Federal taxable income refers to the portion of your income that is used to determine your federal income tax. While this is partially dependent on the tax deductions you qualify for, as well as some other information that can't be determined from a pay stub, you can calculate the amount of your income that could be subject to federal income tax using the amount on your final pay stub of the year.
Different Ways to Calculate Income
When you receive your W-2 for the year, you'll see three types of federal income listed.
- Wages, tips, and other compensation (line 1): This is all of the money you earn that is potentially subject to federal income taxes.
- Social Security wages (line 3): This is how much of your compensation is subject to Social Security taxes. For 2016, this is capped at $118,500.
- Medicare wages and tips (line 5): The amount of your compensation subject to Medicare taxes.
Why are there three types of income? In a nutshell, certain items are excluded from federal taxable income but are included in the other two figures. For example, money you contribute to a 401(k) or other employer-sponsored retirement plan is not taxable on a federal level, but it is subject to Social Security and Medicare taxes.
How to Calculate Federal Taxable Income
First, look on your last pay stub of the year for your gross income for the year. Then add up all of the deductions that are excluded from federal taxes. These may include, but are not limited to:
- 401(k) contributions (as long as your 401(k) isn't a Roth account)
- Health insurance premiums
- Group life insurance premiums
- Other items covered under a section 125 cafeteria plan (such as vision and dental insurance, flexible spending account contributions, and other supplemental forms of insurance)
- Adoption assistance deductions
- Dependent care reimbursement accounts
Subtract the total of these pre-tax deductions from your gross income to arrive at your annual income that could be subject to federal tax.
It's important to note that some of these items aren't excluded from Social Security and Medicare income. In general, the only deductions that are excluded from Social Security and Medicare income are section 125 deductions (insurances) and life insurance premiums for up to $50,000 in coverage. So, if your W-2 lists a higher number for these income figures, that's why.
To illustrate this, consider the following final pay stub information as an example.
|Other insurances (disability, vision, etc.)||$500|
In this case, the pre-tax deductions add up to $5,900. Subtracting this from the gross pay gives us a total federal wage income of $44,100.
An Important Note
As we mentioned earlier, the term "federal taxable income" actually refers to your total income minus your personal exemptions and standard or itemized deductions. In other words, your actual taxable income is likely to be different from the amount you calculated from your pay stub.
However, the calculation described here can give you a good starting point to help determine your eventual tax liability (or refund). By using the income figure you calculated here in a tax calculator (such as this one from TurboTax®), you can use the information on your pay stub along with your tax deductions to get an accurate picture of your tax situation.