What is Taxable Income?

Before you can determine Taxable Income, you must first determine Adjusted Gross Income.

Keep in mind, from a federal tax perspective, business income is a narrower concept than adjusted gross income.

Adjusted gross income encompasses various types of income of which, business income, is only one.

Examples of other types of income included in adjusted gross income are: wages, salaries, tips, interest, dividends, royalties, pensions, capital gains, and even a portion of social security payments received depending on the taxpayers overall income.

Adjusted Gross Income equals:

  • Gross Income, MINUS
  • Above-the-line deductions listed on the front of Form 1040.
    • You can take above-the-line deductions even if you don't itemize.

Taxable Income Equals:

  • Adjusted Gross Income, MINUS
  • Below the line deductions.

Below the Line Deductions Include:

  • Itemized deductions (from Schedule A of Form 1040).
  • The standard deduction (if you don't itemize), plus additional amounts for people 65 or older and/or blind.
  • Personal exemptions (for yourself, your spouse, and dependents)

For example:

  • If you're single, with no dependents, and
  • Have an adjusted gross income of $50,000, and
  • You take the standard deduction of $6,100 (2013), and
  • You deduct one personal exemption of $3,900 (2013), then
  • Your taxable income would be $40,000 ($50,000 minus ($6,100 plus 3,900)).

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