So it’s tax season, and you’re trying to figure out how much tax you owe this year. You may be surprised to find that you and the IRS seem to disagree on your precise income. To prevent that surprise, you need to know about taxable income.
Your taxable income determines your tax rates, which in turn determines precisely how much money you owe the government in tax.
How do I calculate my taxable income?
Your taxable income is determined by taking your adjusted gross income (AGI) and subtracting any allowable deductions.
So what are allowable deductions? You may know them as the standard deduction or itemized deductions (also known as itemizing your return).
Taxable income = adjusted gross income – (standard deduction or itemized deductions)
The standard deduction is a flat number. For 2018, the standard deduction is:
- Single: $12,000
- Married filing jointly: $24,000
- Married filing separately: $12,000
- Head of household: $18,000.
Or, you can itemize your return and add up all the deductions you qualify for. Common deductions include:
- Charitable donations
- Interest on your home mortgage
- Medical and dental expenses that exceed 7.5% of your AGI
Generally, people take the standard deduction—unless their itemized deductions are higher or they’re not eligible for the standard deduction.
So let’s say your AGI for the year is $78,000, and you’re filing as the head of household. You realize the standard deduction is higher than your itemized deductions, so you choose to take the standard deduction for a head of household, which is $18,000. That makes your taxable income $60,000 for the year.
$78,000 (AGI) – $18,000 (standard deduction) = $60,000 (taxable income)
What types of income are taxable?
Great, now that you know the IRS’ definition of taxable income, you’re probably wondering, just what sort of income is taxable?
Income that is taxable includes both earned and unearned income.
Earned income is true to its name: it is money you earned. Examples include:
- Long-term disability benefits
- Net earnings if you are self-employed
- Union strike benefits
Unearned income includes other forms of money you receive, such as:
- Child support
- Interest and dividends
- Retirement income
- Unemployment benefits
Is any of my income nontaxable?
Yes! Not all sources of income are taxable.
Nontaxable income can be finicky, and the best way to sort out the particulars is to consult your accountant. But here are a few situations where income may not be taxable:
- Adoption expenses covered by your employer
- Educational assistance provided by your employer, up to $5,250
- Health insurance premiums paid by your employer
- Qualified transportation benefits, including transit or parking passes or bicycle commuting reimbursements
- Retirement planning services provided by your employer
This article provides general information and shouldn’t be construed as tax advice. Since tax rules may change over time and can vary by location and industry, please consult a CPA or tax advisor for advice specific to your business.