Taxable Income — is a portion of income subject to direct taxation. It is reduced by the expenses and various deductions. Taxable income is computed as an AGI minus the deductions. They include bonuses, wages, investments, and other types of unearned income. Usually, all types of revenues are imposed by taxes. However, some sources of revenue are subject to tax exemption.
What Is Taxable Income
The individual should understand that the taxable income doesn’t equate to salary. Not all money received is taxable because some payments may be a form of social support. The taxable income of juridical persons is an income left after all selling and marketing expenses.
First, it is necessary to define which income is considered taxable, because it can be taxable and nontaxable. Typically, all types of income are viewed as taxable unless otherwise stipulated by law. If an income is taxable, it doesn’t matter whether it was received by cash, check, or electronic payment.
Types of taxable income:
- Compensation payment and bonuses. This type of income includes salaries, emoluments, and additional benefits.
- Investment and income from commercial activity. This income is related to self-employed people.
- Interest from saving account. The interest is considered an addition to the income, so it is taxable.
- Stock options. They are taxes depending on the capital tax rate. Long-term ones are 60% taxed, and short-term ones are 40% taxed.
- Dividends. They are considered part of a personal income tax.
- Income from rent of the real estate. It is considered a passive income.
- Unemployment compensations. They are taxable in the year of receiving.
The nontaxable income isn't subject to direct taxation because they are one-time payment or governmental support. There are many types of nontaxable incomes. For example, the income received from churches is considered nontaxable. Another example is the insurance received after the death of a relative. Dividends aren't subject to tax when they are a return of capital and not a part of the profit. As for the lottery winning, in some countries they are considered taxable ones, in others — they are not.
Types of nontaxable income:
- Gifts. They are nontaxable because they are usually a one-time donation.
- Inheritance. However, some types of inheritance are taxed as income in respect of a decedent. For example, partnership income or royalty.
- Welfare benefits. This is governmental help for the disadvantaged.
- Child support payments. This is governmental help for the parents.
- Cash rebates. They are nontaxable because it’s a discount and not an income.
Calculation of Taxable Income
Calculation of taxable income is necessary to define a sum of taxes to pay. Individuals do this themselves or hire professional accountants. Also, there is the accounting software which helps to calculate the taxable income.
How to calculate a taxable income:
- Select the filing status. It will define the tax returns. Individuals with dependent family members have more tax returns. Also, there are tax returns for widows with children.
- Find the documents approving the sources of income. It can be the paychecks, payment slips, financial aid certificates, or statements of account.
- Define the adjusted gross income. To do so, it is necessary to add up the revenues from various sources of income (salary, house property) and subtract the deductions from the sum.
- Define the deductions. There can be charitable endowments, medical expenses, mortgage, gambling losses, home office deductions, deductions for freelancers, student loans, or teacher’s deductions.
- Define the taxable income. You can compute the taxable income using the corresponding formula. There are different formulas for individuals and corporations. To do so, use the Excel application or the accounting software or free online program. The software is better because the developers provide numerous opportunities and additional functions.
Taxable Income and Tax Fraud
Sometimes individuals and firms aim to avoid or decrease taxation. This is quite a serious crime because in developed countries tax fraud is considered theft from the government and taxpayers.
Tax evasion is the most common crime related to taxes. Tax evasion is an action aimed to conceal or decrease real income. In various countries, tax evasion is punished under a civilian or criminal code.
The alternative to tax evasion is tax avoidance. Tax avoidance is the legal way to decrease taxes. To avoid taxes the taxpayers may use deductions and tax credits. The avoidance helps individuals with dependent relatives, students, charity providers, and persons who spend too much money on their health.
Another avoidance also works for the investors and legal entities. There are tax deductions for the investment in social programs. Also, the businessman can indicate the startup as a business expense. These initiatives stimulate the attraction of financial resources to the social sector and the improvement of the business environment.