Computing Your Taxable Income

Here's another common, but very important, subject you shouldn't miss. Taxable income is the part of your income where your income tax comes from. This post is made special for the newly-employed as well as those planning to start a business. There are two ways taxable income is computed, depending on whether you are a business owner or employee. Remember this: Gross Income is not Taxable Income, contrary to what some people think. Income taxes are not collected from gross income except in certain circumstances we shall take up in other posts.

Employee's formula. This is computed, usually, by the employer:

Gross Compensation Income - (Personal & Additional Exemptions + Premium Payments on Health Insurance) = Taxable Income

Business Owner's formula:

Taxable Income = Net Income - (Personal & Additional Exemptions + Premium Payments on Health Insurance)

Where: Net Income = Gross Income - Business-related Expenses

Hopefully, this info on how taxable income is computed will help you in your financial planning. You should have an idea now about how much your income tax is, how much you can spend, and how much you can save.