How to calculate taxable income

how to find taxable interest

To calculate taxable income, subtract all deductions and allowance for exemptions from the adjusted gross income

Taxable income = adjusted income − (deductions + allowance for exemptions)

With deductions, you can itemize deductions or use the standard deduction

In 2009. the standard deduction is

11,400 USD for married couple filling a joint return

8350 for heads of household

5700 for singles and married individuals filling separately

If you itemize deductions, you can deduct taxes paid, mortgage interest, educational expenses, medical expenses, contributions, and other expenses that exceed 2% of your adjusted gross income.

A 3650 USD exemption was allowed for each dependent in 2009. This can always change. Hopefully, when it changes, it goes higher because it will reduce your taxable income even more

We now illustrate with real life examples

Example #1:

In 2009, Mike's adjusted gross income is 37,000 USD. Mike is married and has three kids. What is Mike's taxable income if he is filling a joint return and chooses to take the

standard deduction?

Taxable income = 37,000 − (11,400 + 3650 × 3)

Taxable income = 37,000 − (11,400 + 10950)

Taxable income = 37,000 − 22350

Taxable income = 14650

Example #2:

In 2009, Sylvia's adjusted gross income is 50,000 USD. If Sylvia has 4 kids and decides to itemize the following items, calculate taxable income?

Taxes paid: 5000

Mortgage interest: 7000

Educational expenses: 4000

Medical expenses: 2000

Charitable contributions: 500

Expenses that exceed 2% of her adjusted gross income: 6000

Total deductions = 5000 + 7000 + 4000 + 2000 + 500 + 6000 = 24,500

Since Sylvia has 4 kids, her exemption is 3650 × 4 = 14,600

Taxable income = 50,000 − (24,500 + 14,600)

Notice that Sylvia's taxable income could have been a lot higher if she has taken the standard deduction of 11,400

It would be 50,000 − (11,400 + 14,600) = 50,000 − 26000 = 24,000

She will end up paying more taxes

Source: www.basic-mathematics.com

Category: Taxes

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