Taxable income—what is it and how does it affect your taxes?
Most types of income are taxable based on IRS rules. This includes money you make from a job or self-employment, investment income, unemployment pay, lottery winnings, and many other income sources.
Only a few types of income are not taxable at the federal level. But IRS deductions, credits, and other adjustments can help reduce your taxable income and total tax bill.
What’s taxable and what's not?
Here are some of the most common types of taxable and nontaxable income. For more help determining what to report on your taxes, talk to a Tooltip or visit www.IRS.gov.
Taxable (earned, unearned, and other)
- Wages, salary, tips, commissions, and bonuses
- Self-employment income
- Union strike benefits
- Certain disability payments
- Unemployment pay
- Other taxable employee compensation
- Rental income
- Retirement account withdrawals
- Social Security income (up to a certain percent, depending on your total income)
- Pension income
- Capital gains, dividends, and interest
- U.S. savings bonds
- Prize, gambling, and lottery winnings
- Alimony payments (if the divorce was final before 2019)
This list is not all inclusive.
- Gifts or inheritances you receive
- Child support
- Life insurance proceeds (after the insured person’s death)
- Interest from municipal bonds (may be subject to alternative minimum tax and state tax for out-of-state bonds)
- Disability income (if you paid the premium with after-tax dollars)
- Certain employee benefits
How does your taxable income affect your taxes?
While most income must be reported on your taxes, the IRS allows you to make certain adjustments and exclusions to reduce your taxable income. Your final taxable income and tax bill are determined only after all allowed deductions and other adjustments are subtracted from your gross income.
All of the taxable income you receive for the year. You’ll report it on your tax return (Form 1040). It includes all of your earned income, unearned income, and other taxable income before any deductions, credits, or other adjustments are subtracted.
Modified adjusted gross income (MAGI)
Another income calculation you might hear about. It doesn’t appear on your main tax form, but the IRS uses it to determine your eligibility for certain tax credits, as well as net investment income tax. It’s your AGI with certain deductions or income added back in.
How does your final taxable income affect your tax bill?
Your final taxable income determines your tax bracket and tax rate. But all of your income isn't taxed at one flat rate. Instead, it's taxed in a graduated manner.
Here's an example:
Let’s say you're a single filer. Your AGI is $80,000 and your final taxable income after your standard deduction is $67,800 ($80,000 minus $12,200). Your marginal (highest) tax rate would be 22%. But your income would be taxed like this:
|Tax rates||2019 tax brackets||Amount of your income taxed at this rate||Tax liability|
|10%||$0 to $9,700||$9,700||$970|
|12%||$9,701 to $39,475||$29,775||$3,573|
|22%||$39,476 to $84,200||$28,325||$6,232|
||Total income: $80,000||
Total tax liability: $10,775
Your effective (average) federal tax rate would be 13.5% ($10,775 divided by $80,000)—not a flat 22%.