Taxable income, gross income, earned income, adjusted income. Why do we have so many incomes if most of us only work one job? (Actually, most of us work more than one now, but you get what we mean).
The good news is that it’s not as complicated as it sounds; they’re all just big scary tax words designed to stress you out and distract you from what matters most: that massive refund check you can get if you’re smart about how you use deductions and exemptions.
Taxable income is a particularly tricky thing for freelancers and independent contractors. If you’re DJing full time as a freelancer, working for Uber on the weekends, or are hustling to start your own side business, taxes get tough. Trying to understand tax terms and need a crash course on taxable income? Here’s what to know and how to calculate your taxable income yourself.
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What is Taxable Income?
A very basic definition of taxable income is that it’s the income you’re taxed on. Seems simple enough, right? Sort of. Let’s break it down:
- Gross Income: This is all of the income that you earn per year from however many sources you earn money from. Not all of that income is taxable, though! You’re able to lower that amount by deducting some of the following…
- Contributions: These are contributions you make to accounts such as an Individual Retirement Account or charitable contributions. You can deduct these from your gross income to lower your tax liability.
- Deductions: If you’re deducting things like unreimbursed business payments (that $250 lunch you got stuck with when those clients flew in at work) or student loan interest from your gross income, it’ll lower the amount you have to pay taxes on. You can decide to either take the standard deduction the IRS gives you or itemize your deductions and contributions separately (but you can’t do both).
- Exemptions: These are designed as “special deductions” that help you reduce the total amount of income you owe taxes on (yet again!). Previously, there were two types of exemptions: personal and dependent. Due to the 2017 Tax Cuts and Jobs Act, you can’t claim personal exemptions until at least 2025.
Okay, so, you start with your gross income, right? Then you deduct your deductions and any exemptions you qualify for. Then, you’re left with your taxable income!
Do You Owe Taxes On All of Your Income?
Nope, that’s the point! Even if you earn $50,000 a year, you will likely never pay taxes on 100% of that $50,000. As mentioned above, the IRS offers a standard deduction you can take that usually benefits people more than trying to itemize their deductions and add them all up and whatnot (not to mention, that’s a massive headache).
Currently, single taxpayers and married people filing separately from their spouses will get a standard deduction of $12,400 while those filing jointly will receive a deduction of $24,800. If you’re a single 230-something, chances are that you won’t be able to find $12,400 in deductions lying around to be able to deduct more than that.
While we do suggest teaming up with a good tax expert, especially if you’re running your own side hustle or small business, it’s also a good idea to think about the types of deductions you might qualify for. For that, here’s our guide on Tax Tips for Millennials that’s got a list of deductions that you might qualify for.
However, if you’re like most people, it’s likely that your taxable income will be whatever you earn minus $12,400.
How Do I Calculate Taxable Income?
It’s important to mention here that on tax forms, taxable income is called adjusted gross income (or AGI for short). To calculate it, you’ll need to look at a few things first:
- Filing status: Are you filing single, married and separately, or jointly?
- Sources of income: Compile all of your income together, including your side hustles, interest income, and any money you get from tips.
- Deductions: Again, follow the guide above to see what works best for you or go ahead and take that standard deduction of $12,400.
Depending on whether or not you’re filing your taxes alone or are having someone else help you with form 1040, you’ll see a few other lines there you need to fill in regarding business income deductions and adjustments (which you probably don’t have to worry about). Then, you’ll arrive at line 11b. If someone’s prepared your taxes for you and you’re only worried about one number, it’s this one. It’s your adjusted gross income, or taxable income.
Still want to know how much you’ll owe the government from there? Take a look at which tax bracket you fall into here (it’s likely between 12 and 24%).
A Crash Course in Taxes
Answering the question of “what is taxable income” is only a small portion of all there is to know about taxes. What even are taxes? What’s a refund all about? Where does that money go? They’re all great questions, and we’ll help you answer them.
Click here to check out more blogs on taxes. Then, click here to learn about how taxes can relate to helping you pump up your wealth via investing. Once you’ve got a handle on taxable income and what that means for you, take your new knowledge and apply it towards your financial future as a whole. Uh, yeah, we’re talking about investing.
Get the Wealth Stack app to continue learning about how you can power your wealth as you grow into your own money magnet. Download the app for iOS or Android. It’s free, always, because we’re not about charging you for knowledge you deserve to have.
