Learn how to determine your taxable income.
With the commercials that you see during your favorite shows at this time of year, it is fairly clear that tax season has begun. Indeed, the federal income tax filing deadline is not for a number of months, but companies such as Intuit and H&R Block want you to know how quickly you can get your coveted income tax refund check.
For most people, an income tax refund is likely the largest check that they will receive all year. It is almost like a bonus check that helps pay for vacations, the new 4k HDTV that you want, or to help catch up on past due bills. With this in mind, who wouldn't want to complete their taxes as soon as possible? The answer: people who are more likely to owe Uncle Sam some money.
Regardless of whether you are expecting a refund or expecting to pay a bill, it is important to know how your taxable income is calculated. This article will highlight how you can determine yours.
First and foremost, it is important to understand that the income that is detailed on your w-2 is not your taxable income. This is because one's taxable incomeis one's gross income subtracted by the various credits and deductions that you may be eligible for depending on how you earned your income. For the uninitiated, gross income is earned in two ways:
Earned income - This includes all of the money you are paid for work you perform for your employer or through a business that you own. This includes your salary, commissions and bonuses; as well as earnings through sick leave and unemployment benefits.
Unearned income - This refers to the money you earned even though you did not provide a service or work for. Also known as passive income, unearned income is money earned from interest and dividend payments that come from investments, profits earned from the sale of a business, as well as rents paid by tenants who live in investment properties.
After one's gross income is determined, the deductions are applied. As we alluded to earlier, the work to reduce your gross income as you find your taxable income. There are two types of deductions. They are:
Standard deductions - This deduction represents the base amount of expenses that can be used to reduce one's taxable income. The standard deduction is based on a number of factors, including, but not limited to, the taxpayer's filing status (married or single), whether they are claimed as a dependent on another person's tax return, or are disabled. It is very common for people to take the standard deduction on various items.
Itemized deductions - Conversely, itemized deductions allow taxpayers to compensate for every deductible expense by maintaining detailed expense logs, keeping receipts and completing the long form 1040 and Schedule A. Itemized deductions are used when taxable expenses (i.e. deductions) exceed the amount allowed through standard deductions.
If you have additional questions about what your taxable income should be, an experienced tax attorney can help.