What Is Taxable Income?

Learn about taxable income in this Howcast finance video with expert Gregory McGraime.

Transcript

Taxable income is a really important number to know and it's an important distinction to make because a lot of times you may earn a high salary and think you're in a high tax bracket, when in reality you might be in a much lower bracket and this can affect a lot of planning decisions that you may be making. Let me give you a context of how that works just to show you the difference between your regular income and what taxable income is. Let's say I make $100,000 a year and that's my salary. But if I contribute $10,000 to a retirement account at work for example like a 401k, often times that number will come off the top. So I was making $100,000 but I contributed some money, now I reduced my income to $90,000. Then I may have deductions like a standard deduction or itemized deductions or above the line deductions that could reduce my income further. So let's just say in that example, I have $20,000 of itemized deductions, now my income is going from $90,000 down to $70,000 so it's very possible that $70,000 is my taxable income, and you can see that's much different from what my full salary was. And the reason that number is so important is because that's the number you end up paying taxes on, not some other number that you're starting with before you're taking into account all these other things. And so very often, people will think they're in a much higher tax bracket than they really are because they're confusing their gross income with their taxable income.

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