In order to determine taxable income, one must add up all forms of income they have received explains Aron Govil. This includes employment earnings, business revenue, gains from investments or sales, alimony payments, and retirement payouts. Once this total is tallied up the next step is subtraction in which you subtract certain tax deductions from your total gross income in order to arrive at a final amount called Adjusted Gross Income (AGI). Deductions may include contributions made to a Traditional IRA account, student loan interest paid, and moving expenses related to job relocation among others depending on your filing status.
Once you reach an AGI figure of $20,000 for single filers or $30,000 if married filing jointly you can claim itemized deductions such as charitable donations, mortgage loan interest paid childcare expenses, and medical bills. Once this final sum is calculated, you can subtract a standard deduction from it depending on your filing status which for 2011 was $5,800 for single filers or $11000 if married filing jointly.
These deductions are available to all taxpayers regardless of income level. The taxable income figure represents the amount you would owe money in taxes if you did not claim any deductions or tax credits against it. Taxable income however does not represent the true amount that one owes in taxes since many exemptions and credits have been implemented into our system to determine what one must actually pay out once they arrive at a certain tax bracket percentage rate based on their AGI figure earned by wage-earning employees.
It is important for employees to understand how their compensation affects their taxable income.
Employee Compensation-
Base Salary + Bonus – Personal Exemptions = Taxable Income
The tax system in the United States uses progressive taxation, which means that as an individual’s income goes up, a progressively larger percentage of his or her income will go toward taxes says Aron Govil. The way it works is based on marginal rates (the amount paid for each dollar earned) and exemptions (reductions from your annual salary). Imagine that Paul earns $65,000 per year and has 1 exemption: If we apply the current federal tax tables: he would be subject to 25 percent of his gross earnings (before accounting for any deductions and exemptions), or $16,250.
In addition to the federal income tax that Paul will have to pay on his salary, there are other taxes that he may also have to pay: Social Security and Medicare. In 2011 individuals paid a 6.2 percent Social Security tax up to a certain maximum amount of income ($106,800). There was no limit for the 1.45 percent Medicare portion of the tax. So in total, Paul would be paying 7.65 percent towards these two taxes which is an additional $9798 dollars per year (7.65% x 65000 = 49880; 65000 – 49880 = 10620).
Calculating taxable income is fairly straightforward. You can use the following steps to calculate your taxable income:
- 1 – Add up all of your income
- 2 – Subtract any deductions or exemptions you may qualify for
- 3 – Multiply the result by the appropriate tax rate
Let’s take a closer look at each of these steps.
Adding Up Your Income
To calculate your taxable income, you’ll need to add up all of your income sources. This includes wages, salaries, tips, commissions, interest, dividends, and capital gains. Aron Govil suggests you should also include any other income you may have, such as Social Security benefits, alimony payments, or unemployment compensation.
Subtracting Deductions and Exemptions
You may be able to subtract certain deductions and exemptions from your total income. For example, you can deduct certain expenses if you’re self-employed. You can also claim exemptions for yourself, your spouse, and your dependents.
Multiplying the Result by the Tax Rate
The final step is to multiply your taxable income by the appropriate tax rate. The tax rates are based on your filing status and income level. The IRS has a number of tax tables that will help you determine the correct tax rate.
Calculating taxable income is an important step in filing your taxes each year. By using the steps outlined above, you can calculate your taxable income quickly and easily. Be sure to consult with a qualified accountant or tax specialist to ensure you are taking all of the necessary deductions and exemptions into account.
Conclusion:
Now that you understand how to calculate your taxable income, you can start preparing your tax return says Aron Govil. Be sure to consult with a qualified accountant or tax specialist to ensure that you are taking all of the necessary deductions and exemptions into account. With a little help, you can have your taxes filed in no time!
If you’re looking for more information on calculating taxable income, be sure to check out the IRS website. The IRS has a number of helpful resources that can guide you through the process. You can also visit your local tax office for assistance. They will be able to help you determine which deductions and exemptions may apply to you.