You want to get a clear picture of your financial standing, right? Understanding total income is a key part of that.
Total income gives you a snapshot of all the money you earn before any taxes or deductions come into play. For mid-career professionals juggling multiple income sources and financial responsibilities, this is crucial information to have.
Let’s break down what total income includes and why it matters.
What is Total Income?
Total income is the sum of all income sources before taxes and deductions. It includes wages, salaries, bonuses, and tips you earn from your job. You also need to count interest, dividends, and capital gains from investments. Other forms of income, such as rental income, royalties, and any other earnings, also contribute to your total income. This comprehensive figure provides a clear view of your financial inflow before any subtractions for taxes or other deductions.
Understanding all these sources can help you see the full picture of your income and plan better for your financial goals.
TIP: For a detailed guide on how to calculate gross wages, check out this resource from Homebase.
Types of Income Included in Total Income
Earned Income
Earned income comes from active work. This includes wages and salaries you receive from your job. Bonuses and commissions, often tied to performance, also fall under this category. Tips, which are common in service industries, count as earned income too. Essentially, any money you earn through employment or self-employment adds to your earned income.
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Unearned Income
Unearned income comes from investments and other sources not related to active work. Interest from savings accounts and bonds is a common form of unearned income. Dividends, which are payments from stocks, also contribute. Capital gains, the profit from selling investments like stocks or real estate, are another source. Rental income from property you own and royalties from intellectual property or natural resources round out this category. These income types can significantly boost your total income without additional work hours.
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Other Income Sources
Other income sources include various payments and benefits. Alimony, which is money received from a former spouse, and child support payments contribute to total income. Unemployment benefits, which provide financial support when you’re out of work, also count. Social Security benefits, received during retirement or disability, add to your income as well. These sources ensure that total income reflects all financial inflows, not just those from work or investments.
For many mid-career professionals, accurately calculating these income sources is essential to avoid financial penalties and optimize tax returns.
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How to Calculate Total Income
Gather All Income Documentation
Start by collecting all necessary documents that show your income. These include W-2 forms from your employer, which detail your wages and salaries. If you have freelance or contract work, gather 1099 forms that report various types of income. Bank statements are useful for tracking interest earned from savings accounts. Investment account statements will show dividends and capital gains. Having all these documents on hand ensures you capture every source of income.
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Sum Up All Income Sources
Next, add up all the different types of income. Begin with wages, salaries, bonuses, and tips from your job. Include any interest earned from bank accounts and dividends from investments. Don’t forget to add capital gains from the sale of stocks or property. Other income sources like rental income, royalties, alimony, child support, unemployment benefits, and Social Security benefits should also be included. Summing all these amounts gives you a comprehensive view of your total income.
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Determine Gross Income
Finally, calculate your gross income. This is the total income before any deductions or taxes are applied. Gross income includes everything you’ve added up from wages, salaries, bonuses, tips, interest, dividends, capital gains, and other income sources. This figure represents your total earnings and is the starting point for further financial calculations, such as determining your taxable income.
Mid-career professionals often need to distinguish between total income and adjusted gross income to better manage their financial planning and tax obligations.
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What is the Difference Between Total Income and Adjusted Gross Income?
Total income includes all income sources before any deductions. This means you add up everything: wages, salaries, bonuses, tips, interest, dividends, capital gains, rental income, royalties, alimony, child support, unemployment benefits, and Social Security benefits. This comprehensive figure gives you a full picture of your earnings.
Adjusted Gross Income (AGI) is different. AGI starts with your total income and then subtracts specific adjustments. These adjustments can include educator expenses, student loan interest, and alimony payments. Other possible adjustments might be contributions to retirement accounts or health savings accounts. By subtracting these amounts from your total income, you get your AGI.
AGI is important because it determines eligibility for certain tax credits and deductions. For example, if you want to claim the American Opportunity Tax Credit or the Lifetime Learning Credit, your AGI must fall below a certain threshold. Similarly, deductions for medical expenses, charitable contributions, and mortgage interest may depend on your AGI. This makes AGI a key figure in your tax calculations and financial planning.
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Understanding how total income impacts your taxes is crucial for making informed financial decisions throughout the year.
How Does Total Income Affect Taxes?
Total income is the starting point for calculating taxable income. It includes all your earnings before any deductions. This figure sets the stage for determining how much tax you owe.
Higher total income generally leads to a higher tax liability. The more you earn, the more you pay in taxes. This is because the tax system uses a progressive structure. As your income increases, you move into higher tax brackets.
Tax brackets determine the percentage of income owed in taxes. Each bracket has a specific tax rate. For example, in 2024, you might pay 10% on the first $10,000 of income, 12% on the next $30,000, and so on. The more you earn, the higher the rate on the additional income.
Deductions and credits can reduce taxable income and total tax owed. Deductions lower your taxable income. Common deductions include mortgage interest, charitable contributions, and medical expenses. Credits directly reduce the amount of tax you owe. Examples include the Child Tax Credit and the Earned Income Tax Credit.
Understanding how total income impacts your taxes helps you plan better. Knowing your tax bracket and potential deductions allows you to estimate your tax liability accurately. This way, you can make informed financial decisions throughout the year.
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Knowing the average total income in the U.S. can help you benchmark your earnings and understand broader financial trends.
What is the Average Total Income in the United States?
The average total income in the United States provides a snapshot of financial health across the country. According to the U.S. Census Bureau, the median household income in 2020 was $67,521. This figure represents the midpoint where half of households earn more and half earn less. It includes all sources of income such as wages, salaries, bonuses, tips, interest, dividends, and other earnings.
For individuals, the median personal income in 2020 was $35,805. This number reflects the earnings of a typical person, again considering all sources of income. It’s important to note that this figure can vary widely among different groups.
Income levels in the U.S. vary based on several factors. Age plays a significant role, with younger workers typically earning less than those in their peak earning years. Education also impacts income, as individuals with higher levels of education generally earn more. Occupation is another key factor; jobs in fields like technology and finance often pay more than those in retail or service industries.
Location also affects income. Urban areas, especially those on the coasts, tend to have higher average incomes compared to rural areas. This variation is due to differences in the cost of living and the availability of high-paying jobs.
Understanding these factors helps you see where you stand and what might influence your income. Whether you’re comparing your earnings to the national average or looking at trends in your specific demographic, these insights can guide your financial planning and decision-making.
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TL;DR
- What: Total income is all your earnings before taxes.
- So What: Crucial for optimizing finances and taxes.
- Pros & Cons: Pros: full financial view; Cons: tracking complexity.
- Bottom Line: Essential for informed financial and tax decisions.
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