Basic structure Figure 15. 1 shows the series of steps used to compute a person's tax liability Step 1: Compute Adjusted Gross Income (AG丿 Step 2: Convert AGl into taxable income by subtracting exemptions and deductions Step 3: Compute tax due by applying a rate schedule, and subtracting tax credits2 Basic Structure • Figure 15.1 shows the series of steps used to compute a person’s tax liability. • Step 1: Compute Adjusted Gross Income (AGI) • Step 2: Convert AGI into taxable income by subtracting exemptions and deductions • Step 3: Compute tax due by applying a rate schedule, and subtracting tax credits