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
Key Takeaways. Income received as wages, salaries, commissions, rental income, royalty payments, stock options, dividends and interest, and self-employment income are taxable. Unemployment compensation generally is taxable.
What's my taxable income? ›
Taxable income includes wages, salaries, bonuses, and tips, as well as investment income and various types of unearned income.
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 3 things must you know to determine your taxable income? ›
You'll need to know your filing status, add up all of your sources of income and then subtract any deductions to find your taxable income amount. So, how do you determine your taxable income exactly? This post will break down the details of how to calculate taxable income using these steps.
Is social security considered taxable income? ›
About 40% of people who get Social Security must pay federal income taxes on their benefits. This usually happens if you have other substantial income in addition to your benefits.
Is your gross income your 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.
How much of my paycheck is taxable income? ›
How Are Taxable Wages Determined? The taxable wage is determined by subtracting any non-taxable wages, deductions, and employer-provided benefits from the gross wage.
What is the least amount of income to file taxes? ›
If you were under 65 at the end of 2023
| If your filing status is: | File a tax return if your gross income is: |
|---|
| Single | $13,850 or more |
| Head of household | $20,800 or more |
| Married filing jointly | $27,700 or more (both spouses under 65) $29,200 or more (one spouse under 65) |
| Married filing separately | $5 or more |
1 more rowTaxable income is your AGI minus your standard deduction (or itemized deductions from Schedule A) and your qualified business income deduction from Form 8995 or Form 8995-A. Net income typically means the amount of income left over after you pay your income tax or get a tax refund.
What is total income that is taxable? ›
Your gross income minus any above-the-line deductions. They do not include itemized deductions or the standard deduction. Examples of above-the-line deductions include Health Savings Account contributions, deductible self-employment taxes, educator expenses, student loan interest, and others.
According to the Income Tax Act, it is mandatory to file income tax returns if: If your gross total income is over Rs. 2,50,000 in a financial year. This limit exceeds to Rs. 3,00,000 for senior citizens and Rs. 5,00,000 for citizens who are above 80 years.
What happens if my taxable income is 0? ›
If you do not have any form of taxable income on your tax return, the IRS E-file system may reject your return. This is because it will read it as an empty tax return. Some people are not required to file returns but choose to file so they have a tax return on record for personal and/or legal reasons.
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.
What is defined as taxable income? ›
Taxable income is a term you've likely heard during tax season. Like it suggests, taxable income is the amount of a person's or company's income—minus exemptions and deductions—that can be taxed. Among the types of taxable income are a person's salary or wages, tips, benefits and investment income.
What kind of income is not taxable? ›
Disability benefits
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 tax-exempt income? ›
Tax-exempt income is income from any source which the Federal, state, or local government does not include when implementing its income tax. Individuals and organizations may have to report this income on a tax return, but the income will not be considered when determining their tax liability.
What is the taxable income on a paycheck? ›
How Are Taxable Wages Determined? The taxable wage is determined by subtracting any non-taxable wages, deductions, and employer-provided benefits from the gross wage.
What items should not be included in income? ›
Income excluded from the IRS's calculation of your income tax includes life insurance death benefit proceeds, child support, welfare, and municipal bond income. The exclusion rule is generally, if your "income" cannot be used as or to acquire food or shelter, it's not taxable.
