How to calculate taxable incomeTo 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) Taxable income = 50,000 − 39,100 Taxable income = 10,900 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 




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