Taxable Income

All income is presumed to be taxable. However, U.S. tax laws provide that income is taxed in a variety of ways. Here's how different types of income are taxed in the U.S., and how to take advantage of these differences in your tax planning.

Taxable Income Tools and Resources

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Federal Income Tax Brackets and Rates for the 2021 Tax Year
Frequently Asked Questions
  • What is taxable income on a W-2?

    Form W-2 is the annual "Wage and Tax Statement" that reports your taxable income earned from an employer to you and to the Internal Revenue Service (IRS). The form also includes taxes withheld from your pay, as well as Social Security and Medicare payments made on your behalf by both you and your employer. Box 1 on the W-2 reports your total taxable wages or salary, and Box 2 reports how much your employer withheld from your paychecks for federal income taxes. 

  • How do you calculate taxable income?

    When you file your tax return, you'll start with your gross income and take several deductions to get your adjusted gross income (AGI). Then, you'll subtract other deductions to arrive at your taxable income, which is what the IRS uses to determine how much you owe for the year before credits. If you qualify for tax credits, you'll apply them directly to your tax liability, reducing it dollar for dollar to get your final tax bill for the year.

  • How do you reduce taxable income?

    Your adjusted gross income (AGI) is the key element in determining your taxes. It's the starting number for calculations, and your tax rate and various tax credits and deductions depend on it. Credits and deductions that can help reduce your taxable income include contributions you made to a traditional IRA, health savings account, or flexible spending account, gifts to charity and cash donations, and child tax and earned income credit can help you reduce your tax bill.

  • How much social security income is taxable?

    You almost certainly won't have to pay income tax on your Social Security benefits if they are your only source of income. That means your Social Security income probably isn't taxable if you never got around to investing in a 401(k), if you don't rent out a property for profit, or if you've given up working entirely. However, if you have other sources of income in addition to your Social Security benefits, the taxable portion will be either 50% or 85% of your benefits.

  • What income is not taxable?

    In 2021, there are several types of non-taxable income including needs-based public assistance, including supplemental security income, disability benefits for which your employer paid the insurance premiums, workers’ compensation payments, employer-provided health insurance, life insurance death benefits—but not proceeds when a policy is cashed in, child support, alimony, as well as inheritances and gifts under a certain amount. 

Key Terms

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