates (including state and FICA)
- How income types flow through the system
- Which years trigger AMT

#### What Happens Behind the Scenes:

- Application of current tax brackets and phase-outs
- AMT exemption calculations and phase-out rules
- Interaction between various income types and credits
- State tax estimation based on your input rate
- FICA wage base limitations and additional Medicare tax thresholds

### Related Articles

- [Understanding Tax Calculations in Grantd](https://support.grantdequity.com/understanding-tax-calculations-in-grantd?hsLang=en)
- [How Equity Compensation Events Impact Your Taxes](https://support.grantdequity.com/how-equity-compensation-events-impact-your-taxes?hsLang=en)
- [Understanding Your Tax Projection Results](https://support.grantdequity.com/understanding-your-tax-projection-results?hsLang=en)
- [Tax Planning Best Practices](https://support.grantdequity.com/tax-planning-best-practices?hsLang=en)

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