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 2017, individual tax filers can claim a $6,350 standard deduction. That amount jumps to $12,000 for 2018, but is set to expire at the end of 2025. (The figures for married filing jointly are $12,700 for 20017 and $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.

RELATED TERMS
  1. Above The Line Deduction

    An above the line deduction is an item that is subtracted from ...
  2. Interest Deduction

    Interest deduction causes a reduction in taxable income or revenues ...
  3. Deductible

    For taxes, a deductible is the expenses subtracted from adjusted ...
  4. IRS Publication 525 - Taxable And ...

    Publication 525 is a document published by the IRS detailing ...
  5. After-Tax Income

    After-tax income is the net income after all federal, state, ...
  6. IRS Publication 554

    A document published by the Internal Revenue Service (IRS) that ...
Related Articles
  1. Taxes

    10 Sources of Nontaxable Income

    Taxes are often a deterrent from investing and saving. These financial practices will bring you no tax grief.
  2. Managing Wealth

    17 Types of Income the IRS Can’t Touch

    Uncle Sam can't get his hands on your money if it's in one of several specific income categories.
  3. Retirement

    Top Tax Tips for Retirees

    Filing your taxes during retirement can be just as time consuming as when you were employed. We have some tips to help you out.
  4. Taxes

    Minimizing the Amount of Income Tax You Owe

    The amount of income you receive and tax deductions and credits you take impact how much you'll owe.
  5. Taxes

    An Overview of Itemized Deductions

    Itemized deductions will mostly stay the same for 2017 tax year (medical deductions improve under the new tax bill). Big changes start in 2018.
  6. Taxes

    Why You Should Itemize Your Tax Deductions

    This strategy of moving your tax deductable payments and donations to the following year could mean hundreds more on your return.
  7. Taxes

    5 Tax-Efficient Portfolio Tips for High Income Earners

    High income earners can use these tips to make their portfolio more tax-efficient.
  8. Taxes

    How Fixed Income Threshold Reduces Social Security Benefits

    The use of fixed income threshold amounts to an ongoing tax increase and a means test on Social Security beneficiaries. Here's how.
  9. Taxes

    How To Get The Most Money Back On Your Tax Return

    These tips will help you get a larger refund this year, while teaching you how to pay less taxes going forward.
  10. Taxes

    Misconceptions About Income and Taxes in Retirement

    When it comes to taxes and retirement, misunderstandings are common. Here are three.
RELATED FAQS
  1. What assets are taxable and what assets are not taxable?

    Adjust your taxable income by understanding what assets the IRS taxes. Learn about legal strategies to lower tax liability ... Read Answer >>
  2. Are gross sales and taxable gross sales the same thing?

    Learn the difference between gross sales and taxable gross sales and how these terms relate to the profit and tax liability ... Read Answer >>
Hot Definitions
  1. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  2. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  3. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  4. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  5. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  6. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
Trading Center