Most of your income will be reported to you on your Form W-2, Forms 1099, and Schedule K-1. If you are self-employed, you will report your own income on Schedule C. If you receive unemployment benefits, those are also fully taxable.
Interest and dividend income is also taxable. In most cases, dividends paid by domestic corporations and some foreign corporations are taxed at favorable rates in the same manner as net long-term capital gains. Unemployment compensation is taxable, while workers’ compensation payments are not taxable. In order to qualify as non-taxable workers’ compensation benefits, the payments have to be made based on the authority of a law providing compensation for on-the-job injury or illness.
On your income tax return, taxable income is the result of several mathematical calculations involving deductions and credits. The starting point for your income tax return is your total income. This includes your wages, salaries, and tips; taxable interest and dividends; taxable state refunds or credits; alimony received; business income or loss; capital gain or loss; IRA distributions; other gain or loss; pensions and annuities; rental real estate, royalties, partnership income, S corporation income, income from trusts, etc.; farm income or loss; unemployment compensation; social security benefits; and other income.
Once you have your total income, there are adjustments to subtract to arrive at adjusted gross income. These adjustments include Archer MSA deduction; certain business expenses of reservists, performing artists, and fee-basis government officials; health savings account deduction; moving expenses; half of self-employment tax; self-employed SEP, SIMPLE, and qualified plans; self-employed health insurance deduction; penalty on early withdrawal of savings; alimony paid; IRA deduction; student loan interest deduction; jury duty pay you gave to your employer; and domestic production activities deduction. After subtracting these amounts, you have arrived at your adjusted gross income.
After you have determined your adjusted gross income amount, there is one more deduction to take to compute your taxable income. At this point, you will either subtract the standard deduction for your filing status, or subtract your total itemized deductions. Itemized deductions consist of deductions for medical and dental expenses, interest you paid, taxes you paid, gifts to charity, casualty and theft losses, job expenses and certain miscellaneous deductions, and other miscellaneous deductions.
After subtracting your standard deduction or itemized deductions, you have your taxable income. From here, you would look up your taxable income in the tax tables to determine your tax amount.
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