Taxable Income is an important component of being a taxpayer and refers to the gross income subject to taxation. When filing taxes, individuals must report all sources of income that meet the criteria of a taxable income. This can include income from employment, investment gains, and business profits, among other sources. Before calculating taxable income, taxpayers must know what constitutes taxable income and how to account for deductions to accurately represent their net taxable income.

Income that is deemed as taxable by the Internal Revenue Service (IRS) falls into either earned or unearned income categories. Earned income (or wages) refers to income made from sources such business profits, investments, and employment. Unearned income includes income from annuities, pensions, rental properties, and Social Security benefits.

To accurately calculate taxable income, an individual must start by determining their filing status. This helps to determine the taxpayer’s deductions, credits, and tax rate. To determine an individual’s taxable income, the taxpayer must include any wages, bonuses, and proceeds from self-employment to calculate their gross income.

Income that requires special consideration should also be included in taxable income calculations. This includes, but is not limited to, income gained from investments, such as capital gains and dividends. Furthermore, any amount received from government agencies such as Social Security should be included in taxable income calculations. Other forms of income that should be included are alimony, unemployment compensation, proceeds from the sale of a property, and prizes or awards.

Once the gross taxable income has been calculated, the taxpayer then needs to accommodate for any deductions. These deductions are expected to decrease the taxpayer’s income which in turn affects the taxable income calculation and ultimately impacts the amount of tax that needs to be paid. Deductions can come in various forms such as business expenses, student loan interest, retirement account contributions, and charitable donations.

It is also important to note that any refunds from previously paid taxes and any interest earned on such refunds are also deemed as taxable income.

Taxable income is the basis of all tax calculations, and is calculated by taking the concepts of earned income, unearned income, deductions, and other aspects into account. It is important that taxpayers take the task of determining their taxable income seriously, as it will ultimately determine the amount owed in taxes. Ultimately, when done correctly, this can help reduce the amount of taxes paid.