What is taxable income?
October 12, 2023 4 min read
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. Read on to learn more about what it is and how to calculate it.
- Taxable income is the amount of your income that can be taxed.
- Common types of taxable income include salary, wages, tips, bonuses, employer-provided benefits and interest from investments.
- Some kinds of income might not be taxable, including inheritances and child support.
Taxable income definition
Taxable income is money a person or company earns—after exemptions and deductions are taken out—that can be taxed. A person or company may be required to file federal, state or local income tax returns.
What is considered taxable income?
Many kinds of income are considered taxable income and must be reported on a person’s federal income tax return. Among them are:
- Salary or wages
- Income from side gigs
- Employer-provided benefits
- Employer-granted stock options
- Work bonuses
- Unemployment benefits
- Pay for jury duty
- Income from renting out property
- Royalties from copyrights, patents, and oil, gas and mineral properties
- Gains from the sale or exchange of virtual currency
- Most investment dividends
- Pension and annuity payments
- Withdrawals from traditional IRAs
- Canceled debts
- Some disability benefits
- Income generated by a hobby
- Interest from bank accounts
- Certain court-granted monetary awards and damages
- Winnings from gambling
Taxable income for businesses
For the most part, businesses pay taxes on their income earned. However, partnerships don’t pay income taxes. They file a tax return, but the partners include business income or losses on their personal tax returns.
How to calculate taxable income
Calculating your taxable income takes a little homework and a little math. Here are the four steps:
Step 1: Determine your filing status
Anyone who files an income tax return has a filing status, which determines the rate your income is taxed, according to the IRS. The five filing statuses are:
- Single: typically a taxpayer who is unmarried, divorced or legally separated
- Married filing jointly: married couples who file one return
- Married filing separately: married couples who file individual tax returns
- Head of household: generally a taxpayer who is not married but has at least one dependent
- Qualified widow or widower: typically a taxpayer whose spouse has died in the past two years and has a dependent child
Step 2: List all forms of your taxable income
To come up with your taxable income, you also must calculate your gross income, which is the total of all your income before taxes and deductions. This amount can include:
- Overtime pay
- Some employer-provided benefits
Step 3: Calculate adjusted gross income (AGI)
To calculate your adjusted gross income (AGI), subtract specific adjustments to your income—like student loan interest or alimony payments—from your gross income.
Step 4: Subtract deductions from AGI to determine taxable income
Next you’ll need to calculate and subtract your deductions. You’ll have either itemized deductions or a standard deduction. Both itemized and standard deductions reduce your taxable income.
Common itemized deductions for individual taxpayers may include charitable contributions, medical and dental expenses, mortgage interest, and property taxes.
Some taxpayers choose to take a standard deduction, which is a lump sum, instead of claiming itemized deductions. The IRS has more information about which option may be right for your financial situation.
Once you’ve tallied your tax deductions, you subtract the total dollar amount for deductions from your AGI to determine your taxable income.
What is nontaxable income?
Some kinds of incomes are nontaxable, meaning you’re not required to pay taxes on them. You may still have to report them on your tax return, though.
Nontaxable income examples
Examples of potential nontaxable income include:
- Inheritances up to a certain amount
- Gifts up to a specific amount
- Welfare payments
- Child support payments
- Health care plans provided by your employer
- Alimony payments under court orders after 2018
- Most beneficiary payouts from life insurance policies
- Most scholarships
Taxable income FAQs
Is taxable income the same as gross income?
Taxable income is not the same as gross income. Taxable income is your total income once deductions and exemptions are subtracted from your gross income. Gross income is your total income before deductions are figured in and taxes are paid.
What is the formula for calculating taxable income?
Here’s what the formula looks like:
What is a tax exemption?
A tax exemption eliminates or reduces the taxes that an individual taxpayer or an organization owes. As an individual taxpayer, you might have tax exemptions for your property tax, income tax or other types of taxes.
Taxable income in a nutshell
Taxable income is the amount of your income that is subject to taxation. Common types of taxable income include salary, wages, tips, bonuses and employer-provided benefits. Some kinds of income may not be taxable, though, like employer-sponsored health insurance and child support payments.
Knowing the difference between the two can help as you file your taxes each year.