What is Considered Taxable Income For The Average Earner?
Typically, you need to file your personal income tax forms by April 15, but in 2020, you have until July due to the COVID-19 pandemic. You still need to know what you’re doing though. The tax date delay just gives you a little longer to learn the details of personal income taxes.
Taxable Income Defined
In accounting terms, your taxable income refers to the income amount used to calculate your income tax in a single year, also called the adjusted gross income (AGI). The AGI refers to the individual’s total income minus allowed exemptions and deductions. Broadly, your gross income includes your wages and salary, any bonuses or tips, investment income, and unearned income. After you have calculated all of that, you get to apply the deductions and exemptions to get to your AGI.
A Few Quick Takeaways
Your taxable income includes earned and unearned income.
The IRS provides deductions and exemptions that you can apply to your gross income to reduce your taxable amount.
You get to choose between a standard deduction or itemized deductions – whichever saves you more money.
Taxable Income For The Average Earner
One of the key things to learn is what the Internal Revenue Service (IRS) considers taxable income. The other thing you need to learn is what the IRS considers an average earner.
Now, why do I say that?
Well, unless you make a fabulous salary, recently inherited a gob of money or regularly make a killing in the stock market, you should keep reading. That means you qualify as the average earner.
You probably either will take the standard tax deduction or you will file form 1040 or 1040-A. Chances are good that you do not qualify for the 1040-EZ form. While the one page form could save a lot of time, only certain folks can use it.
First, let’s learn the definition of the average US earner.
The Average US Earner Defined
Okay, for just a second, think back to your college stats class. Although I describe the average US earner, the income described will be the median income of a US household as determined by the US Census Bureau (USCB) in 2018, the last year for which USCB has complete data.
Here’s why. When you use an average, the really low and high numbers skew the result. That means it does not really provide a clear picture of what the majority of people make. It causes, in the case of wage earners, those few making very little and those making a huge amount. Instead, use the median to get a clear picture of the actual most typical income.
The typical American earns a median income of $63,179. That shows an increase in earnings of 0.8 percent from 2017 and double bonus, that marked the first time that happened since 2007. According to the Bureau of Labor Statistics (BLS), the median weekly wage for US workers in fourth quarter of 2019 was $936.
Regionally Different Median Incomes
Of course that varies by region, too, but the figure works pretty well as a typical annual earning. In the Northeast, the median household income goes up with residents of that area earning a median of $70,113 annually. On the West coast, people earn about that with a median salary of $69,520 each year. The Midwest median rises slightly above the national median at $64,069 annually. In the South though, the median annual household income drops a few thousand below the national level to $57,299 a year.
Gender and Earnings
Regardless of the area of the country, men continue to earn more money than women. We’re talking a pretty significant difference of about $10,000. A female working full-time in the US earns a median income of $45,097, while a male earns a median income of $55,291.
Ethnic Differences in Median Income
In addition to variation on earnings depending on where you live and your gender, ethnicity also seems to divide higher earning individuals from those closer to the median and beneath it. While not a predictor of earnings, a clear difference does exist among ethnic and racial groups. Those of Asian-American ethnicity earn a median income of $87,194 annually, out-earning all other racial groups. Caucasian-American households earn a median annual income of $66,943, nearly $21,000 less. Hispanic-American earners generate an annual income of $51,450. African-American earners generated the lowest median incomes, earning a median annual salary of $41,361. So, now you have a decent idea of the median income of an American resident. You also have an idea of the range of earnings and how it can differ depending on where you live, your gender and your racial background. All this means that the taxable income discussed herein should be accessible ideas to everybody reading this. This article will delve into the items contributing to your taxable income – the stuff the IRS looks at to determine your gross income which is the number on which they base your taxes due.
What is Unearned Income?
Why, I am so glad you asked! You probably get that your earned income refers to money you earned at a job. It means salary, wages, tips if you work as a waiter, waitress, cabby, delivery driver, etc. Well, unearned income refers to everything else.
Woah. Sounds huge, right?
It is. Massive. Everything means…everything. Dude, it’s a long list.
It is a really long list. You can use those extra months to gather up everything you need and make a list and check it twice.
Accuracy means everything. Sometimes you only qualify for a deduction if you earned a certain amount. You need to have every number right before you begin.
Itemized Deductions Defined
If you choose the standard tax deduction, the IRS will have lumped together a bunch of really common deductions and the provided the amount for which the majority of people qualify. In 2020, for individuals it equals $12,400 and for those married and filing jointly it equals $24,800. You subtract that one huge number and then you’re done. Snazzy. Click to file it or mail it, if you still do that.
Let’s say that you have an inkling, as my Dad would have said, that you would gain a far larger deduction by simply itemizing. It can happen and pretty easily. Here’s a quick list of the many things you, the average earner, can deduct.
individual retirement account (IRA) contributions,
interest paid on mortgage loans,
certain medical expenses,
a portion of the costs associated with your home office and the utilities used for your business.
