What Is Taxable Income? How Is It Calculated?
Taxable income is the portion of your gross income that the IRS determines to be taxable annually that consists of both earned and unearned income. You can calculate your taxable income first by gathering important tax documents and determining your filing status. Taxable income is your certain deductions and credits subtracted from your gross income.
Taxable income is the portion of your gross income used to calculate how much tax you owe in a given year. Wages, salaries, bonuses, gratuities, investment income, etc are all considered forms of taxable income. It consists of both earned and unearned income.
What's A Non-Taxable Income?
There are several types of income that are fortunately not taxable. Some include child support payments, interest from municipal bonds (this interest is exempted from state income taxes if the bond was issued in your state), capital gains, gifts and inheritances, and life insurance proceeds.
How To Calculate Your Taxable Income: Step-By-Step
Step 1: Determine Your Filing Status
The first thing you must do is determine your filing status. You can file as "Single" or "Head of Household" depending on if you have any qualifying dependents. If you're married, you have options to file jointly or separately depending on your circumstances.
Step 2: Gather Documents
Of course, the IRS will be requiring you to report all of the income that you make. This includes any side gigs, interest income, and other income that might have helped you earn from wages and tips. All of your income will be reported directly on your Form 1040, the U.S. Individual Income Tax Return.
Step 3: Calculate Your Taxable Income
Once you report all of your income on your Form 1040 and Schedule 1, you will then adjust your income on Schedule 1. Using Schedule 1, you're able to reduce your income with contributions such as traditional IRA, student loan interest, self-employment deductions, and other expenses. Your Adjusted Gross Income (AGI) is then calculated by subtracting the adjustments (above-the-line deductions) from your total income. The resulting amount is taxable income on which your taxes are calculated.
Resolve Your Tax Bills
If you've found yourself in a nasty mess with the IRS, take a deep breath. For taxpayers who may have difficulty paying off an excessive amount of tax debt, there's a new and improved relief program that consolidates many major relief programs into a one-size-fits-all assistance program. Any issues regarding back taxes, unfiled years, or any other tax-related problems may be solved through one program; the IRS Fresh Start Program!
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