Taxable income is the income subject to taxation by a state or country, with deductions reducing the amount of taxable income. Tax credits can reduce the total tax owed, and different types of income may be taxed differently.
Taxable income is the gross income made by an individual or business that is considered taxable by a state or country, or both in the US. There are certain things, depending on income level and other country-mandated deductions, that are reduced of the amount of income considered taxable. For example, a certain amount of contributions made to a person’s 401k is not taxable income, and amounts deducted for social security payments in the United States are generally eliminated and considered nontaxable.
The degree to which your income is taxable depends, in a progressive tax system, on certain allowable deductions. If you earn income below the poverty level, you are unlikely to pay much, if any, in taxes. People with average incomes receive individual deductions for self-support when they file their taxes, as well as for the support of anyone else in their household, such as spouses and dependent children. These deductions are subtracted from your gross income levels to determine your tax bracket or tax rate when you fill out income tax forms.
There are several defined deductions, such as donations to charities, payments for child care expenses, and payments for education expenses that can reduce taxable income. When you file federal taxes for the US, you’ll typically review a list of deductions you can take, which are then subtracted from your gross pay. Once you’ve made all of these subtractions, federal forms like the 1040 read to mean “This is your taxable income,” and then ask you to find your tax based on this amount.
You will then be asked to compare the amount you were taxed with the tax amount allowed for your income category. If you paid more than your taxable income allowed, you’ll get a refund, and if you paid less, you’ll owe money to the IRS. However, there are certain deductions from the taxes owed that can reduce the total tax. These are called tax credits and are deducted not from your taxable income, but from the tax you owe on that income. Tax credits can brighten your mood quickly if you can take enough of them, and they reduce the amount you owe to what you’ve already paid (or more than you’ve paid) through paycheck deductions.
There are certain types of income that can be taxed under very different rules than the standard income earned when you work for an employer. If you inherit large sums of money, win the lottery, make a huge gain in stocks, or receive a huge unexpected bonus, this income may be taxed at different levels and different percentages than other income deemed taxable. A lot depends on how much extra money you make, earn, or inherit, but these are all considered “income” of some kind. They must be accounted for on your federal tax returns and can change the amount you must pay at the end of the year.
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