The term taxable income refers to the specific portion of a income that is taxed according to the laws of the jurisdiction in which the income is earned. Taxation can fall under the laws of federal, state, or other governmental jurisdictions. In the United States, income taxes are collected by the Internal Revenue Service (IRS) for the federal government and by each individual state as separate and independent taxing entities.
Taxable income is calculated on a percentage basis of the gross income earned by individuals and corporations, which is adjusted in accordance with the various deductions that are allowed by the laws of the taxing authority. In certain situations, income may be taxed at different rates or not taxed at all.
Wages and compensation earned by hourly employees, salaried personnel, and business enterprises such as corporations, partnerships, sole proprietorships are taxed. Other sources of income, called capital gains, may also be taxed. This includes profits on the sale of real estate, stocks and bonds, and other interest, dividends, or equity earning vehicles.
Income from rental property, gifts, inheritances, commissions, tips, and royalties are taxed as income. So is money from gambling, such as casino winnings, horse racing, and money won playing the lottery.
Internal Revenue Codes spells out what part of an individual's income is, and is not, taxable and what expenses, such as interest paid on home loans, business expenses, charitable donations, and college tuition savings, are deductible.
How is taxable income calculated? First, you have to determine your gross income minus any exemptions and excluded income, and then subtract allowable deductions. Certain business use other accounting methods.
Both taxable income and nontaxable income must be reported on your tax returns. If income has been made available to you, such as an uncashed check that is in your possession, it must be filed on your taxes for the year you received it. But if, for example, the check was sent in the mail in December and you do not receive it until after January 1st of the following year, it may be included on the next year's return.
Taxable income is determined by beginning with your gross income and deleting exemptions and excluded income. Then subtracting allowable deductions. To determine what income should be used and which deductions should be taken, the taxpayer's method of accounting should be used, which is also called the cash receipt and disbursement method. This means that the income has to be received and the deductions have to be spent.
If you are unsure about your taxable income, you should seek the advice of an accountant or a practicing tax attorney.