The government doesn’t actually tax every cent you make during the year. Instead, your individual taxes are based only on your taxable income, which is your gross income minus allowable personal exemptions and deductions. When you file your taxes, you can use the individual forms 1040EZ and 1040A to help you calculate the smallest level of taxable income.
Gather your gross income
There are two categories of income—earned and unearned. When you begin computing your taxable income, you need to first add up all of your income, which includes any money you were paid for performing work. This includes salary, wages, tips, bonuses, and commission. However, it also includes money you received from unemployment benefits and sick pay. You will also have to include noncash fringe benefits, such as ticket to events, life insurance coverage, or a company car, in your earned income calculations.
Tally your taxable income
Depending on your filing status and the form you choose to file, you can use certain adjustments or subtractions. Once you make these adjustments to your gross income level, you will have your adjusted gross income. Next, you can reduce your adjusted gross income further by taking deductions, which are certain expenses the IRS allows you to subtract from your income. If your tax-allowable expenses, such as mortgage interest and charitable contributions, are greater than your standard deduction amount, you should use a Form 1040 and itemize these deductions on Schedule A.
Determine what is taxable
Though there are potential exemptions and deductions to your gross income, the IRS considers most income taxable. Generally, your salaries, wages, tips, commissions, and interest earnings will all be taxed. If you exchanged something for noncash payment, you will need to value your noncash earnings and count that amount toward your income.
As the 2014 tax season approaches, it’s important for individual filers and businesses to get their tax preparation needs in order. Kalil & Associates is a full-service accounting firm offering bookkeeping and tax services in Tucson. Call (520) 628-4264 to speak with an experienced Tucson accountant today.