Key Takeaways
- How do you know how much you’ll owe during tax filing season? Can you know? The answer is calculating your taxable income.
- Taxable income is the amount of your income that’s subject to tax and is different from—and lower than–your gross income.
- There are a few things that go into figuring out your taxable income, and you can apply them step by step:
- Start with your gross income: salary, bonuses, tips, unemployment—include every dollar you brought in for the year.
- Note that some types of income aren’t taxed, like life insurance payouts and health savings account (HSA) payments, so you can exclude those.
- Select your filing status: single, married filing jointly (MFJ), married filing separately (MFS), head of household (HoH), or qualifying surviving spouse (QSS).
- Each status has its own deductions and exemptions that reduce the amount of taxes you owe by lowering the amount of income you’re taxed on.
*This amount is your adjusted gross income, or “AGI.” Your federal AGI is also what most states start with to determine your state income tax.
- Take either the standard deduction, which reduces your taxable income even further by a set amount determined by the government each year, or itemize your deductions.
* Once these steps are complete, you have your taxable income.
- Next, apply the marginal tax rates (tax brackets) to your taxable income, and you know your tax liability.
- Finally, you can apply any available tax credits to your tax liability, directly reducing your tax burden.
- After all of these steps, you know what you owe during filing season or if the government owes you a refund.
Transcript
Want to know how much you’ll owe during tax filing season? Then you need to know your taxable income.
Your taxable income is the amount of your income that’s subject to tax.
There’s a maze of variables to navigate to get to that number, but here’s how it is determined:
To calculate your taxable income, we start with your gross income.
Salary, bonuses, tips, unemployment—include every dollar you brought in for the year. There are a few types of income that aren’t taxed, so you can exclude those.
The next step is your filing status. Whichever status you choose has its own deductions and exemptions, which cover things like child care or student loan payments. These deductions and exemptions reduce the amount of taxes you owe by lowering the amount of income you’re taxed on.
What’s left is your adjusted gross income, or “AGI.” Your federal AGI is also what most states start with to determine your state income tax.
Then, you can take either the standard deduction, which reduces your taxable income even further by a set amount determined by the government each year, or you can itemize your deductions.
That’s your taxable income.
Now apply the marginal tax rates to that, and you get your tax liability. There’s just one last step. It’s time to apply any available credits to your tax liability. Credits directly reduce how much you owe.
Congrats! You’re done. Now you know what you owe or if the government owes you a refund.
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