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It’s tax season 2025. We know how stressful filing your taxes can be. It’s all about your taxable income. Calculating your taxable income can feel overwhelming, but it’s a straightforward process when you break it down into manageable steps. Understanding how to determine your taxable income is essential for filing your taxes accurately and ensuring you’re not overpaying. Let’s walk through the process step-by-step, so you can confidently figure out what you owe.
What is Taxable Income?
Taxable income is the portion of your income that the IRS uses to determine how much tax you owe for the year. It includes wages, salaries, tips, interest, dividends, and other forms of income, minus any adjustments, deductions, and exemptions you’re eligible for. The goal is to reduce your gross income as much as legally possible to lower your tax liability.
Step 1: Start with Your Gross Income
Your gross income is the total amount of money you earn in a year before any deductions or adjustments. This includes:
- Wages, salaries, and tips
- Interest and dividends
- Business income (if you’re self-employed)
- Rental income
- Alimony received (for divorces finalized before 2019)
- Other income sources like unemployment benefits or gambling winnings
Add up all these sources to determine your total gross income.
Step 2: Subtract Adjustments to Income
Next, you’ll subtract any adjustments to income, also known as above-the-line deductions. These reduce your gross income to arrive at your adjusted gross income (AGI). Common adjustments include:
- Contributions to qualifying retirement accounts (e.g., IRA or HSA)
- Student loan interest paid
- Educator expenses
- Self-employment taxes
- Alimony paid (for divorces finalized before 2019)
For a full list of adjustments, refer to IRS Publication 17.
Step 3: Calculate Your Adjusted Gross Income (AGI)
Your adjusted gross income (AGI) is your gross income minus all allowable adjustments. This number is crucial because it’s used to determine your eligibility for certain tax credits and deductions.
Step 4: Subtract Your Standard Deduction or Itemized Deductions
After calculating your AGI, you’ll subtract either your standard deduction or your itemized deductions, whichever is higher. The standard deduction amounts for 2024 are:
- $14,600 for single filers
- $29,200 for married filing jointly
- $21,900 for head of household
If your itemized deductions (e.g., mortgage interest, charitable contributions, medical expenses) exceed the standard deduction, you’ll benefit from itemizing. Otherwise, take the standard deduction.
Step 5: Subtract Qualified Business Income Deduction (If Applicable)
If you’re self-employed or own a small business, you may qualify for the Qualified Business Income (QBI) deduction. This allows you to deduct up to 20% of your qualified business income. Check the IRS QBI Deduction page for more details.
Step 6: Determine Your Taxable Income
Once you’ve subtracted all applicable deductions, you’ll arrive at your taxable income. This is the amount the IRS uses to calculate your federal income tax liability. Your taxable income will fall into one of the seven federal tax brackets, and your tax rate will depend on your filing status and income level.
Step 7: Apply Tax Credits
After calculating your tax liability, you can reduce it further by applying tax credits. Unlike deductions, which reduce your taxable income, credits directly reduce the amount of tax you owe. Common tax credits include:
- Child Tax Credit
- Earned Income Tax Credit
- Education credits (e.g., American Opportunity Tax Credit)
- Energy-efficient home improvement credits
Tax Laws and Resources
Tax laws can change frequently, so it’s important to stay updated. The IRS provides detailed guides and resources to help you understand your tax obligations. Refer to IRS Forms and Instructions for the latest information and forms.
At People’s Tax Advisors, it is our goal to maximize your deductions and credits and get you the maximum refund possible. Visit us to set up your virtual appointment now!
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