In a nutshell, taxable income is the compensation or the amount of income of an individual or a business used towards determining the tax liability. Alternatively, it refers to the portion of the gross income that helps calculate the amount of tax an individual or an enterprise owes to the Government.
Taxable income is gross income or adjusted gross income minus all the deductions and exemptions for a particular year. To understand taxable income, you should know what gross income is.
Taxable income is not just one’s salary but also constitutes other compensations like commission, bonus, allowance, tips, wages and others. All these constitute gross income and, it’s the beginning from where, after making some allowable deductions, the actual taxable income is derived.
In short, gross income is all the income from all the sources before making allowable deductions. Gross income includes:
- Government benefits
- Income from gambling
- Unearned income like dividends
- Compensation received for unemployment
- Income from investments
- Select withdrawals from retirement accounts
- Income earned from lottery
- Miscellaneous income like cancelled debts
- Income earned from appreciated assets
- Rent from personal property
However, gross income includes more than these and almost anything not considered tax-exempt by the Internal Revenue Service.
To calculate taxable income for a financial year, knowing non-taxable income is equally important. There are a select number ofincome streams that are exempt from tax and don’t come under gross income.These comprise of:
- Child support payments
- Workers’ compensation
- Compensatory damages for physical injury
- Welfare benefits
- Supplemental security income
- Veterans’ benefits
- Employee achievement award [Subject to conditions]
- Cash rebates
To gain a complete understanding of taxable income, you should know the factors that affect taxable income. These deductions have a profound impact on the portion of your income that is taxable.
Deductions Affecting Taxable Income
There are two types of deductions that affect taxable income.
It’s that part of your income you can use to reduce your tax bill and, is not subject to tax. It’s applicable only when you don’t itemize your deductions [More of this later]. The standard deduction depends on your age, the filing status, and whether you are dependent or disabled.
In layman’s terms, the standard deduction is a single, no-questions-asked reduction in an individual’s adjusted gross income. The advantage is, it’s much faster and easy to claim and, you need not keeptrack of every qualifying expense.
Restrictions to standard deductions
There are limits imposed on whether a taxpayer can qualify for standard deductions. A non-resident individual and his/her spouse cannot claim it. A married person who files separately and whose spouse has filed for itemized deductions cannot file for the standard deduction.
These deductions are eligible expenses; there are several of these, that taxpayers can claim to decrease the taxable income. Which means you can choose from numerous individual tax deductions to itemize instead of the flat-rate, standard deduction.
Since there isa multitude of deductions available, itemized deductions can often be more than standard deductions. However, they require proof, and you need to maintain records and keep everything organized.
It’s also time-consuming as it involves the filling of several tax forms and supporting schedules.
Choosing Between Standard Deduction and Itemized Deduction
Choosing standard deduction or itemized deduction boils down to the total amount of deductions. If the standard deduction is less than itemized deduction, switch to itemize. If the standard deduction is more than itemized deduction, you can stick to the standard deduction.
Remember that you can choose either one of them to reduce your tax liability. You cannot do both.
Expenses that Can be Itemized
There is an extensive list of expenses that can be itemized and, there are limits and conditions applied on most items. In fact, some itemized deductions have been taken off somewhere in the year 2018. The list includes (But not limited to):
- 401(k) contributions
- Adoption credit
- Charitable donations
- Child tax credit
- Deduction for state and local taxes
- Educator expenses
- Gambling losses
- Home office expenses
- Investment interest
- Ira contributions
- Medical expenses
- Mortgage insurance premiums
- Mortgage interest
- Student loan interest
If you consider taking the standard deduction, the job is much easier but, you cannot deduct the above expenses. However, if you choose itemized deduction, you probably will save much more but, you need to provide supporting documents for audit purposes.
Taxable Income for Businesses
Businesses don’t consider the revenue generated as business income. They deduct permissible business expenses from gross sales to arrive at gross income. This is the net business income that is taxable.
Procedure Involved in Calculating Taxable Income for Your Business
You have to determine the gross sales
Arriving at gross sales is the first step to determine your business’s taxable income. This includes revenue generated from all the sources for a financial year minus all expenses.
Calculate the cost of sales or goods sold
This is only of those businesses that actually sell goods. You can subtract the value of inventory purchased from the total revenue generated. This also includes all other expenses that come under cost of goods sold. These include overhead costs, direct labour costs, storage, cost of raw materials and others.
Itemize your business expenses
There are some business expenses that are fully deductible and others, partially. Some of these include (But not limited to):
- Repairs and maintenance
- Salaries and wages
- Utility expenses
- Printing charges
- Legal fees
- Marketing and advertising costs
- Insurance costs
- Office supplies
- Bank and accounting fees
Subtract business deductions
Now, you need to subtract business deductions and credits including business interest, retirement plans and other related expenditure.
