Gross income is where the IRS starts in order to figure out how much in taxes a person should pay. There’s a difference between gross income and wages, and sometimes it can be confusing. While wage earnings make up 80% of what is considered gross income, any income, whether it’s actually earned or not, is consider wages and is not tax-exempt, according to the IRS.
What is counted as gross income includes a lot of different income streams. This can include investments, capital gains, dividends, social security, as well as money coming in from paying professions. This includes commissions earned on sales and bonuses. Any gambling winnings are included as well. Royalties on intellectual property also count as a part of gross income and are subject to be calculated in to be taxed.
People who own their own business are considered self-employed, and figure out their taxable gross income in a slightly different way. It’s important to note that revenue and income are two separate things. Revenue comes from business, and total revenue is calculated through subtracting allowable business expenses, which is then called gross profit. Gross income is actually called net business income for business owners.
Taxble income isn’t actually term that’s used by the IRS. It’s a term that’s developed through common use and has several different meanings. Most of the time, it’s related to what’s called adjusted gross income, or AGI. This is the number a taxpayer is left with after credits, deductions and other tax considerations, according to the IRS.
Gross income is significantly reduced by several types of deductions to the taxable income.
Personal exemptions are one of the first deductions taken out of gross income. A personal exemption can apply to spouses, family members, or children. Taxpayers have the option to take standard deductions.
Itemized Deductions Vs. Standard Deductions
Itemized deductions work in two ways; the first is tax credits and the second is through tax deductions.
– Tax credits work by taking an owed tax amount off of the total tax bill. For instance, if I person owes $14,000 in taxes, and they receive a tax credit of $2,000, their full amount owed will be $12,000.
– Deductions work differently. Different tax brackets require a different percentage of income as tax dues. So if a person receives a tax deduction of say $6,000, and is in the bracket where 25% of taxes are owed, it means that their taxes will be lowered by 25% of $6,000, or $1,500. If they make $73,000 per year, their taxable income will become $71,500.
Standard tax deductions are specific amounts that are available for different members of society. In 2018, a single person could claim $12,000, while married couples could claim $24,000 when turning in a joint filing.
Itemized deductions are expenses, usually related to professional or business expenses, that the IRS allows to taxpayers to decrease their taxable income. This means that the amount of taxes they owe overall will also decrease, leaving them with their adjusted gross income, or AGI. Sometimes applying the itemizing approach can be advantageous to creating a larger amount of deductions.
Some American residents don’t have the choice as to whether to use a standard deduction or itemize. For instance, if a married couple files separately, they have to claim the same type of deduction. Non-resident aliens have to choose itemizing.