Taxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income.
Arriving at Taxable Income
Individuals and corporations begin with gross income, the total amount earned in a given year. This includes income from bonuses, tips, freelancing, rental properties, retirement plan payouts, unemployment benefits, court awards, gambling winnings and prizes, interest, digital assets and cryptocurrency, and royalties.An individual taxpayer’s filing status—whether single, married, or head of household—is also important in determining taxable income.
For individual filers, calculating federal taxable income starts by taking all income minus “above the line” deductions and exemptions, like certain retirement plan contributions, higher education expenses, student loan interest, and alimony payments, among others. This results in a taxpayer’s adjusted gross income (AGI).
Upon arriving at AGI, a taxpayer may then take the standard deduction, which reduces a taxpayer’s taxable income by a set amount, or choose to itemize their below-the-line deductions, which produces taxable income. For corporations, arriving at taxable income involves deductions for compensation, the cost of goods sold, and other business expenses.
Due to these deductions, taxable income is typically less than a taxpayer’s AGI.
Income Starting Points
Most states use either AGI or federal taxable income as a starting point for their own calculations of individual income tax liability for the state income tax. Beginning with federal taxable income incorporates federal standard and itemized deductions, as well as the personal exemption when available (it is currently suspended), whereas beginning with AGI excludes these modifications, leaving states to establish their own deductions and exemptions, or to separately link their codes to the federal provisions.
Nontaxable Income
Most types of income are considered “taxable” by the Internal Revenue Service (IRS). However, some forms of revenue are generally considered nontaxable income. With exceptions, examples of nontaxable income can include:
- Life insurance payouts
- Payouts from qualified retirement accounts like 401(k) plans and Roth IRAs
- Health savings account (HSA) payments for qualified medical expenses
- The value of employer-provided insurance like health insurance or long-term care insurance
- Disability insurance payments
It is important to note a difference between income excluded from the tax base altogether, like employer-sponsored health insurance, and income that can be placed in a vehicle for savings-neutral tax treatment via a deduction for traditional accounts or Roth treatment. Health savings accounts are unique in that they receive both traditional and Roth treatment.
Other forms of income are technically not considered taxable income but can be taxed in other ways.
For example, financial gifts over $2.92 million in 2023 may be subject to a gift tax and inheritances are subject to inheritance and estate taxes.
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FAQs
Most income is taxable unless it's specifically exempted by law. Income can be money, property, goods or services. Even if you don't receive a form reporting income, you should report it on your tax return. Income is taxable when you receive it, even if you don't cash it or use it right away.
How is taxable income calculated responses? ›
Taxable income is the amount of your adjusted gross income minus all applicable deductions, such as itemized deductions. AGI is greater than taxable income.
What is equal to taxable income? ›
The term “taxable income" often gets confused with income subject to tax. Income subject to tax refers to individual income items—such as wages—that count as income on your tax return. Add all income subject to tax to determine total income. Taxable income equals total income minus deductions.
What best describes taxable income? ›
Taxable income refers to the portion of your income that can be taxed by the government. This includes wages, salaries, tips, and any other sources of income you might have, like rental properties, capital gains from stock investments or gambling winnings.
What would be considered a part of your taxable income? ›
Income received as wages, salaries, commissions, rental income, royalty payments, stock options, dividends and interest, and self-employment income are taxable.
What is the taxable income amount? ›
Taxable income is the amount of money you earn that tax is payable on and can be reduced by making deductions on your tax return such as work-related expenses.
What income is not taxable? ›
Disability and worker's compensation payments are generally nontaxable. Supplemental Security Income payments are also tax-exempt. Disability compensation or pension payments from the Department of Veterans Affairs to U.S. military Veterans are tax-free as well.
What is the formula to determine taxable income? ›
The formula for taxable income for an individual is a very simple prima facie, and the calculation is done by subtracting all the expenses that are tax exempted and all the applicable deductions from the total gross income.
What is the difference between total income and taxable income? ›
Gross income includes all income you receive that isn't explicitly exempt from taxation under the Internal Revenue Code (IRC). Taxable income is the portion of your gross income that's actually subject to taxation. Allowable deductions are subtracted from gross income to arrive at your taxable income.
What counts as other taxable income? ›
Generally, this is income not from wages, self-employment, retirement, home or property rentals, or investments; from a tax perspective, this is any income not reported on a W-2 or 1099 form.
Earned income includes all the taxable income and wages you get from working or from certain disability payments. Taxable earned income includes wages, salaries, tips, and other taxable employee pay. It can also include union benefits and long-term disability benefits received prior to retirement age.
What is all taxable income called? ›
Adjusted gross income, also known as (AGI), is defined as total income minus deductions, or "adjustments" to income that you are eligible to take. Gross income includes wages, dividends, capital gains, business and retirement income as well as all other forms income.
How do I calculate my taxable income? ›
For individual filers, calculating federal taxable income starts by taking all income minus “above the line” deductions and exemptions, like certain retirement plan contributions, higher education expenses, student loan interest, and alimony payments, among others.
Is my gross income my taxable income? ›
Gross income
All of the taxable income you receive for the year. You'll report it on your tax return (Form 1040). It includes all of your earned income, unearned income, and other taxable income before any deductions, credits, or other adjustments are subtracted.
Which of these examples is taxable income? ›
What are some examples of income that is taxable? Money earned through a salary, wages, and self-employment income are some of the most common types of taxable income. Other types include royalties, commissions, rental income, and strike pay.
What is not taxable income? ›
Disability and worker's compensation payments are generally nontaxable. Supplemental Security Income payments are also tax-exempt. Disability compensation or pension payments from the Department of Veterans Affairs to U.S. military Veterans are tax-free as well.
Is social security considered taxable income? ›
You report the taxable portion of your social security benefits on line 6b of Form 1040 or Form 1040-SR. Your benefits may be taxable if the total of (1) one-half of your benefits, plus (2) all of your other income, including tax-exempt interest, is greater than the base amount for your filing status.
Where do I find taxable income on my return? ›
Taxable Income is line 43 of Form 1040. Still have questions? Use your Intuit Account to sign in to TurboTax. By selecting Sign in, you agree to our Terms and acknowledge our Privacy Statement.
