What Is Taxable Income (With Examples)?

What Is Taxable Income?

Taxable income is the amount of money, in earned income and unearned income, that creates a potential tax liability.

What Is Earned Income?

Earned taxable income is any income you receive for work and for other services provided. Any wages, tips, and fees you receive are deemed by the Internal Revenue Service as earned income.

What is Unearned Income?

Unearned income is money you get without actually directly working for it. The term actually covers a great deal of ground and includes the following categories:

Unemployment benefits and other federal and state financial benefits
Canceled debts
Lottery winnings
Profits earned by assets sold (like a car or an asset sold for a profit on eBay or any online sales site)
Alimony payments and child support
Social Security and Medicare benefits paid by your employer
Severance pay
Rental income from personal property
Capital gains and losses when investing
Stock dividends
Bonuses and rewards (like trips paid for by your employer)

Nontaxable Income

While taxable income covers the amount of money, in gross income terms, owed to the government, the IRS does consider some forms of income to be nontaxable.

It’s worth noting, though, that most forms of non-taxable income, while not taxable, still need to be listed on your income tax return.

Here are some examples of non-taxable income:

Cash gifts and inheritances
Cash rebates from retailers and businesses
Welfare income
Damages from a physical injury, illness, or disability
Child support payments
Hotel and restaurant (like meals) services incurred when on the job

There’s yet another category of income that may or may not be considered taxable by the IRS (for example, the income may be granted as an exclusion by the IRS). It’s a good idea to talk with a professional accountant to see if any of the following potential sources of income are tax-exempt:

Deductions and Taxable Income

Uncle Sam provides a substantial break on taxable income in the form of the standard deduction on U.S. individual and spousal tax forms. It offers more tax breaks in the form of itemized deductions, which require you to record all expenses incurred that you wish to use on your tax returns.

Standard Deduction

Basically, taxpayers can claim either the standard deduction when filing taxes, or they can itemize their individual qualifying deductions. The standard deduction cuts your taxable income by a specific amount ($12,200 for the 2019 tax year for single filers, $18,350 for heads of household, and $24,200 for married couples filing jointly). Itemized deductions are comprised of individual deductions based on potential eligible expenses. It’s up to the taxpayer to decide which deduction to claim, so it’s important to know which deduction lowers your tax burden most.

It’s also worth noting that the new tax bill, passed in December 2017, changes the standard deduction levels.

Starting in 2018, the standard deduction changed to:

$24,000 for married filing jointly or surviving spouse
$18,000 for head of household
$12,000 for married filing separately or any single filer

And since then, the standard deduction has increased each year incrementally and continues to do so; while the standard deduction for single filers is $12,200 for the 2019 tax year, it will be $12,400 for the 2020 tax year.

Americans, 65 years old and over, get a big tax break, too. In addition to getting the standard deduction, individual tax filers who are 65-or-over can claim an additional $1,650 deduction on their taxes, and married filers over 65 can claim an extra $2,600 ($1,300 if married, filing jointly when only one spouse is 65 or older).

In general, the standard deduction is preferable if you don’t have a long list of itemized deductions. It keeps you from recording expenses, hanging on to receipts, and keeping a ledger of itemized expenses.

Itemized Deductions

Another way to slash your taxable income is by using itemized deductions.

The savings can really add up in doing so. If you’re a taxpayer in the 15% tax bracket, every $1,000 listed as itemized deductions on your tax return saved you $150, according to H&R Block. So $5,000 in itemized deductions can save you $750 off your tax bill.

All itemized deductions for individual and married taxpayers should be included on IRS Tax Form 1040, in Schedule A. Itemized tax deductions are not allowed on IRS Tax Form 1040A or 1040EZ—only the standard deduction can be taken on those forms.

Itemized deductions cover a wide array of expenses incurred over the course of a year that would otherwise be deemed as taxable by the IRS. Typical itemized deductions include:

Mortgage interest
Healthcare expenses
Property taxes
Charitable expenses
Investment interest expense
Tax preparation fees
State and local taxes

If your list of itemized deductions adds up to more in tax savings than your standard deduction, then itemizing is the way to go. Just be sure to save receipts and record your expenses on a regular basis, and store them safely in the event the IRS asks about an itemized deduction.

The formula for figuring out your estimated itemized deductions is easy—list your expenses and count them up. Then, subtract your total deductions from your taxable income to calculate your itemized deductions.

How to Calculate Taxable Income

There’s no hard and fast formula for calculating taxable income, as your total taxable income depends on your tax deductions, filing status, and the standard deduction. Just know that your goal is to take the maximum amount of deductions possible to lower your tax bill.

Source: https://www.thestreet.com/personal-finance/taxes/what-is-taxable-income-14691999?puc=yahoo&cm_ven=YAHOO&yptr=yahoo