What Is Taxable Income?Personal Taxes
Taxable income is the total amount of a taxpayer’s income subject to income tax minus certain adjustments to income and deductions allowed by the IRS.
Learn what taxable is and how to calculate it.
Definition and Example of Taxable Income
Taxable income is a tax calculation that adds up a taxpayer’s total income except items of income that are specifically excluded from tax by the tax code and then subtracts from this amount certain adjustments and deductions allowed by the tax code.
For example, let’s say that last year a single taxpayer:
- Made $45,000 a year from their day job
- Netted a $5,000 profit from a side hustle
- Earned $3,000 in interest income from municipal bonds
- Sold their primary residence for a $200,000 gain that qualifies for the home sale gain exclusion
- Paid $1,000 in student loan interest
- Did not have itemized deductions in excess of his 2021 standard deduction amount of $12,550
This taxpayer’s taxable income would be calculated as follows:
+ $45,000 Day Job Income
+ $5,000 Side Hustle Profit
– $1,000 Student Loan Interest Deduction
– $12,550 Standard Deduction
– $1,000 Qualified Business Income Deduction
= $35,450 Taxable Income
The $3,000 in municipal bond interest income and $200,000 gain from selling their primary residence is not included in taxable income because the tax code excludes these kinds of income from federal income taxation.
The $1,000 qualified business income deduction is calculated as 20% of the taxpayer’s net side hustle income.
How Taxable Income Works
Adjusted gross income is calculated on Line 15 of Form 1040.
Taxable income is the sum of all of a taxpayer’s income items subject to income tax, less certain adjustments to income allowed by the Internal Revenue Code, less the taxpayer’s itemized deductions or standard deduction amount, less the taxpayer’s qualified business income deduction.
Taxable Income vs. Adjusted Gross Income
Adjusted gross income is a component of taxable income, but the terms are not synonymous.
Adjusted gross income includes everything that taxable income includes except a taxpayer’s qualified business income deduction and standard deduction amount or itemized deduction amount.
Adjusted Gross Income
– Standard Deduction or Itemized Deductions
– Qualified Business Income Deduction
= Taxable Income
|Tax Item||Included in Taxable Income||Included in Adjusted Gross Income|
|All Income Subject to Tax||Yes||Yes|
|Adjustments to Income||Yes||Yes|
|Qualified Business Income Deduction||Yes||No|
How Is Taxable Income Used?
Once a taxpayer’s taxable income is calculated, their regular income tax amount is calculated based on their taxable income.
If the taxpayer does not have special income amounts subject to special tax rates such as long-term capital gains and qualified dividends, the taxpayer’s regular income tax is calculated by applying the tax rates in effect for the tax year for their filing status to their taxable income.
Taxable Income: Conclusion
Here’s what you have to know about taxable income.
- Taxable income is a tax calculation that adds up all of a taxpayer’s income subject to tax and subtracts certain adjustments and deductions allowed by the tax code.
- Adjusted gross income is calculated on Line 15 of Form 1040.
- Taxable income is used to calculate a taxpayer’s regular income tax liability for the year.
- Taxable income is not the same as adjusted gross income.
Logan is a practicing CPA and founder of Choice Tax Relief and Money Done Right. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money. Learn more about Logan.