What is taxable income, and how can you reduce it?

Core Points - Understanding taxable income is essential for minimizing tax liability and developing effective tax strategies for the future [1][2] Group 1: Taxable Income Overview - Taxable income is defined as the portion of earned and unearned income subject to income taxes [3] - It includes various income sources such as salary, bonuses, unemployment benefits, and lottery winnings, which must be reported unless exempted by law [4] - The calculation of taxable income involves determining adjusted gross income (AGI) minus deductions [5] Group 2: Types of Taxable Income - Employee compensation includes wages, tips, bonuses, and fees, typically reported on a W-2 form [6] - Investment income encompasses earnings from business activities, rental income, interest, dividends, and capital gains from asset sales [7] - Fringe benefits refer to additional compensation like tips and bonuses that must also be reported [8] - Miscellaneous taxable income includes income from partnerships, royalties, and digital currencies [9] Group 3: Nontaxable Income - Certain income types are nontaxable, such as charitable contributions and capital gains from selling a primary residence [11] - Specific rules apply to alimony and retirement account withdrawals, affecting their taxability [11] Group 4: Calculating Taxable Income - The process involves gathering income documentation, determining filing status, calculating gross and adjusted gross income, and deciding on standard or itemized deductions [12][14][15][18] - The final taxable income is derived after applying deductions to the AGI [20] Group 5: Reducing Taxable Income - Strategies to reduce taxable income include increasing contributions to retirement accounts, health savings accounts, and itemizing deductions [22][23][26] - Contribution limits for retirement accounts and HSAs are specified for tax years 2025 and 2026 [23][27] Group 6: Taxable Income FAQs - Taxable income is listed on the W-2 form in Box 1, but may differ after adjustments and deductions [30] - Student loan interest is deductible up to $2,500 per year, depending on income eligibility [31] - Federal student loan forgiveness is not taxable until the end of 2025, after which it may become taxable again [32]