Determine the taxable income
In this final step, you subtract all the allowable tax deductions and credits from the gross income. This amount is taxable. In case the figure is in the negative, it means your business has suffered a loss for the particular financial year.
Other Business Expenses Allowed for Deduction
There are some expenses incurred by a business that are both personal and business-related. There are cases where a business owner uses his car for personal and business purposes. In such circumstances, the travelling expenses incurred for business purposes can be deducted.
Similarly, in a home-office set up, only that portion of the home used as office space is deductible. These are categorized under the listed property that serves business and personal uses.
Other Business Deductions
There are capital expenses that actually happen to be business assets. A business should capitalize on these assets and deduct over a specified number of years through depreciation. Most of these include furniture, computers, equipment, vehicles and many others.
Often, businesses give gifts to their clients or employees as a mark of appreciation. The cost of these gifts is also deductible subject to certain conditions. Expenses incurred on meals and entertainment are deductible up to 50 percent.
Taxable Income and Tax Bracket
A tax bracket is determined by and is an important component of your taxable income. Tax brackets are a series of divisions where income tax rates move ahead in a progressive tax system. In such a system, the tax rate increases as and when an individual’s or an enterprise’s income increases.
There are different dollar ranges for single filers, couples’ joint filers and couples filing separately. The inflation rate helps adjust the brackets accordingly every year using the Consumer Price Index.
Tax Rate and Tax Bracket
Every tax bracket has a specific tax rate, which happens to be the percentage at which your income is taxed, attached to it. Tax rates are called marginal tax rates that increase with each additional dollar of income. Your income will be taxed progressively and is subject to different tax rates.
However, the tax bracket doesn’t tell the exact amount you will be paying as tax. The government divides your taxable income into chunks that fall into specific tax brackets. Every portion is then taxed at the corresponding tax rate.
Progressive tax brackets can generate more revenue for the government while also offering tax rebates and tax deductions for individuals and businesses. However, there are arguments that a flat tax structure should be in place. The argument stresses that everyone is equal in the eyes of the law without any discrimination.
Another glaring loophole is the wealthy will possibly spend too much to exploit the law and find ways to pays less tax and, personal savings rate can reduce dramatically. But, considering the numerous benefits this system provides, it’s still the most effective way to plan and work for the welfare of the individuals, the businesses and the nation.
Staying connected: keeping the numbers moving in the finance industry
By Robert Gibson-Bolton, Enterprise Manager, NetMotion
2020 will certainly be hard to forget. Amongst the many changes we have come to live with, for many of us it has been adapting to a new style of working. Whatever your take on it is, remote working, working from home or even agile working, one thing remains clear – for many of us, this could be the new-normal for the foreseeable future. The professional services sector is no different. For example, many finance practices around the world are now allowing staff to work from home part of the time. In addition, a recent KPMG report found that half of the UK’s financial services workforce want to work from home after COVID-19.
Will this therefore become the de facto working practice for the finance industry too? We can’t say for sure, but this agile approach to working has certainly caused a major rethink for many firms. And as they evolve and adapt to meet the demands of a different way of working, firms need to ensure that their workforce can seamlessly interact with each other and their clients – this is key if they want to continue to deliver exceptional client service. Whilst financial services organisations everywhere are busy adopting innovative new technologies to better reflect the ‘work from anywhere environment’, they need to ensure secure access to resources and strive towards enhancing the end user experience. Success will be replicating the office working experience at home or wherever else they may be.
It’s all well and good for a firm to boast about the ability of their staff to work successfully from home, but how do they also establish that their people are just as productive as they were before? Whilst the IT department will have to grapple with security and compliance issues that arise from agile and remote working, they must also ensure that their people can connect securely, without eschewing user experience. And it needs to be completely seamless, without compromising the service level provided to clients.
Why all the fuss?
Which brings us nicely to persistent connectivity. Persistent connectivity effectively allows you to do more. How frustrating for the user when connectivity drops, or when the device that they are working on can’t find a network to connect to (or if the device switches between different networks). When connectivity drops, and re-connection is required then there is that small period where the user is not connected at all. And the user might have to re-authenticate or log into their VPN again (most VPNs are rubbish when they lose connectivity). All of these different scenarios ultimately disrupt the user experience – persistent connectivity provides the flexibility to overcome these challenges. When you enjoy consistent connectivity, you are making sure that the technology works as it was designed to work, allowing staff to rely on optimum user experience, anytime, anywhere – in effect, supplying them with that office-like experience, wherever they are. Just think about how many hours might be spent on a train, in a hotel or even on a client site. Consistent connectivity is key here – consistent in any of these locations.
Connectivity will be a fundamental component for successful remote working as firms try to meet the demands of an increasingly mobile workforce. Ultimately, they need encrypted and reliable connections that enable them to quickly and easily reach business applications and services. Working in a disconnected environment can lead to frustrated workers, hardly fitting given all the new remote working policies in place.
