What is Taxable Income

Once we begin our professional career and start earning, there are many things related to financial management which we must be aware of. Paying taxes to the government where we live and work is mandatory in all parts of the world. So if you are earning and living in the United States, you should be aware of what is taxable income for a corporation and also for individuals.

Taxable Income in the United States

In simple words, taxable income is that income on which you are required to pay federal taxes. The amount beyond which you have to pay the income tax is decided by the tax authorities after careful research. The incomes of people belonging to different age, localities and occupations is studied and the overall scenario is studied before deciding what the taxable income should be. The taxable income brackets are useful in determining the tax which an individual owes to the nation or state. By consulting your tax consultant you can easily get to know about what constitutes as taxable income for social security.

Maintaining the complete details of all your investments is essential for understanding what taxable income entails. From the total gross income, the contribution to the retirement plans, health insurance deductions, education expenses etc are deducted and what remains would be your taxable income. So, taxable income deductions help you to save a lot of money. The taxable income formula been stated below.

Taxable income = Total gross income - deductions availed by the person.

Income from all sources is considered while calculating your total tax liability. Taxation laws and tax deduction rules are different in different countries and hence if you are migrating to some other place for work, then you should inquire and be aware of the laws in those countries.

Penalties for Tax Evasion

The internal revenue service tax evasion penalties can be quite strict and it has actually helped to recover taxes from people. The fine for tax evasion can be around $100,000 and a person may face jail sentence for a period of up to five years. At the same time, there are laws to prevent people from providing false income details at the time of filing for income taxes. A person who gives false income information may get an imprisonment sentence of three years and/or a fine which could be equal to that for tax evasion. Apart from disclosing the right income, taxes need to be paid before the last date given to all tax payers. Failure to do so can attract a penalty which can be equal to five percent of the total taxable amount of the person.

Hopefully, this article has helped you understand the importance of knowing how taxes are calculated and why one should pay them in time. A good tax paying history can help you get loans when needed and hence will benefit you in the long run. So, pay your taxes and enjoy the benefits!