U.S. Individual Income Tax Part 4 How to Calculate Your Taxable Income?
Some people may be interested in how to calculate own taxable income (line 11b in Form 1040). This article will give you a brief guideline.
Step 1 Total Income
The IRS requires you to report all your income that you have received during the tax year. This includes your wages, taxable interest, ordinary dividends, taxable IRA distribution, taxable pensions and annuities, taxable social security benefits, capital gain (attach Schedule D) and other income (attach Schedule 1). Your total gross income is determined by adding up all types of income.
Step 2 Adjusted Gross Income (AGI)
Your AGI is the next step in figuring out your taxable income. Once you report all of your income on your Form 1040 and Schedule 1, you will then have the chance to adjust your income on Schedule 1.
Using Schedule 1 (“Additional Income and Adjustments to Income”), you may be able to reduce your income with the help of contributions to a student loan interest, self-employment deductions, and other expenses. Adding these up on line 22 of Schedule 1 gives you the total adjustments. Your Adjusted Gross Income (AGI) is then calculated by subtracting the adjustments from your total income.
You then subtract certain deductions from your AGI. Typically you can take either the standard deduction or itemized deductions. If you’re a business owner you may also be eligible for the qualified business income deduction.
Step4 Taxable Income
Subtract deductions from your AGI, you will figure out your taxable income on which your taxes are calculated. After you figure your tax, you may be eligible for certain credits that lower your tax liability, such as the child tax credit.