What is Taxable Income
Taxable income is gross income minus standard deductions. The taxable income attracts tax at different rates depending upon the source. Standard deductions are fixed for a particular tax year. Salaried employees and income from other sources are two main categories which require different tax structure.
Taxable income is generated from appreciation of the price of asset, from dividends and interest earned and from the capitalization of assets. Some common deductions that are applicable before reaching taxable income figure are business expenses in case of the companies and insurance investments as in the case of individuals.
Most of the inflow of money which we employ for day-to-day living qualifies for payment of tax. Any income which is generated in lieu of service rendered or achieved due to any skill falls under the category of taxable income. That is why; money generated by baby-sitting, childcare providing is also to be included in taxable income. Publication 525 discusses various heads of income which fall under taxable category.
For salaried employees, common heads of income are employee compensation, allowances, bonuses and achievement awards. Accrued leave payment, unpaid life insurance premiums and stock appreciation rights also contribute taxable revenue.
Military, clergy, Members of Religious Orders are some entities which are treated under special provisions to calculate taxable income. It is essential to understand the tax liability of any income source to avoid embarrassment in the hands of income tax raiders.
Non-salaried sources of income are those which are generated from rents from personal property, partnership in business income and S corporation income. Form 1120S is applicable for filing returns as in the case of S Corporations. Royalties earned from book sales is also a form of taxable income.
There are two types of exemptions: personal exemption and dependent exemption. If parents claim exemption by keeping you as dependent then you cannot claim personal exemption. You can claim exemption for spouse if someone else is not claiming exemption keeping your spouse as dependent. Most importantly if you are earning and somebody is claiming you to be dependent and enjoying exemption then also you are required to file your return.
Choice of correct file status is very important. Various file status have different tax structures. The best way to lower tax is by lowering the taxable income. Income can be lowered by investing in retirement plans. Clear idea of itemized expenses is also beneficial for clear understanding of tax liability. Summing of itemized expenses may sometimes exceed the standard deduction allowed. So higher of the two should be chosen to lower the taxable income. Itemized expenses are medical bills, car registration fees, tax preparation fees, state and local taxes, job- related expenses or investment related expenses. You can also increase dependents by getting married.