Taxable income is the amount of income that is subject to taxation. It is the total of all your income from all sources before deductions and exemptions are made. This includes income earned from salaries, wages, tips, self-employment, unearned income such as dividends and interest earned on investments, royalties, and gambling profits. Taxable income is usually lower than gross income due to deductions and exemptions. Marginal tax rates and effective tax rates are two different ways of calculating taxes.
Marginal tax rates are used to determine what will happen if your income or deductions go up or down, while effective tax rates are used to calculate the percentage of your taxable income that goes to the IRS. Knowing your tax bracket and effective tax rate can help you reduce your taxable income and taxes. Calculating taxable income can be complex, as the IRS classifies other types of income as taxable income. However, no matter what category you fall into, you won't pay that tax rate on your entire income. Raising a tax bracket doesn't necessarily mean you're going to lose more money; it just means that the portion of the money you've earned compared to your previous tax bracket will be taxed at a higher rate. The first step in preparing your income tax return is to determine which tax status fits your situation.
Most states use Adjusted Gross Income (AGI) or federal taxable income as a starting point for their own individual tax liability calculations. When determining what tax category you fall into, look at the highest tax rate that applies to the top of your taxable income for your filing status. Contacting a Polston Tax professional and having them handle your tax calculations can simplify the process and ensure that every step is managed correctly. Understanding how to calculate taxable income can help you make informed decisions about how to reduce your taxes.