What is Taxable Income? How To Calculate Taxable Income

What Is Taxable Income?

If an individual exceeds a minimum income according to the government guidelines then that person needs to pay the tax. In other words, the taxable income is the income that is chargeable to the government for a particular year.

Taxable income comprises salaries, wages, pensions, capital gains, rental income, investment income, business income, and unearned income.

Formula To Calculate Taxable Income

Taxable Income for Individual = Gross Total Income – Total Exemption – Total Deductions

Taxable income for corporation = gross sales – the cost of goods sold – operating expenses – interest expenses – tax deduction/credits

Types of Taxable Income

Every taxpayer should know how to file a report for one’s income tax. So, here are some types of income.

  1. Taxes on Income: It is the most common type of taxable income. It includes wages, salaries, and fringe benefits.
  2. Business and Investment Income: This includes taxes form rental income, partnership income, S corporation income.
  3. Miscellaneous Income: Income which don’t fall under the above two categorize are under this income.

Difference Between Taxable and Non-Taxable Income

The income which is received by an individual but is not subject to taxation. For example, if you work for a religious organization and it is registered to do good for society then that income comes under non-taxable income.

Earnings That Count Under Taxable Income

  1. Income you earn: When you work for someone like for a firm or company or you are self-employed that earned income comes under taxable income. These includes salaries, wages, commission, freelance earning, bonuses and tips.
  2. Winning: Money earned from gambling, betting, or winning a prize from a contest all have to report to the government and you have to pay the taxes for the winning amount.
  3. Money or Property Gain: When you earn money from investments and rental properties you have to pay taxes for them also. According to the IRS, the following are taxable to the government.
  4. Canceled or forgiven debt
  5. Dividends from investments
  6. Real estate gains
  7. Rent from property
  8. Royalties
  9. Stock and Bonds
  10. Unemployment compensation
  11. Gains from virtual currency
  12. Fringes: Money which is given to you as a benefit such as bonus are all comes under taxable amount.

 Earnings That Come Under Non-Taxable Income

  • Accident and personal injury rewards
  • Cash rebates
  • Child support
  • Federal income tax refund
  • Foster care payments
  • Money gifts
  • Life insurance pays
  • Scholarships or fellowship grants
  • Welfare benefits

Maybe, some of these can come under taxable incomes under certain circumstances.

How to Lower Your Taxable Income?

Tax Deductions: A tax deduction can help you in reducing your taxable amount by applying for the standard deduction you can lower your taxes.

Adjustment to The Income: Adjustment to income can be beneficial for an individual. If you qualify, the more you can take off from your taxable income.

How To Know if You Qualify for Adjustments or Not?

  1. If you pay student loan interest
  2. If you make traditional HSA or IRA
  3. If you teach k-12
  4. Receive income form self-employment

For more details, you can check the guidelines on the IRS website.

Investing in traditional 401(K): If you are not paying taxes and investing in traditional 401(K). Then you are applicable for reducing your taxes.

What are Tax Deductions?

Let’s say an individual earns $52000 from a year. Then he takes a standard deduction of $12400 from his annual income. Therefore, $50000 subtracted from $12400 will be $37600. This means the government can only tax $37600 from his or her annual income. So, Tax Deduction reduces the taxable income which in term reduces the overall tax.

How Much Tax You Have To Pay?

The US government has made some guidelines that have to be followed by every individual. According to 2020 guidelines.

  • 10% for incomes of $9,875 or less ($19,750 for married couples)
  • 12% for incomes over $9,875 ($19,750 for married couples)
  • 22% for incomes over $40,125 ($80,250 for married couples)
  • 24% for incomes over $85,525 ($171,050 for married couples)
  • 32% for incomes over $163,300 ($326,600 for married couples)
  • 35% for incomes over $207,350 ($414,700 for married couples)
  • 37% for incomes over $518,400 ($622,050 for married couples filing jointly)

In 2020 the standard deductions have increased slightly by $12,400 for single fillers and for couples it is $24,800 exact double.


Let us take if you are single and you have a taxable income of $60000. Therefore,

The total income tax will be $8990.

  1. First Tax Bracket:  $9875 x 10% = $987.50
  2. Second Tax Bracket: $30,250 x 12% = $3630.00
  3. Third Tax Bracket: $19875 x 22% = $4372.50


If your tax situation is very simple, then you should have no problem in filing taxes on your own but if you have a very complicated tax situation like if you have various roots of earning money then you should hire some professional.

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