Of course, that is not an exhaustive list. It gives you an idea though of how quickly things can add up. If you have a $2,000 per month mortgage payment and you use your home as an office you can take a deduction for that. For ease in math, let’s say you dedicated half of your home to the business. You spend $1,000 on business rent then and get to deduct it. You also opened an independent IRA to which you contribute each month. Voila! You, as a individual, already have more itemized deductions than the standard deduction provides.
Many people benefit from taking the itemized deduction. A lot of folks associate itemizing with the wealthy, but you can probably see where a person with a moderate income would do well to itemize.
When Your Salary Is Not Taxable
The IRS recognizes that some people do not earn much and give most of their time to helping others. It considers their earnings non-taxable. Typically, this includes religious organization employees in one of the following situations:
members of religious organizations who took a vow of poverty,
work for an organization run by the religious order,
donate your earnings to the religious order.
Under certain conditions, employee achievement awards go untaxed.
Now that you know that, let’s look at the other income that the IRS does not tax. They are nice about providing you with a lot of freebies so you get to keep more of your hard earned money.
Other Agencies
While I am not covering other countries’ tax systems, you should know that everywhere does this differently. For example, just across our northern border in Canada, the Canada Revenue Agency (CRA) does not tax lottery winnings or casino winnings. CRA considers that a one-time non-taxable windfall. The IRS, does tax these. So, if you just moved here or recently did so from another country, you must read the IRS rules because they very likely differ from what you have become used to in your home country. Rather than get in trouble and end up owing lots of penalties, fees and interest, just read and follow the rules in the first place.
It is so much easier to do things right the first time and stay out of trouble.
Speaking of staying out of trouble…
Sometimes, people get bad ideas. Embezzling funds qualifies as a really, no make that R-E-A-L-L-Y bad idea. If you do that and get caught and convicted there is this creek you will be up that starts with an “S.” My ex-boyfriend and his friends will come after you.
You probably think white collar crime, as it gets called, carries small prison terms. Oh, how wrong you are, my friend. Not only will you spend years and years in prison, you must pay the IRS taxes on every penny you stole and the interest.
Like the movie character E.T. the extraterrestrial said, “Be good.”
Go check out a tax table to learn what taxes on a cool million dollars costs you. Tack onto that the penalties, the fees, the interest. Oh, yeah. You owe, you owe. It is off to work you go.
Take Care of Your Taxes.
All You Need In One Place with the Taxry Store.
Stuff the IRS Does Not Tax
Fair is fair.
The IRS charges you taxes on gambling winnings. You also get to deduct gambling losses though. So, that $2,000 you lost at the track, you get to deduct that. That is fair.
Let’s say your grandmama passes away, God forbid. The sweet lady left you her life insurance proceeds. As the policy beneficiary, you inherit the death benefit. The IRS does not tax this money.
While you do orderly pay taxes on your alimony, you do not pay taxes on the child support payments you receive as the custodial parent of a child or children post-divorce. Similarly, you avoid taxation of foster care payments.
For anyone in college, you will be happy to know you’re your fellowships and scholarships avoid taxation. Also, those awarded a post-graduate fellowship avoid taxes on it.
Gifts, whether from your parents, siblings, random strangers or your spouse, etc. go untaxed.
If you got injured in an accident, the personal injury award you received from the individual or their insurance company is not taxable. Neither is any workers compensation payments you get.
The Iffy Categories, Also Known As the Exceptions
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Provide an iffy category. These payments become taxable when your employer paid for the accidental death and dismemberment or liability or other disability insurance policy. You avoid paying taxes on these payments when you paid the premiums out-of-pocket for the insurance policy.
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Becomes a taxable item if it comes from US government bonds. Interest income from municipal bonds issued in your state of residence avoid taxation.
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Become taxable if you finagled a smaller amount owed on your own, like negotiating a lower credit card balance. The cancelled debt avoids taxation if you filed bankruptcy or declared insolvency and you received a Form 1099-C.
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Either do or do not get taxed, depending on your income. This is an entire article by itself, but one most of my readers will not need for many years to come.
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They avoid taxation. You can buy all the Bitcoin you like as well as any other cryptocurrency coin or token. Hold them, or HODL as its called, so you do not need to pay taxes on it. That – the sale – creates the taxation. You might own $5 million worth of Bitcoin, but you would not pay one red cent of taxes on it. If you sell $1 million of that Bitcoin though, the amount of the sale becomes taxable. Here is the other situation. Let’s say you exchange some Bitcoin for some Litecoin. Ah. You owe taxes on the profit from the exchange.
Now, if you hold a virtual currency of any type for the purpose of investment, it becomes taxable. (That is why so many companies create utility tokens. They use a loophole to make their crypto coins attractive for use, but typically untaxable.)
The Upshot
So, as the ex-bf would say, “Now, you know.”
You have a few extra months. Meet with a certified public accountant. They can help you figure out all of this. You may not owe much in taxes after you deduct all the awesome amounts allowed.
Start learning about taxes. You have plenty of free resources online. Start with Taxry and read all the resources to which it links, including the IRS website, Bankrate, US News and World Reports, and others. Even when you use a CPA, you need to understand the basics and know what your accountant talks about. Your understanding can save you money and time.