How to calculate taxable income

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To 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 followed the guideline below:

  • 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 just to mention a few the following items:

  • Taxes paid
  • Mortgage interest
  • Educational expenses
  • Medical expenses
  • Contributions
  • 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.

Real life examples showing how to calculate taxable income


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 have been 50,000 − (11,400 + 14,600) = 50,000 − 26000 = 24,000 

If she had taken the standard deduction, she would have ended up paying more taxes.

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