HSC General Maths - Taxable Income
How to Determine Taxable Income
When tax season rolls around, you’ll need to calculate your taxable income. Generally, most income is taxable, whether earned or unearned. After adding up your income, you can reduce your taxable income by applying certain deductions, depending on your circumstances. If you need help understanding tax law, consult a qualified tax professional.
Calculating Your Adjusted Gross Income
Identify your earned income.You must report all income to the IRS, which includes earned income. Your earned income should be reported on your W-2 or 1099-MISC forms. Identify all of the following:
- business income from a business you run day-to-day
Calculate your unearned income.You’ll also need to pay taxes on income that is unearned, meaning that you get it without having to work for it. Unearned income should be listed on various 1099 forms you will receive around tax time. You can also check IRS Publication 525. The following are common types of unearned income:
- unemployment compensation (Form 1099-G)
- IRA distributions (Form 1099-R)
- Social Security benefits (Form SSA-1099)
- dividends (Form 1099-DIV)
- taxable interest (Form 1099-INT or 1099-OID)
- some real estate income
Choose your filing status.Your filing status determines how much of your income you need to claim for income tax purposes. Consider the following:
- Single. You can choose this status if you are single on the last day of the calendar year. If you have children, you will file single if you are not the primary caregiver. You will only need to report your own income.
- Married filing jointly. You can file married filing jointly provided you are married on December 31st of the tax year. You’ll need to add in your spouse’s income to your own.
- Married filing separately. Even if you are married, you have the option of filing separately. Nevertheless, filing jointly is usually the best option. Your state’s laws will determine how you calculate your income.For example, in community property states, you may have to add up all of your income and divide it equally.
- Head of household. You are unmarried as of December 31st and are paying more than half the costs to maintain your home. You also have a qualifying dependent (such as a child or dependent parents) for at least 6 months.
Reduce your income.You can lower the amount of taxable income for several different reasons. They are listed on lines 23-35 of Form 1040. Some of the more common deductions include the following:
- Health Savings Account (HSA) contribution. You can take this deduction for your own contributions but not for employer contributions or rollovers.
- Deductible part of self-employment tax. Self-employed individuals must pay 15.3% of their income as self-employment tax. However, they can also take half of that and deduct it from their income.
- Self-employed retirement plan contributions.
- IRA deduction. You might be able to take a deduction for contributions to a traditional IRA, but not a Roth IRA.
- Student loan interest. You can also deduct the amount you pay in student loan interest if you make less than ,000 in adjusted gross income as a single person or 0,000 if married filing jointly. You cannot be claimed as a dependent on someone else’s tax return.
Calculate your adjusted gross income.Subtract your adjustments from your total income. This will give you your “adjusted gross income.” This number appears on the following lines:
- Line 37 of Form 1040
- Line 21 of Form 1040A
- Line 4 of Form 1040EZ
Taking Additional Deductions
Choose the standard deduction.You are able to deduct a certain amount from your adjusted gross income based on your filing status. The amount changes each year.In 2019, the standard deductions were as follows:
- Single or married filing separately qualify for a ,350 standard deduction.
- Married filing jointly qualifies for ,700.
- Head of household qualifies for ,350.
- If you are blind or over age 65, you qualify for a larger standard deduction.
Itemize your deductions instead.Instead of taking the standard deduction, you can choose to itemize deductions. People rarely benefit from itemizing deductions. Check Schedule A to see what expenses can be itemized:
- some medical and dental expenses
- state and local taxes (either income or sales taxes, but not both)
- property taxes
- home mortgage interest
- gifts to charity
- unreimbursed employee expenses, such as union dues, job education, or job travel
Apply your exemptions.You also get to reduce your income by claiming exemptions. You can claim 1 for yourself and 1 for your spouse, as well as your dependent children or parents. Multiply your total exemptions by a set dollar amount.
- The dollar amount might change each year. For 2019, the amount is ,050.
- For example, if you are married with 1 child, you can typically claim 3 exemptions totaling ,150.
Getting Tax Help
Find free tax help.The Volunteer Income Tax Assistance (VITA) program offers free tax help to people making ,000 or less. Volunteers can answer your questions and provide basic income tax return preparation.
- You can find the nearest VITA site by calling 800-906-9887 or by using the VITA Locator Tool online.
Locate help if you are elderly.The Tax Counseling for the Elderly (TCE) program provides free tax help to people 60 or older. Most TCE sites are operated by the AARP Foundation’s Tax Aide program. You can find the nearest site by calling 888-227-7669.
- You can also find the nearest TCE site here: .
Consult with an accountant.You should meet with an accountant if you make too much money to qualify for VITA or if your tax issues are particularly complex. You can obtain a referral from your state’s society of certified public accountants. Alternately, you can look in the phone book or find someone online.
- Always research your accountant before hiring them. You can find reviews online.
Video: Taxable income framework
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