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Author: Admin | 2025-04-27
About taxable income above. Taxable income is what you’ve earned minus deductions and credits. Deductions are expenses that you’re allowed to deduct from your gross income, which is what you’ll find in box 1 of your W-2 form. (If you’re self-employed, your taxable income is all the money you’ve received for doing that thing you do.) You also owe income taxes on certain other income, such as interest from bank accounts, which is reported on Form 1099-INT, as well as dividends and capital gains, which are also reported on Form 1099. Most people take the standard deduction, which is available to all taxpayers. Single taxpayers can deduct $14,600 from their gross income, up from $13,850 the previous year. A person with $64,600 in gross income, for example, can reduce their taxable income to $50,000. The standard deduction for couples filing jointly will rise to $29,200 in 2024, up from $27,700 the prior year. You should figure out your itemized deductions before you take your standard deduction. The tax law lets you deduct a myriad of expenses, the most common of which are mortgage interest and medical expenses. If you have a honking big mortgage or big medical bills, it may be worthwhile to itemize your deductions. A few deductions are called above-the-line deductions, which means you can take those even if you take the standard deduction. These include teacher expenses, contributions to health savings accounts, part of your self-employment tax, health insurance premiums, alimony paid and contributions to traditional individual retirement accounts (IRAs). They’re great, that’s what they are. A tax deduction lowers your taxable income, which lowers your tax bill. A tax credit reduces your tax bill dollar for dollar. If you owe $600 in taxes and have a $500 tax credit, your tax liability falls to $100. Normally, you can only take a credit for as much as you owe. If you have a $500 credit and a $300 tax bill, you can only reduce your bill to zero. But there are a few wonderful exceptions to that rule. Refundable tax credits, such as the Earned Income Tax Credit (EITC), can not only reduce your tax bill but also turn a bill into a refund. Say you have a $600 tax bill. A $700 refundable tax credit would turn your $600 bill into a $100 tax refund. John Waggoner is a contributing writer of all things financial for
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