How To Calculate Taxable Income

We define Taxable Income as Adjusted Gross Income fewer Deductions and Exemptions. This means that you must thoroughly understand these three components. For a better explanation of each category, you must read and study the IRS publications for both general and specific information pertaining to your situation. Go to www.irs.gov for these items.

Total Taxable Income

Total Taxable Income refers to your total income from all sources. It includes every dollar you received for your services. It does not need to be in the form of dollar compensation. It may be in the form of other tangible rewards.
It is important for anyone who is not on a salary receiving a W-2 form to read IRS publication 525. It gives detailed discussions with examples of major income categories and special instructions for persons who are exempt from reporting certain income or benefits.

Listed here are the broad categories for Total Taxable Income:

These include wages, salaries, commissions, fees, tips, fringe benefits, and stock options. Don’t try to “forget” the check not cashed or deferred compensation for which you are eligible. They count.

Then you have income from interest and dividends, partnerships, capital gains, income from alimony, business and farm income, retirement income, royalties, and net proceeds from rental or other income.

Deductions

There are two ways to calculate your tax deductions. The IRS tables give you a Standard Deduction according to the filing status for which you qualify, e.g. Single, Married or Head of Household. You would compare that amount to your total of gross deductions to determine which is greater. For example, you may have had large medical bills, pay taxes and interest on your home, unsecured casualty losses or large unsecured business losses.

Other common deductions include Education Expenses, Student Loan Interest,
Alimony paid out, Deductions for an IRA and one half of your Self- Employment Tax. Here again, each of these categories has accompanying qualifications with examples that explain what you must have to take the deduction.

Exemptions

Depending you filing status, you can take an exemption for yourself if filing separately, an added exemption for your spouse if filing jointly and an exemption for each dependent. This category includes son, daughter, foster child, brother, sister, half-brother, half-sister, stepbrother, stepsister and descendant from any of them, General qualifications include: The child must be under age 19, live more than half the year with a guardian, the parent must provide more than half of support expenses and the child cannot file a joint return. There are further qualifications for divorced or separated parents and for children living with step-parents, children who are disabled and children born or deceased during the calendar year.

An exemption can only be taken on ONE tax return. When parents are separated, the parent who provides more than half the support would take the deduction.

Calculating Taxable Income

Take your total income and subtract your deductions. This will give you your Adjusted Gross Income (AGI). Next, subtract your exemptions. This will give you your Taxable Income.