When you file your individual income tax return (Form 1040), you must report your income items. The income amount reported determines your federal and state income tax liability; therefore, it is essential to understand how the tax laws affect your income items. Additionally, even if you utilize a tax return software, it is helpful to have a basic understanding of the income concepts in order to optimize the tax return preparation process. Below, I detail the major components of the individual income tax formula. I also provide examples of items for each major taxable income formula component. Lets begin.
Guide to Taxable Income for Individuals
As you can see from the table above, the major components of the taxable income formula are gross income, adjustments, AGI, standard deduction/itemized deductions, QBI deduction, taxable income, income tax liability, tax credits, and tax payments. It is important to understand each component, including examples of the items that make up the taxable income formula components.
Individual Taxable Income Formula Components
Gross Income
Gross income includes all your taxable income items. The list of income items is extensive. You should report income from all sources derived at the amounts before any deductions. Some common gross income items include:
- wages, salary, & other compensation (bonuses, commissions)
- interest
- dividends
- flow-through business income
- capital gains/losses
- retirement account income
- unemployment compensation
- other income
Adjustments
Adjustments include above the line deductions. In other words, you decrease gross income by adjustment items to arrive at your adjusted gross income (AGI). Above the line adjustments are beneficial in that the tax adjustments lower your taxable amount. Additionally, tax law tends to utilize AGI to assess thresholds and phase-outs. The common above the line tax adjustments include:
- Educator expenses
- IRA/401(k) contributions
- Student loan interest expenses
- HSA contributions
- Self-employment taxes
AGI
AGI = Gross Income - Adjustments
You may utilize your AGI to determine eligibility for various tax applications. Understand both gross income items and adjustments in order to properly calculate the AGI total.
You may utilize your AGI to determine eligibility for various tax applications. Understand both gross income items and adjustments in order to properly calculate the AGI total.
Standard Deduction OR Itemized Deductions
Taxpayers may choose between taking the standard deduction or itemizing deductions. The choice depends upon the actions of the taxpayer for the tax year.
In 2019, the standard deduction is $12,200 (Single) and $24,400 (MFS). You should take the standard deduction unless your itemized deductions exceed $12,200 or $24,400.
TCJA changed the rules relating to several itemized deductions. It is important to know the itemized deduction tax rules to determine the best deduction option. The common itemized deductions include:
- Non-reimbursed medical expenses
- State/local taxes - property & income/sales
- Interest expense
- Charity
- Casualty & theft
QBI Deduction
The QBI deduction allows a deduction of up to 20% of qualified business income for eligible flow-through entities. The deduction is available to all taxpayers other than regular C Corps. Please see the following posts for more information on the Sec. 199A QBI deduction:
- How to calculate the Sec. 199A QBI deduction in 2019?
- Sec. 199A QBI Deduction for Taxpayers Between the Threshold Amounts
- How to calculate the Sec. 199A QBI deduction in 2019?
- Sec. 199A QBI Deduction for Taxpayers Between the Threshold Amounts
Taxable Income
Taxable Income = AGI - Standard deduction/Itemized deductions - QBI deductionYou use the taxable income amount to calculate your tax liability. You then adjust your tax liability by tax credits and tax payments to determine your taxes owed or your tax refund.
In conclusion
You adjust your gross income by the stated adjustments and deductions in order to arrive at taxable income. Gross income tends to include most sources of income. If you are unsure about an income item, research the income type to determine if its taxable or nontaxable. Additionally, a basic understanding of the adjustments and deductions should help lower your tax liability.I hope the following improved your understanding about your tax return. Please share to help others learn how to calculate their taxable incomes. Please comment below for any and all questions and concerns relating to the individual taxable income calculation!
The above discussed information is very useful and interesting
ReplyDeleteHow Does Income Tax Return Filing Online Works in India
Thanks for sharing fabulous information. The information you have updated above is very good and useful
ReplyDeleteIncome Tax Return Filing in India
Thank you for sharing this informative post. It is very useful and valuable in many terms. Income Tax is something that almost every individual has to pay out of his/her savings. I want to tell you that last week I got my life insurance from RBS Tax Services and they provide me the best plan for Life Insurance Houston TX. Income Tax is money outgoing process and life insurance is incoming money when you will be no more and that will support your family.
ReplyDeleteI liked your work and the way in which you have shared this article here about tax planning. It is a beneficial and helpful article for us. Thanks for sharing an article like this. Advisor in Toledo for investing in retirement
ReplyDeleteWhich you have shared here. This post is very informative and I liked to see it. asset management
ReplyDeletesuch a nice piece of article. Thank you for sharing your knowledge. This is a very valuable thing you shared. good stuff!!Top tax planning services for restaurants
ReplyDelete
ReplyDeleteThanks for sharing interesting information discussed above. Income tax is a direct tax that a government levies on the income of its citizens.
Income Tax Assessment in Chennai
Thanks for sharing this post with us, I also want to share my experience with you. In the previous month, I was looking for Tax Service, then I found RBS Tax Services they offer their Tax Services in Houston Texas. They independently owned a tax service firm. They provide tax services with full professionalism and handle the stress of my taxes.
ReplyDeleteCalifornia estimated tax payments Thanks for a very interesting blog. What else may I get that kind of info written in such a perfect approach? I’ve a undertaking that I am simply now operating on, and I have been at the look out for such info.
ReplyDeleteIt is nice post about how to calculate taxable amount and file the tax return for your business.
ReplyDeleteercapplication.com
Your blog is very important which you have shared right here regarding investing. I value your efforts which you have actually put into this short article and also it is a lucrative write-up for us. Thank you for sharing this post here.
ReplyDeleteThe details you went over above is extremely useful and intriguing. Many thanks for sharing such excellent article on plr ebooks
ReplyDeleteMalkoun & Associates understand that more often than not, clients work ’in their business’ and not ‘on their business’. This can be detrimental and can often lead to failure. Without the right advice and without the proper resources, businesses can get left ‘behind’ until it is eventually too late.
ReplyDeleteWe offer clients a virtual cfo services and can identify risks, inefficiencies, weaknesses and opportunities in each business. Clients can tap into our knowledge bank and let us guide them through each phase of their life cycle.