Taxable Income: How is it Determined?

How to determine your taxable incomeOne of the most common questions I'm asked as a tax attorney is, "What's taxable?" Believe it or not, that's a pretty difficult question to answer, because the list is so lengthy. A much easier question would be, "What isn't taxable?" This is because our tax system is considered inclusive. In other words, all income is considered taxable unless otherwise excluded.

To figure your taxable income, you must first calculate total income. To do this, include everything you receive in payment for services. That means wages, salaries, commissions, fees, tips, as well as fringe benefits and stock options. Income that is available to you, such as an uncashed check, can still be included under the doctrine of constructive receipt. The same theory applies to deferred compensation: If you could take the income without incurring a significant penalty, it's considered yours when made available -- not when you take it.
In addition to payment for services, you must include other items of income, such as interest and dividends, alimony, business and farm income, capital gains, retirement income, partnership income, net proceeds from rentals and "other income." "Other income" may include income from the pursuit of a hobby; it may also include gambling income or income from illegal activities, like drug sales or prostitution (and no, I'm not making that up).

And don't be fooled -- income doesn't have to be in the form of cash or check. You can also receive income in the form of property or services.

After you've figured your total income, you can deduct some expenses right off the top to determine adjusted gross income (AGI). These include certain qualified expenses for teachers, moving expenses and student loan interest. It also includes alimony paid out, deductions for IRA contributions and one-half of self-employment tax paid.

Next, subtract personal exemptions and deductions. Use the larger of your standard deduction or your itemized deductions in your calculation. The result is your taxable income.

You can boil these steps down to this basic formula:

Adjusted Gross Income - (deductions + personal exemptions) = taxable income

Your taxable income is what you'll use to calculate the tax due, using the applicable tax rates.

The rules for credits and deductions can vary from year to year, as do tax rates. Check back with WalletPop to see how changes in 2010 could affect your bottom line.

Video: How to Estimate the Value of Clothing for IRS Deductions

Learn how to estimate the value of clothing for IRS tax deductions as charitable donations. The value of clothing donations to charity are based on published lists of retail values or current thrift store prices. List your donation values on the Form 8283 with the help of TurboTax in this video on filing annual taxes.

Read More

Brought to you by TurboTax.com

The Top Tax Myths (and What Happens When You Believe Them)

Don't get caught believing in any of these myths when it comes to your taxes.

Read More

Brought to you by TurboTax.com

Video: What Are Tax Tables?

The tax tables issued by the federal government and many state governments determine what amount of tax you owe based on your net income after deductions and exemptions. See how your tax status affects your position on the tables in this video on tax basics.

Read More

Brought to you by TurboTax.com

How to Use Your Lyft 1099: Tax Help for Lyft Drivers

Whether you drive for Lyft full-time or part-time, you’re now enjoying the pay, perks, and prerogatives of being self-employed—from setting your own hours to building customer relations. With the onset of tax season, you face a new business challenge: filing your taxes in a way that minimizes your tax liability. Follow these tips on how to use your Lyft 1099 to complete your tax return and maximize your tax deductions.

Read More

Brought to you by TurboTax.com
Read Full Story