# How to calculate taxable income

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

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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