Taxable income can be termed as the amount on which an income tax is applicable for any taxpayer. The procedure for determining the taxable income of any particular taxpayer is to firstly calculate the gross income and tax deductions that are allowed and then subtract the deductions from the gross income amount.
What is Gross Income?
According to the Internal Revenue Code, any income that has been derived from any source is called as gross income. It is not limited only to cash; gross income includes realized money in any way such as property and services. Wages, tips, service charges, profits received from sale of property, stocks or bonds, amount received as rent, pensions and many other income sources are considered when determining the gross income of a person or entity. There are some types of incomes that are entitled for exemption which means that they are not included in the gross amount. Percentage of social security benefits, interest received on municipal bonds, gifts, inherited property or objects and a few employee benefits are some examples of incomes that are exempted from taxes.
Tax Deductions
Expenses that have been utilized in order to generate income are generally termed as tax deductions. Basically, there are two kinds of tax deductions; business tax deductions and personal tax deductions. Majority of expenses made in a business are permitted to be exempted. However, there are limits on a few of these expenses and they are not completely tax deductible. For instance, the expenses incurred on food and entertainment are only 50 percent tax deductible. The practice of tax deductions for individuals which is also called as personal deductions is altogether different. A special deduction termed as personal exemption is allowed to individuals who have dependants in their family. The amount is fixed for each taxpayer in addition to a constant amount for every child or other members that the taxpayer is supporting. Besides, state and local income taxes are deductible. A 50 percent deduction is applicable to amount paid to charitable trusts or organizations.
After all these calculations and deductions, a final figure is determined and is called as taxable income. According to the tax brackets and tax rates, the income tax which the taxpayer has to pay is determined.