Knowing how much of your income is taxable and how it’s going to be taxed is important because it’ll help you understand what you’ll owe on Tax Day (April 18 this year).
So, how do you know what income is taxable and what isn’t? And how exactly do you calculate your taxable income? Let’s dig a little deeper and find out.
What Earnings Count As Taxable Income?
The IRS taxes a lot of stuff, not just your salary or hourly wages. If your income falls under any of the categories below, you have to report it on your federal tax return.
Income You Earn: Whether you worked for someone or you were self-employed, your earned income is always taxable. This includes wages, salaries, commission, freelance earnings, holiday bonuses and tips.
Winnings: You must report anything you win from gambling or betting—even prizes you win on a game show or in a contest.
Money or Property You Gain: Maybe you earned money from your investments or you own a rental property. Is that income taxable? Yes. In particular, the IRS considers all of the following to be taxable income:
- Canceled or forgiven debt
- Profits from the sale of stock or other investments
- Interest or dividends from investments
- Proceeds from the sale of real estate
- Royalties from copyrights and patents
- Stock options
- Unemployment compensation
- Union strike benefits
- Gains from virtual currency (like Bitcoin)
Exchanges or Bartered Services: Let’s say you’re a mechanic and your best friend—a carpenter—builds a deck on your house. In exchange, you fix the transmission on his truck. According to the IRS, both of you must declare the value of the other’s service as income.
Fringes: A fringe is a benefit your company gives to you. It can be anything from a paid gym membership to a Christmas bonus. Like prize winnings, you will be taxed on fringes.
What Doesn’t Count As Taxable Income?
Generally, here’s what the IRS usually considers nontaxable income:
- Accident and personal injury rewards
- Cash rebates
- Child support
- Federal income tax refund (duh!)
- Foster care payments
- Inheritances and money gifts (up to a certain amount)
- Life insurance payouts
- Scholarships or fellowship grants
- Veterans benefits
- Welfare benefits
Some of these can be taxable under certain circumstances.
How Do Tax Deductions Affect Your Taxable Income?
What Is a Tax Deduction?
Tax deductions reduce your taxable income which, in turn, reduces your tax bill.
When it comes to filing taxes, you can take a standard deduction ($12,950 for single filers in 2022 or $25,900 for married couples filing jointly). Or you can itemize deductions from a list made by the IRS that includes things like charitable giving, mortgage interest and property taxes.
You can’t do both. You can take the standard deduction or you can itemize. How do you choose? Pick the one that saves you more money! If you’re not sure which one to choose, definitely contact a tax pro.
How Can I Lower My Taxable Income?
- Take advantage of tax deductions.
- Use adjustments to income if you can.
- Contribute more to a traditional 401(k).
Source: Ramsey Solutions Oct 25, 2022 https://www.ramseysolutions.com/taxes/taxable-income
“Worthwhile Wealth is not a tax advisor and does not offer tax advice. You you should consult a CPA or other tax advisor for any decisions you make regarding the foregoing information. Worthwhile Wealth Council has shared this information based on sources that are public and are believed to be reliable. Worthwhile Wealth Council is not responsible for any specific application thereof for any tax payer.
**Disclaimer: This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.