How To Calculate Taxable Income

How To Calculate Taxable Income

What is taxable income

Taxable income are all business compensations or individual compensation that can be used to determine tax liability.  The gross or total income is used as criteria in calculating what an individual or business owes the IRS over a specified tax period. It is very important to note that taxable incomes do not only includes salary but also includes;

  • All commissions
  • Winnings
  •  Bonuses
  • Allowances
  • Strike pay
  • Royalty payments
  • Unemployment compensation
  • Self-employment income

Types of taxable income

Failure to pay your taxes as at when due, will definitely attract a penalty from the IRS.  So always endeavor to pay up your taxes as at when due. Below is the list of the types of income:

  • Miscellaneous taxable income
  • Employee compensation and benefits
  • Investment and business income.
  • Miscellaneous taxable income

these are majorly incomes that doesn’t fit into other categories of incomes which includes, cancelled debts, life insurance, alimony, income from one’s hobby, are all miscellaneous taxable incomes. They can also include disability retirement payments gotten from an employer paid plan, property and services bartered by you, incomes or money generated from offshore accounts.

  • Employee Compensation and benefits 

These are the most important and commonest types of taxable income and they include fringe benefits, wages and salaries.

  • Investment and business income 

Every taxpayer that is self-employed is subjected to tax liability through the income generated from the business.

Taxable and Non taxable income 

Taxable income; simply means all the type of compensation, either in services rendered, cash, or property. All income is taxable except if exempted by law from the tax liability, you should endeavor to report all income tax returns. 

Below are some examples:

  • Dividends
  • Stock options
  • Salary
  • Wages
  • Rents generated from personal property
  • Notes received
  • Interest received from the bank
  • Unemployment compensation 

Non-taxable income; this simply means income that are received and cannot be subjected to taxation. Even though such income cannot be taxed, they still need to be recorded in the tax return. Examples of non-taxable income includes;

  • Welfare benefits
  • Gifts
  • Child support payments
  • Money reimbursed from qualifying adoptions
  • Alimony payments
  • Inheritance
  • Social security benefits
  • Scholarships/ fellowship grants
  • Cash rebates from items bought
  • Meals bought while lodging

How does taxable income affect how much tax I owe? 

The total of your taxable income determines your tax, which is relative to your income tax rate and the amount of tax you owe. The federal tax operates on a progressive graph, meaning the more you earn the more tax you pay.

How then does my taxable income affect my tax refund? 

Did you notice that some amount of money from your paycheck goes to the IRS? If you are self-employed that means you must have been paying quarterly taxes to the IRS all year round. 

If you have been loyal and responsible to paying your tax, based on your taxable income, you will definitely receive a refund. The simple logic is this, the more tax you pay the bigger your refund.

You should also know that the IRS considers all income from unemployment taxable. To avoid penalties, you can decide to have the IRS deducts your tax from your unemployment payments starting from the time you enroll. 

How do I compute my taxable incomes? 

It is mandatory for all taxpayers to calculate their tax and determine how much they are to pay for that particular tax season. Some people find it easy to compute their tax, while some may need to the help of a tax accountant. 

Below are some few steps you can use in determining your total taxable income.

  • Choose the suitable status that suits your current relationship status, from single, married filing jointly, head of the household, married filing separately.
  • You should make sure you determine your total income for the tax year, and do not forget to include all the compensations you received.
  • You should list all unearned incomes as well, which simply means all the income that was obtained without having to work for compensation such as dividends, unemployment compensation and real estate incomes.
  • Check the form 1040 for the list of all taxable income deductions.
  • When you are sure you followed all the steps listed above, you can then deduct the sum from your total income, so you can determine your gross income
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