Comprehensive Guide to Calculate the Percentage of Your Taxable Income

Knowing the exact Percentage of your taxable income plays a crucial role in your planning of the budget of your house, business, or organization. The exact figure of your tax helps us to manage your financial issues and fill your income tax return accurately. 

Moreover, understanding how to calculate the percentage of your taxable income is effectively helpful to compliance with tax laws. Many people are worried about determining the exact percentage of their taxable income. 

Now, don’t worry about that this guide will provide the solution to this problem by explaining the key concepts and providing step-by-step instructions to determine the taxable income and percentage of your income that is owed in taxes.

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Table of Contents

What is Taxable Income?

Sources of Gross Income

Deductions and Exemptions

Steps to Calculate Percentage of Your Taxable Income

How to Calculate the Percentage of Taxable Income?

Conclusion

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What is Taxable Income?

Taxable income is a specific percentage or amount of your whole income that is given to the federal state or federal government by paying local taxes through any means. It is determined by subtracting the deductions and some exemptions from your total gross income.

The taxable income depends on many incomes such as: wages, salaries, bonuses, tips for investment income, and many other types of unearned income. Unearned income is defined as income that is earned without doing any work such as: earned by lottery, government benefits, and strike benefits.

Taxable income also includes earnings that are earned by selling the assets during the year from the dividends and interest income. The taxable income depends on different factors of the gross income and deductions or exemptions from the whole income. Here we discuss its factors.

Sources of Gross Income

Gross income includes all income you receive in the form of money by selling goods, property, and services that are not exempt from tax. This includes:

• Wages and Salaries: Earnings of your job in a private company or any government sector or platform. Your gross income also includes your bonuses, tips, and commissions from your job.

• Business Income: In gross income also add the profits from self-employment or business activities that you run as part-time or as a back-up plan if you are fired from the job.

• Rental Income: Earnings by renting out your property such as a shop, store, land for store, agricultural land, etc.

• Other Income: Some specific incomes also count in the whole income such as unemployment compensation, social security benefits, and other miscellaneous income sources.

Deductions and Exemptions

You can subtract some deductions and exemptions from your gross income to pay a tax to your concerned authority. Some are discussed below:

• Standard Deduction: A fixed amount that reduces the income you’re taxed on, which varies depending on your filing status.

• Itemized Deductions: Specific expenses on some particular real-life use products on which tax is not allowed such as mortgage interest, medical expenses, and charitable contributions.

• Exemptions: These are some specific amounts you could deduct for yourself and each dependent, but have been eliminated under the Tax Cuts and Jobs Act.

Steps to Calculate Percentage of Your Taxable Income

Here we discuss the steps to calculate the percentage of your taxable income by using the data of your different incomes.

• Determine Your Gross Income: Add up all sources of income to determine your total gross income.

• Subtract Adjustments to Income: Subtract the amount from your income, so that certain adjustments can reduce your gross income as contributions to a traditional IRA, student loan interest, and tuition fees. 

• Subtract Deductions: Now choose the standard deduction or itemize your deductions by taking the amount of every nontaxable product amount. However, is a higher or lower amount.

• Federal Tax Calculation: After determining your taxable income, the next step is to calculate the federal tax owed using the tax brackets. Federal tax rates are progressive, meaning they increase as your income increases. For 2023, the U.S. federal tax brackets for single filers might look like this (these figures can change annually):

• Calculating the Tax Percentage: Finally, to find the percentage of your taxable income that you pay in taxes, divide your total tax liability/gross income by your taxable income and multiply by 100. It mathematically can be represented as:

For example: if your total federal tax for the year is $15,000 and your taxable income for the year is $75,000 then the 20% of your taxable income is payable amount as federal tax.

Alternatively, to determine the percentage of your taxable income use the percentage calculator by Allmath to make your calculation easy and faster or without using any manual formula. 

• Alternative Minimum Tax (AMT): Some taxpayers may be subject to the AMT, which requires a separate calculation that affects your overall tax rate. The AMT ensures that high-income earners pay a minimum amount of tax, regardless of deductions and credits.

How to Calculate the Percentage of Taxable Income?

Here we solved the examples to find the Tax percentage of the total gross income with complete steps for a better understanding to determine the percentage.

Example: 

Find the Tax percentage of Ali’s income. If Ali earned $50,000 from his job, $5,000 in freelance work, and $2,000 in investment income. After that, he contributed $2,000 to an IRA and paid $1,000 in student loan interest.

Solution:

Step 1:  Collect the data from the above statement.

Job income = 50,000 $, Freelance work income = 5,000 $

Investment income = 2,000 $, IRA contribution = 2,000 $

Student loan interest = 1,000 $

Step 2: Determine Gross Income by adding all Add up all sources (job, freelance work, and investment income) of income.

Gross Income = Job income + Freelance income + Investment income

= 50,000 + 5,000 + 2,000 = 57,000 $

Step 3: Now find the Adjustments of the Income on which tax is not applicable and find the AGI by subtracting the adjusted income from gross income.

Adjustments income = IRA contribution + Student loan interest

                    = 2,000 + 1,000 = 3,000 $

Adjusted Gross Income (AGI) = Gross Income− Adjustments AGI 

 = 57,000 − 3,000= 54,000$

Step 4: To find the Taxable income by subtracting the standard deduction.

Note: For the 2023 tax year, the standard deduction for a single filer is $13,850.

Standard Deduction = 13,850 $,  AGI = 54,000$Taxable Income = AGI − Standard Deduction 

   = 54,000 − 13,850 

Taxable Income = 40,150 $

Step 5: Now calculate the tax of your whole income by using the 2023 tax Rate/brackets for a single filer.

The tax calculation is as follows:

• 10% on income up to $11,000

• 12% on income from $11,001 to $44,725

Since Ali’s taxable income is 40,150 $ then we apply the above rates:

1. First tax rate: 

10% Tax on the first 11,000 = 11,000 × 0.10 

    = 1,100 $

1. Second tax rate: 

Find the remaining amount for 12% rate = 40,150 - 11,000 = 29,150 $

12% Tax on the remaining amount = 29,150 × 0.12 

   = 3,498 $

Step 6: Now, find the Total tax paid by Ali to the federal government by adding both taxes.Total Federal Tax = 1,100 + 3,498 

     = 4,598 $

Step 7: To find the tax percentage of Ali’s taxable income put the values in the tax percentage formula and simplify to determine the percentage.

Total Federal Tax = 4,598, Taxable Income = 40,150 

Tax Percentage = (Total Federal Tax/ Taxable Income) × 100

  = (4,598/40,150) × 100 

= (0.11452) × 100 = 11.45%

Conclusion

In this guide, we discussed the detailed taxable income involves understanding your gross income, and applying the appropriate adjustments or deductions. Also discussed, is how to calculate your tax liability using the tax brackets with the detailed steps. 

By following the detailed outline in this guide, you can accurately determine your taxable income and the percentage of it that you owe in taxes. Moreover, always consult with a tax professional for personalized advice and to stay updated on the latest tax laws and regulations.