How to Figure Taxable Income

Income taxes must be paid on all income whether earned or not.
Income taxes must be paid on all income whether earned or not. (Image: Jeffrey Hamilton/Digital Vision/Getty Images)

Income taxes, both state and federal, are determined by the amount of money you have collected throughout the year. Typically this is money paid by your employer, or to yourself if self-employed, for the completion of a job. However your total taxable income includes other sources of money such as rent and unemployment benefits, as well as non-cash benefits such as a car provided by an employer, country club memberships and even tickets to the theater, a sporting event or any other entertainment.

Add all of your annual income together to determine your gross annual income. Include all forms of payment received including money paid from your employer, tips, commissions, bonuses and sick pay. Also include all unearned income such as fringe benefits like a company car or cell phone, discounts on any products or services received and money received from a life insurance policy greater than $50,000.

Subtract your allowable deductions from your total income. The Internal Revenue Service allows taxpayers to claim a standard amount, called a standard deduction. The 2010 standard deduction is $5,700 for an individual or $11,400 if married filing jointly. The alternative to a standard deduction is itemized deductions. Itemizing your deductions allows taxpayers to claim a percentage of medical or dental costs, mortgage interest, charitable contributions, state and local taxes and other expenses as tax deductions. However, after calculating the itemized deduction amount, approximately two-thirds of all taxpayers find the standard deduction allows for greater tax savings.

Subtract the allowable exemption amount for each dependent. The federal government considers any person living in your home who counts on you for financial support as a dependent. As of 2009, the Internal Revenue Service allows taxpayers to reduce their taxable income by $3,650 for each dependent in the household. For example, the head of household for a family of three should deduct $10,950 in exemptions. The remaining amount is your taxable income.

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