Personal Finance

What is taxable income?

Does everything you earn get taxed?

Most of the terms that are thrown around when it comes to finances and taxes are not very well defined, and in fact, most people do not know what they mean. Usually these terms use simple and obvious words – but that does not mean that they always stand for what they initially stand for. One thing that sounds fairly obvious is “taxable income”, however, there is still a debate over what taxable income actually is.

Essentially, your taxable income is not necessarily all of the money that you make each year. If you’ve heard people talking about donations being “deductible” or adding up their deductibles for each tax season, this is why. Your taxable income is equal to your adjusted gross income with all of your deductions removed. Your adjusted gross income is almost equal to all of the money that you make each year – with a few exceptions. While you will have to deduct your own personal exemptions each year, the government does not tax certain amounts, for instance, IRA deductions or alimony payments.

Once you know what your adjusted gross income is, you can easily find out what your taxable income is – once you know what you can deduct from that amount. Essentially, deductibles depend on what your job is, in some cases. If you have your own business and you needed to purchase supplies or equipment for that business, then those supplies are deductibles. You should make sure that you only list things that you absolutely need for your business, however, otherwise you might find yourself getting audited!

You can also deduct charity donations to certain organizations. If you have any doubts, make sure that you ask the charity you are donating to whether or not your donation is a deductible. The people working at that charity should be happy to help you out.

Therefore, your taxable income is basically all of the money that you make each year, minus IRA payments and other automatically exempted sources of income, minus the money that you spent on necessary equipment or other deductibles. Once you find out what your taxable income is, you’ll be able to use that to determine your marginal tax rate – and find out how much money you can expect to pay in taxes that year.