Home > Mom's Life > Family Finances > Understanding Finances > What's Your Taxable Income?

What's Your Taxable Income?

Before we begin the process of understanding taxes, take a look at the formula below to calculate our taxes:

To Calculate Taxes Payable:

Add all Taxable Income
(Subtract Adjustments)
Result is known as Adjusted Gross Income (AGI)
(Subtract Standard Deduction or Itemized Deductions)
(Subtract Number of Exemptions × $3,100)

Result is your Total Taxable Income
Calculate Tax

(Subtract Tax Credits)
Result is the actual tax to be paid

Taxable income is the amount of your income on which you pay taxes. Yeah, we know. You thought for sure you were paying taxes on every cent you make, or your taxes wouldn't consume such a large chunk of your income, right? Well, if it seems that way, you're right. We work for a good part of the year just to make the money that we pay in taxes, and it can be mighty discouraging if you dwell on it.

But you're not going to dwell on it. Instead, you're going to figure out how to make less of your income taxable. You're still going to pay taxes; don't get us wrong. But you might be able to whittle them down a little bit and give yourself a little more money for other things.

Show Me the Money

Your taxable income is the amount of your income on which you begin calculating your final tax liability. Nontaxable income is income that is exclud-ed from tax liability.

You have to pay taxes on the money you earn by working, your income may come from sources other than your paycheck. For instance, the interest you earn on the money in your 401(k) plan is income, but it's not taxable income. This income is referred to as nontaxable income. You get to earn it for free (for now, anyway). Theoretically, you could make all your income nontaxable. Of course if you did that, then you wouldn't have a salary or any money to live on. But at least you wouldn't be paying any taxes!

Let's have a look at what's taxable income and what's not. Taxable income includes the following:

  • Your salary, with the exception of money you may have deducted and put into a 401(k) plan
  • Interest earned on savings and checking accounts
  • Interest on all bonds except municipal (tax-free) bonds and dividends on investments
  • Bonuses, severance pay, and sick pay from your employer
  • Unemployment compensation
  • Tips
  • Capital gains on mutual funds and other investments. (Capital gains are the amount by which proceeds from the sale of a capital asset exceed the cost. They're the profit you make.) Although the tax rate on capital gains is different than regular taxable income, it's still considered taxable income.
  • Bartering, royalties, and gambling winnings, including lottery winnings
  • Most withdrawals from an IRA or annuity

Nontaxable income includes the following:

  • Money you contribute to certain types of retirement accounts
  • Disability income on benefits you paid for with after-tax dollars
  • Funds contributed to a Flexible Spending Account used for childcare or medical expenses through work
  • Return of invested capital—that is, your money invested that is returned to you
  • 401(k) money that's rolled over into another 401(k) or IRA when you change jobs
  • Child support payments
  • Money you've lent that is repaid

Use this information about taxable and nontaxable income to help you to be smart when it comes time to figure out what to do with the money from your salary that you don't need to cover your expenses.

More on: Family Finances

Excerpted from The Complete Idiot's Guide to Personal Finance in your 20s and 30s © 2005 by Susan Shelly and Sarah Young Fisher. All rights reserved including the right of reproduction in whole or in part in any form. Used by arrangement with Alpha Books, a member of Penguin Group (USA) Inc.

To order this book visit the Idiot's Guide web site or call 1-800-253-6476.


8 Epic Emoji-Themed Crafts, Activities & Recipes
Check out the best emoji crafts, activities, and recipes! They're perfect for an emoji-themed birthday party or anytime you need DIY (and screen-free!) summer activities for kids, tweens, and teens.

Find Today's Newest & Best Children's Books
Looking for newly released books for your child? Try our Book Finder tool to search for new books by age, type, and theme!

10 Free Summer Learning Worksheets
Print these free printables for preschoolers and kindergarteners to help your child's mind stay sharp until September!

Ready for Kindergarten?
Try our award-winning Kindergarten Readiness app! This easy-to-use checklist comes with games and activities to help your child build essential skills for kindergarten. Download the Kindergarten Readiness app today!

stay connected

Sign up for our free email newsletters and receive the latest advice and information on all things parenting.

Enter your email address to sign up or manage your account.

Facebook icon Facebook icon Follow Us on Pinterest

editor’s picks