Income tax preparation involves a variety of calculations to arrive at the amount of taxes you owe or the refund you will receive. One of the first steps in preparing your taxes involves estimating your taxable income. Your taxable income is your adjusted gross income after subtracting applicable credits, deductions and exemptions. With this figure, you will have a realistic idea of your tax burden.
Add all earned income together. Earned income includes wages, salaries, tips, commissions, employment bonuses, stock options, unemployment benefits and sick pay benefits.
Total all unearned income together. Unearned income includes dividends and interest accrued from investments, farm and business income, profits from the sale of assets (capital gains), collected rental payments, winnings from gambling, royalties, alimony, Social Security payments and retirement fund earnings.
Add all earned and unearned income together to arrive at your gross income.
Deduct expenses from your gross income. As of 2011, the following deductions may apply. Educators can deduct up to $250 of qualified educational expenses. Expenses connected with an occupational move may be deductible provided they meet IRS criteria. Students with student loans may be able to deduct the interest from their student loans. If you have alimony payments, IRA contributions or self-employment taxes, you can also deduct at least a portion of these expenses. The biggest deductions, for most taxpayers, will involve their homes -- any mortgage interest paid on a primary or second home is deductible, as are state or local property taxes associated with those homes. Vehicle taxes that are associated with vehicle value are also deductible.
Subtract exemptions from your gross income. As of 2011, married couples who file a joint return get a standard deduction of $11,600. In addition, the IRS set the value of every personal and dependent exemption at $3,700. If you have itemized deductions such as mortgage interest and charitable contributions that amount to more than the standard deduction, itemize your deductions on your income tax forms instead of taking the standard deduction.
Subtract tax credits available to you from your gross income. Eligible tax credits may include earned income credit, child and dependent care tax credit, home improvement credits and energy efficiency improvements to your home such as window replacements, insulation installation and solar energy system installation. Follow the credit guidelines to deduct the correct percentage of your expense from your gross income.
Items you will need
- After subtracting your expenses, exemptions and credits from your gross income, the result is your taxable income. This is the income you will use to calculate your income tax forms.
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