What is Taxable Income
Taxable income is the amount of income used to calculate how much tax an individual or a company owes to the government in a given tax year. It is generally described as gross income or adjusted gross income (which is minus any deductions or exemptions allowed in that tax year). Taxable income includes wages, salaries, bonuses and tips, as well as investment income and unearned income.
BREAKING DOWN Taxable Income
Unearned income considered taxable income can include canceled debts, alimony payments, child support, government benefits such as unemployment benefits and disability payments, strike benefits and lottery payments. Taxable income also includes earnings generated from appreciated assets that have been sold or capitalized during the year and from dividends and interest income.
What Is Nontaxable Income?
The U.S. Internal Revenue Service (IRS) considers almost every type of income taxable, but a small number of income streams are considered nontaxable. For example, if you are a member of a religious organization who has taken a vow of poverty, and you work for an organization run by that order, and you turn your earnings over to the order, your income is nontaxable. Similarly, if you receive an employee achievement award, its value is not taxable as long as certain conditions are met. If someone dies and you receive a life insurance payment, that is nontaxable income as well.
Different tax agencies define taxable and nontaxable income differently. For example, while the IRS in the United States considers lottery winnings to be taxable income, the Canada Revenue Agency considers most lottery winnings and other unexpected one-time windfalls to be nontaxable.
Which Deductions Affect Taxable Income?
In the United States, the IRS offers tax filers the option to claim the standard deduction or a list of itemized deductions. Itemized deductions include contributions to individual retirement accounts (IRAs), interest paid on mortgages, some medical expenses and a range of other expenses. The standard deduction is a set amount each tax filer can claim if he doesn't have enough itemized deductions to claim. For 2018, individual tax filers can claim a $12,000 standard reduction. However, that reduction is set to expire at the end of 2024. (The figure for married filing jointly is $24,000 from 2018-2025.)
When businesses file their taxes, they do not report their revenue as income. Rather, they subtract their business expenses from their revenue to calculate their business income. Then, they subtract deductions to calculate their taxable income. (For related reading, see "What are the Best Ways to Lower My Taxable Income?")