What is Taxable Income?
Taxable income is the portion of your gross income on which you are required to pay income taxes. It refers to any individual’s or business’ compensation that is used to determine tax liability. The total income amount or gross income is the basis to calculate how much the individual or business owes the government for the specific tax period.
Types of Taxable Income
1. Employee compensation and benefits
These are the most common types of taxable income and include wages and salaries, as well as fringe benefits.
2. Investment and business income
For people who are self-employed, they are also subject to tax liability, specifically through the income earned by their business. For example, net rental income and partnership income qualify as taxable income.
3. Miscellaneous taxable income
This includes income that doesn’t fit into the other types. It includes things such as death benefits, life insurance, and canceled debts. Alimony, income earned through barter trading, and income from one’s hobby are also miscellaneous taxable income.
What Is Non-taxable Income?
Non-taxable income refers to income that is received but that is not subject to taxation. Examples of non-taxable income are gifts, inheritance, earnings made from a religious or charitable organization that are subsequently returned to that organization and If someone dies and you receive a life insurance benefit, that is also nontaxable income.
How Is Taxable Income Calculated?
Taxable income is basically calculated by adding up all sources of income, excluding nontaxable items, and subtracting credits and deductions.
Take the steps below to calculate your taxable income:
Total your taxable income for the year
Figure out your adjusted gross income
Subtract any standard or itemized tax deductions from your adjusted gross income
Once you've subtracted any tax form adjustments, deductions, and exemptions from your gross income, you've arrived at your taxable income figure.
If unsure, you might need the help of a professional. At Nuve, we’ll help you determine your taxable income as part of preparing your return. Book a call with us today to learn more.
Disclaimer: This blog post is provided for informational purposes only and does not constitute legal or financial advice. The information contained in this post is based on our current understanding of tax laws and regulations as of the publication date, which may be subject to change. It is your responsibility to consult with a qualified tax professional or seek advice from your local tax authority to determine your specific tax obligations. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to the information contained in this post. Any reliance you place on such information is therefore strictly at your own risk.