Your total income, also called gross income, isn’t all subject to tax, thanks to exemptions, tax deductions, and tax credits. Your taxable income is the amount of your income that you actually have to pay tax on. Certain types of income or payments are also just exempt from tax, like workers’ compensation.
Finding your taxable income is a necessary part of filing your income taxes because the amount of tax you owe for the year is determined by multiplying your taxable income by the income tax rates.
You can calculate your taxable income by taking your gross income and subtracting the value of all deductions and any tax-exempt income you had. More simply, you can also get your taxable income by finding your adjusted gross income (AGI) and then subtracting the value of your standard deduction (or itemized deductions if you itemize).
Taxable income is the amount of your total income that’s actually subject to tax
Calculate taxable income as your adjusted gross income (AGI) minus either the standard deduction or your itemized deductions
Your taxable income is multiplied by the federal tax rates to find how much tax you owe for the year
The IRS also uses “taxable income” to discuss any types of income that you need to pay tax on, which includes most forms of income
What is taxable income?
Taxable income can refer to two separate things. First, when you file your income tax return, your taxable income is the income that you actually have to pay tax on. Most people don’t pay tax on their gross income because certain types of income are exempt from tax and then the value of your tax deductions and certain credits will decrease how much of your income is subject to tax. If you look at Form 1040 (the main income tax form) you’ll notice that the first page walks you through whittling your total income down to your taxable income.
The IRS also uses the term taxable income to refer to any type of income that is subject to federal income tax, meaning you need to include that income when determining your gross income for your tax returns.
Types of taxable income
Just about all income is taxable income (including cash income) and you will need to include it on your tax return when calculating how much tax you ultimately have to pay.
Common types of taxable income:
Salaries, wages, and tips
Most interest and dividend income
Income from a hobby, freelancing, or a second job
Social Security income (some may be tax-exempt)
Business income and self-employment income
Alimony you receive
Gambling winnings (if they exceed your gambling losses)
Your gains from selling a house (subject to capital gains tax)
Gains from selling investments, including cryptocurrency
Types of nontaxable income
Below is a list of common types of nontaxable income:
Distributions from a Roth IRA or Roth 401(k)
Inheritances (exempt on federal tax but six states tax inheritances)
Life insurance death benefits (in most cases)
Disability insurance benefits (in most cases)
Child support you receive
Your federal and state tax refunds
How to calculate taxable income on your tax return
Your taxable income is your gross income minus any tax-exempt income and minus all tax deductions. The first step for calculating your taxable income is to find your adjusted gross income (AGI). Then you can subtract the value of your standard deduction or itemized deductions from your AGI. The result is your taxable income. When you file your tax return, it will take you step by step through calculating your AGI and your taxable income.
Note that tax credits don’t affect your taxable income. Instead, they decrease how much tax you owe, which is the value you get after multiplying your taxable income by the income tax rates.
Taxable income vs. AGI
Your adjusted gross income, or AGI, is your total income minus the value of certain tax deductions (above-the-line tax deductions). After you calculate your AGI, you subtract the value of either the standard deduction or your itemized deductions, and the result is your taxable income.
Your AGI is used to determine your eligibility for certain programs or tax benefits, but only your taxable income is used to determine the amount of income tax you have to pay for the year.