Knowing your total household income helps you better plan your budget for the year so that you know how much you can afford to spend on various expenses. In addition, lenders often want to know your household income before issuing you a credit card, car loan or mortgage. Generally, household income includes the gross income of each person over 15 years old living in the home, and gross income refers to all the income earned prior to any withholding for taxes or other deductions. As a result, you can’t just look at your paychecks and add them up because you’d be missing out on the amount of money that your employer withholds for income taxes. To find your annual household income, add up the gross income for each person in your household.
Income From Working
For many people, the biggest source of annual income is from working, either as an employee, a self-employed individual or an independent contractor. If you’re an employee, the easiest way to find your annual income is to look at the W-2 that your employer sends you and look at your total income for the year. If you work as a contractor, each of your employers should be sending you a Form 1099-MISC at the end of the year documenting how much you were paid. Even if you don’t receive a tax form, such as if you earned less than $600 from an employer, you still count those wages as part of your annual household income.
You might also have income from investments that you can include in your annual household income. For example, if you have money in a bank account that earns interest, that interest counts as part of your household income for the year. Similarly, if you sell investments such as stock or mutual funds for more than you paid for them, or if a stock you own pays dividends, that also adds to your household income. For other people, rental property investments can also generate additional income each year.
Other Types of Income
If you’re divorced, you might be receiving alimony from a former spouse that can be included in your household income. Or, if you’re retired, you should also include Social Security benefits and any distributions from retirement plans, such as IRAs and 401(k)s. Even if you have Roth accounts and the distributions aren’t included in your taxable income, you can still count those withdrawals as part of your household income.
- Be careful when using your annual household income to develop a budget or savings plan; remember that this amount is before taxes or withholdings. It is better to develop spending plans from the amount of money that you actually take home, or the net amount. Planning a budget from the gross amount can cause you to think that you have more money than you actually do.