Taxable income is the portion of gross income that is used to calculate how much tax an individual or corporation owes in a given tax year. It is the income over which the government imposes tax. Generally, taxable income includes some or all items of income and is reduced by expenses and other deductions. The amounts included as income, expenses, and other deductions vary by country or system.
Taxable income includes wages, salaries, bonuses, tips, investment income, and various types of unearned income. Unearned income that is considered taxable includes canceled debts, government benefits, strike benefits, and lottery payments. Taxable income also includes earnings generated from appreciated assets that have been sold during the year and from dividends.
It is important to note that most systems require that all income realized be included in taxable income. However, some systems provide tax exemption for some types of income. Many systems impose tax at different rates based on the amount of taxable income.
In contrast, nontaxable income is not subject to tax, whether or not it is entered on a tax return. Examples of nontaxable income include inheritances, gifts, bequests, cash rebates, alimony payments (for divorce decrees finalized after 2018), child support payments, most healthcare benefits, welfare payments, and money that is reimbursed from qualifying adoptions.
To calculate taxable income, one must first know their filing status, add up all sources of income, and then subtract any deductions to find the taxable income amount. Deductions can include standard or itemized deductions, and the resulting amount is the taxable income on which taxes are calculated.
