Determine (and Reduce) Your Taxable Income

Tax time only comes once a year — and the date to file will be here before you know it — so a little refresher before we get into the swing of things probably wouldn’t go amiss.

Your taxable income determines how much you pay in state and federal income taxes and H&R Block explains how tax laws view your income and determine what is considered taxable—and to remember to use adjustments to reduce your income.

1. Determine filing status

Filing jointly is usually best for married couples, but you can file separately, which means dividing up deductions. If you aren’t married, you file as single — simple enough.

2. Consider types of income

There are two general classifications of income, the first being the obvious earned income. Earned income comprises wages, tips, salary and income from ventures you are involved day to day.

The second type of income is unearned income, or money you receive even though you didn’t do any active work for it. For instance, money received from selling investments, dividends, retirement account distributions, Social Security benefits and gambling are all considered unearned.

3. Figure taxable income

It’s not just enough to add up all of the income reported and claim that is your taxable income. Now, you have a chance to adjust it a little and be taxed less. You can reduce your income. You can contribute to qualified Health Savings Account and IRA plans to reduce the amount of taxable income or claim student loan interest you’ve paid.

To see more ways to lower your tax liability, click here.

Read more:

Why Your Practice is Your Most Important Tax Shelter