How do i calculate my annual income
One of the most common questions I'm asked as a tax attorney is "What's taxable?" Believe it or not, that's a pretty difficult question to answer, because the list is so lengthy. A much easier question would be, "What isn't taxable?" This is because our tax system is considered inclusive. In other words, all income is considered taxable unless otherwise excluded.
To figure your taxable income, you must first calculate total income. To do this, include everything you receive in payment for services. That means wages, salaries, commissions, fees, tips, as well as fringe benefits and stock options. Income which is available to you, such as an uncashed check, can still be included under the doctrine of constructive receipt. The same theory applies to deferred compensation: If you could take the income without incurring a significant penalty, it's considered yours when made available -- not when you take it.
In addition to payment for services, you must include other items of income, such as interest and dividends, alimony. business and farm income, capital gains, retirement income, partnership income, net proceeds from rentals and "other income." "Other income" may include income from the pursuit of a hobby; it may also include gambling income or income from illegal activities, like drug sales or prostitution (and no, I'm not making that up).
And don't be fooled: Income doesn't have to be in the form of cash or check. You can also receive income in the form of property or services.
After you've figured your total income, you can deduct some expenses right off the top to determine adjusted gross income (AGI). These include certain qualified expenses for teachers. moving expenses. and
student loan interest. It also includes alimony paid out, deductions for IRA contributions and one-half of self-employment tax paid.
Next, subtract personal exemptions and deductions. Use the larger of your standard deduction or your itemized deductions in your calculation. The result is your taxable income.
You can boil these steps down to this basic formula:
Adjusted Gross Income less (deductions + exemptions) = taxable income
Your taxable income is what you'll use to calculate the tax due, using the applicable tax rates.
There are a few special considerations for 2009 to keep in mind:
- Your economic recovery payment is not taxable for federal income tax purposes.
- A federal subsidy for payment of COBRA health care coverage continuation premiums is not taxable for federal income tax purposes.
- The first $2,400 of unemployment compensation is exempt from federal income tax. Unemployment compensation over that amount is taxable.
- If you benefited from Pay-for-Performance Success Payments under Home Affordable Modification Program (HAMP), the payments are not taxable.
- Despite rumors that were flying around earlier in the year, the receipt of cash or a voucher under the CARS "cash for clunkers" program to buy or lease a new fuel-efficient automobile is not taxable for federal income tax purposes.
- Transit exclusion benefits have increased to $230 a month. Employees may exclude up $230 per month in transit benefits and $230 per month in parking benefits. It's not an either/or situation: You can receive benefits for commuter transportation and transit passes and benefits for parking during the same month.