- Days left

Taxable Income: How is it Determined?

How to determine your taxable incomeOne of the most common questions I'm asked as a tax attorney is, "What's taxable?" Believe it or not, that's a pretty difficult question to answer, because the list is so lengthy. A much easier question would be, "What isn't taxable?" This is because our tax system is considered inclusive. In other words, all income is considered taxable unless otherwise excluded.

To figure your taxable income, you must first calculate total income. To do this, include everything you receive in payment for services. That means wages, salaries, commissions, fees, tips, as well as fringe benefits and stock options. Income that is available to you, such as an uncashed check, can still be included under the doctrine of constructive receipt. The same theory applies to deferred compensation: If you could take the income without incurring a significant penalty, it's considered yours when made available -- not when you take it.
In addition to payment for services, you must include other items of income, such as interest and dividends, alimony, business and farm income, capital gains, retirement income, partnership income, net proceeds from rentals and "other income." "Other income" may include income from the pursuit of a hobby; it may also include gambling income or income from illegal activities, like drug sales or prostitution (and no, I'm not making that up).

And don't be fooled -- income doesn't have to be in the form of cash or check. You can also receive income in the form of property or services.

After you've figured your total income, you can deduct some expenses right off the top to determine adjusted gross income (AGI). These include certain qualified expenses for teachers, moving expenses and student loan interest. It also includes alimony paid out, deductions for IRA contributions and one-half of self-employment tax paid.

Next, subtract personal exemptions and deductions. Use the larger of your standard deduction or your itemized deductions in your calculation. The result is your taxable income.

You can boil these steps down to this basic formula:

Adjusted Gross Income - (deductions + personal exemptions) = taxable income

Your taxable income is what you'll use to calculate the tax due, using the applicable tax rates.

The rules for credits and deductions can vary from year to year, as do tax rates. Check back with WalletPop to see how changes in 2010 could affect your bottom line.

Learn about investing from the comfort of your own home.

Portfolio Basics

Take the first steps to building your portfolio.

View Course »

Investment Strategies

Learn the strategies you need to build a winning portfolio

View Course »

TurboTax Articles

5 Tax Tips for Single Parents

Filing taxes as a single parent requires coordination between you and your ex-spouse or partner. Usually the custodial parent claims the child as a dependent, but there are exceptions. A single parent is allowed to claim applicable deductions and exemptions for each qualifying child. Even though you claim your child as a dependent, she may still have to file her own tax return if she has income, such as from an after-school job.

Affordable Care Act Decoded

The health care reform law known as the Affordable Care Act may directly affect your tax liability. Many taxpayers are familiar with the requirement that most Americans either carry health insurance or pay a tax penalty. But that's just one provision, and knowing what else is in the law can help you avoid surprises come tax time.

Cost of Taking the Wrong Tax Deductions

Taking the wrong tax deductions can cost you time and money. If you're depending on a tax refund, a tax return that is improperly filed can keep you waiting for a long time. You may also get back less than you expected. If the Internal Revenue Service suspects errors or requires proof of deductions, you may be asked to provide back-up documents to prove your numbers and amend the return. "If the IRS requires further information," advises Bill Symons, president of Computer Accounting Services in Oswego, N.Y., "You'll receive an official request by mail. Normally the situation is easily rectified, but it can delay refunds by up to 10 to 11 months."

5 Steps to Navigate the Healthcare Marketplaces

To navigate the Health Insurance Marketplace, you have to know what you want from a health plan. Have your previous plan handy to make comparisons, as well as household and income information. If this is your first health plan, be aware of your needs and know your tax situation. Eligibility depends on the size of your family and combined income from all sources.

Add a Comment

*0 / 3000 Character Maximum