Getting the user experience spot-on
When you fine-tune connection performance so that essential business applications run reliably across networks, you are essentially talking about traffic optimization. Mobile traffic optimization ensures that applications, resources and connections are tuned for weak and intermittent network coverage and can roam between wireless networks as conditions and availability change. When connections aren’t performing well, applications that are crucial for job performance can experience packet loss, jitter or latency that can make working on the hoof extremely tricky. Compared to wired networks, wireless networks operate under highly variable conditions, including such factors as terrain or congested mobile towers. When you optimise the flow of traffic, you are helping to manage packet loss. Effectively, packet losses are data loss, which happens very regularly when you’re on the move or transitioning between different networks. Applications that require a lot of data tend to become fairly unusable when you hit even minor packet loss, which can be a common occurrence for many on residential broadband or on local Wi-Fi. conversely, NetMotion can enable critical applications to work and prevent disruptions at over 50% packet loss – in this way, employees can rely on technology performing well in situations and locations where it simply could not before. That is incredibly powerful for firms.
The finance industry is facing many of the same challenges presented to other industries. It is a question of balancing the requirement for more sophisticated ways to ensure secure access to resources with the need to enhance the end user experience (key team members in particular). For finance firms everywhere, adopting the right technologies will ensure that their people can enjoy a ‘work-from-anywhere’ environment.
Hong Kong’s Cathay Pacific warns of capacity cuts, higher cash burn
(Reuters) – Cathay Pacific Airways Ltd on Monday warned passenger capacity could be cut by about 60% and monthly cash burn may rise if Hong Kong installs new measures that require flight crew to quarantine for two weeks.
Hong Kong’s flagship carrier said the expected move will increase cash burn by about HK$300 million ($38.70 million) to HK$400 million per month, on top of current HK$1 billion to HK$1.5 billion levels.
Hong Kong is set to require flight crew entering the Asian financial hub for more than two hours to quarantine in a hotel for two weeks, the South China Morning Post reported last week, citing sources.
“The new measure will have a significant impact on our ability to service our passenger and cargo markets,” Cathay said in a statement, adding that expected curbs will also reduce its cargo capacity by 25%.
The airline, in an internal memo seen by Reuters, requested for volunteers among its crew who could fly for three weeks, followed by two weeks of quarantine and 14 days free of duty, adding it will be a temporary measure and not all its flight will require such an operation.
“We continue to engage with key stakeholders in the Hong Kong Government,” the memo said.
The government did not immediately respond to a request for comment.
Separately, a company spokeswoman said the airline could not detail the impact on vaccine transport specifically in terms of cargo shipments.
The aviation industry has been hit hard by the COVID-19 pandemic as many countries imposed travel restrictions to contain its spread.
In December, Cathay’s passenger numbers fell by 98.7% compared to a year earlier, though cargo carriage was down by a smaller 32.3%.
($1 = 7.7512 Hong Kong dollars)
(Reporting by Shriya Ramakrishnan in Bengaluru; Additional reporting by Jamie Freed in Sydney and Twinnie Siu in Hong Kong; Editing by Bernard Orr and Arun Koyyur)
Travel stocks pull FTSE 100 lower as virus risks weigh
By Shashank Nayar
(Reuters) – London’s FTSE 100 fell on Monday, with travel stocks leading the declines, as rising coronavirus infections and extended lockdowns raised worries about the pace of economic growth, while fashion retailers Boohoo and ASOS gained on merger deals.
The British government quietly extended lockdown laws to give councils the power to close pubs, restaurants, shops and public spaces until July 17, the Telegraph reported on Saturday.
The blue-chip FTSE 100 index dipped 0.1%, with travel and energy stocks falling the most, while the mid-cap index rose 0.1%.
“Stock markets are crawling between optimism around the rollout of vaccines and worries that a jump in virus infections and fresh local lockdowns could further affect recovery prospects,” said David Madden, an analyst at CMC Markets.
Britain has detected 77 cases of the South African variant of COVID-19, the health minister said on Sunday while urging people to strictly follow lockdown rules as the best precaution against the country’s own potentially more deadly variant.
Prime Minister Boris Johnson had earlier warned that the government could not consider easing lockdown restrictions with infection rates at their current high levels and until it is confident that the vaccination programme is working.
The FTSE 100 shed 14.3% in value last year, its worst performance since a 31% plunge in 2008 and underperforming its European peers by a wide margin, as pandemic-driven lockdowns battered the economy.
Online fashion retailers Boohoo and ASOS surged 4.8% and 5.9%, each. Boohoo bought the Debenhams brand, while ASOS was in talks to buy the key brands of Philip Green’s collapsed Arcadia group.
Recruiter SThree Plc gained 0.9% after its profit, which nearly halved, still managed to beat market expectations and the company said it had resumed dividends.
(Reporting by Shashank Nayar in Bengaluru; editing by Uttaresh.V)
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