For tax purposes, your adjusted income is the gross amount you have left after taking your deductions. The remaining adjustable tax income is the amount on which you owe federal, state and local governments. To figure out your taxable income, you either itemize your deductions or take a standard deduction.
You must report all forms of income you received during the year to come up with your gross income before taking deductions. Income includes wages and salaries you received for work; tips and commissions, and fees and stock options. If you have your own business, your income will be compiled from Internal Revenue Service Form 1099s you’ll get from companies or individuals that paid you more than $600 in the year. You typically receive a W-2 form from employers that itemizes all your work-related benefits. Income also includes interest from investments, alimony, stocks and rental income.
The standard personal deduction varies from year to year; the standard deduction for single individuals was $5,950 in 2012. Married couples filing jointly can take a standard deduction of $11,800 as of 2012. The standard deduction also is available for people filing as head of household, as well as if you file "married filing separately," with all classes receiving increases in the amount allowed. The amount you come up with after subtracting the standard deduction is your adjusted taxable income.
If you own a house, itemizing your deductions can lower your tax burden because all the interest on your mortgage is tax-deductible. This lowers your adjusted gross income and the amount of taxes you’ll end up paying. You’ll also be able to deduct medical expenses above a certain amount, charitable contributions and capital losses. If have any work as an independent contractor, all your business expenses are deductible.
While most homeowners have used the itemized deductions to lower their taxable income figures, as the standard deductions rise and home values fall, you may want to reconsider how you file your taxes. Itemization is worth the extra work only if the sum total of your deductions is more than the standard deduction. The goal of tax preparation is to reduce your taxable earnings and pay taxes only on the amount you really owe.
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