In order to determine how much you can earn before you owe taxes, you first need to figure out what your income is. Your income is the amount you earn, plus any deductions or adjustments. Those deductions and adjustments will lower your total taxable income.
Adjustments and deductions reduce taxable income
Adjustments and deductions reduce taxable income by reducing the amount of tax you pay. Tax credits are also available and can be used to lower your taxes. Tax credits are directly applied to your income and are more valuable than deductions. If you’re a student, for example, a credit for qualified education expenses may be worth $2,500 in total.
There are two main types of deductions: the standard deduction and itemized deductions. The standard deduction is the same for everyone, while the itemized deduction is different for each filer. The standard deduction is based on the amount of money you make, and is adjusted periodically for inflation.
Earned income tax credit (EITC) for low-to-moderate-income workers
The Earned Income Tax Credit (EITC) is an incentive that helps low-to-moderate income workers reduce or eliminate their federal tax liability. You may qualify for the credit if you meet certain income thresholds and have other qualifying circumstances. The Internal Revenue Service offers an interactive online EITC assistant to help you determine if you qualify.
The EITC began in 1975 as a modest program to offset the Social Security payroll tax for low-income families with children. Its design evolved after vigorous public discussion. The Nixon Administration had proposed the use of a Negative Income Tax (NIT), in which a person’s wages were taxed away at a flat rate. Today, the EITC is a work-oriented credit that increases as earnings rise. The maximum EITC is $5,236 for taxpayers with earnings between $13,090 and $22,300.
Business income
The IRS sets a minimum amount you can earn before you have to pay taxes, and the amount depends on your filing status, age, and dependent status. Fortunately, there are ways to reduce your income to a level you can afford to pay. This can save you thousands of dollars each year.
Unemployment benefits
Depending on your situation, you may be able to earn less than the minimum amount of income required by law before you owe taxes. The IRS sets the threshold, and it differs for different people. Your age, filing status, and dependent status will all play a part. You should check with the Internal Revenue Service if you are earning less than the minimum amount. This amount can be as low as $20, and it can be as high as $38,000.
Capital gains
Whether you’re investing in stocks or mutual funds, capital gains are taxable when you sell them. The amount you owe will depend on your income and tax bracket. The higher your income, the higher your capital gains tax rate will be. The amount you owe will also depend on how long you held the investment.
Capital gains are taxed as income in the year you sell it, and you’ll have to report them under current federal and state law. If you’ve held the asset for less than a year, the gains are taxable as ordinary income. If you’ve held it longer, the gains may be tax-exempt.
