Taxable Income vs. Gross Income: An Overview
Gross income includes all income you receive that isn't explicitly exempt from taxation under the Internal Revenue Code (IRC). Taxable income is the portion of your gross income that's actually subject to taxation. Deductions are subtracted from gross income to arrive at your amount of taxable income.
Key Takeaways
- Gross income is all income from all sources that isn't specifically tax-exempt under the Internal Revenue Code.
- Taxable income starts with gross income, then certain allowable deductions are subtracted to arrive at the amount of income you're actually taxed on.
- Tax brackets and marginal tax rates are based on taxable income, not gross income.
Taxable Income
Taxable income is a layman's term that refers to your adjusted gross income (AGI) less any itemized deductions you're entitled to claim or your standard deduction. Your AGI is the result of taking certain "above-the-line" adjustments to income, such as contributions to a qualifying individual retirement account (IRA), student loan interest, and some contributions made to health savings accounts.
Taxpayers can then take either the standard deduction for their filing status or itemize the deductible expenses they paid during the year. You're not permitted to both itemize deductions and claim the standard deduction. The result is your taxable income.
Claiming the standard deduction often reduces an individual's taxable income more than itemizing because the Tax Cuts and Jobs Act (TCJA) virtually doubled these deductions from what they were prior to 2018.
Thestandard deductionfor 2022 is $25,900 for married couples filing joint returns; $12,950 for single taxpayers’ individual returns and married individuals filing separately; and $19,400, for heads of households.
For the 2023 tax year, these deductions will increase slightly:
- For single taxpayers and married individuals filing separately, the standard deduction rises to $13,850, up $900 from the prior year.
- The standard deduction for married people filing jointly is $27,700, up $1,800
- For heads of households, the standard deduction is $20,800, up $1,400.
A taxpayer would need a significantly large amount of medical costs, charitable contributions, mortgage interest, and other qualifying itemized deductions to surpass these standard deduction amounts.
Gross Income
Gross income is the starting point from which the Internal Revenue Service (IRS) calculates an individual's tax liability. It's all your income from all sources before allowable deductions are made. This includes both earned income from wages, salary, tips, and self-employment and unearned income, such as dividends and interest earned on investments, royalties, and gambling winnings.
Some withdrawals from retirement accounts, such as required minimum distributions (RMDs), as well as disability insurance income, are included in the calculation of gross income.
Gross business income is not the same as gross revenue for self-employed individuals, business owners, and businesses. Rather, it's the total revenuesobtained from the business minus allowable business expenses—in other words, gross profit. Gross income for business owners is referred to as net business income.
Gross income, however, can incorporate much more—basically anything that's not explicitly designated by the IRS as being tax-exempt. Tax-exempt income includes child support payments, most alimony payments, compensatory damages for physical injury, veterans' benefits, welfare, workers' compensation, and Supplemental Security Income. These sources of income are not included in your gross income because they're not taxable.
Some people confuse their gross income with their wages. Wage earnings often do make up the bulk of an individual's gross income, but gross income includes unearned income, too.
Taxable Income vs. Gross Income Example
Joe Taxpayer earns $50,000 annually from his job, and he has an additional $10,000 in unearned income from investments. His gross income is $60,000.
For the 2022 tax year, Joe claimed an above-the-line adjustment to income for $3,000 in contributions he made to a qualifying retirement account. He then claimed the $12,950 standard deduction for his single filing status. His taxable income is $44,050. While he had $60,000 in overall gross income, he will only pay taxes on the lower amount.
FAQs
Gross income includes all income you receive that isn't explicitly exempt from taxation under the Internal Revenue Code (IRC). Taxable income is the portion of your gross income that's actually subject to taxation. Deductions are subtracted from gross income to arrive at your amount of taxable income.
Is taxable income the same as gross income? ›
Gross income
All of the taxable income you receive for the year. You'll report it on your tax return (Form 1040). It includes all of your earned income, unearned income, and other taxable income before any deductions, credits, or other adjustments are subtracted.
What is my taxable income? ›
Taxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income.
Which explains a difference between income and taxable income? ›
Which explains a difference between income and taxable income? Income is what a person earns, while taxable income reflects deductions subtracted for relevant expenses.
Is taxable income the same as earned income? ›
What is Earned Income? Earned income includes all the taxable income and wages you get from working or from certain disability payments. Taxable earned income includes wages, salaries, tips, and other taxable employee pay.
What is an example of gross income? ›
You simply add up all of your income sources before any tax deductions or taxes. For example, if last year you earned $100,000 in salary, $1,000 in interest income, and $12,000 in rental income, your gross income for the year would be $100,000 + $1,000 + $12,000 = $113,000.
What reduces your taxable income? ›
Both health spending accounts and flexible spending accounts help reduce taxable income during the years in which contributions are made. A lengthy list of deductions remains available to lower taxable income for full- or part-time self-employed taxpayers. Saving for retirement can help lower your taxable income.
How to calculate gross income? ›
Alternatively, you can calculate your gross income as (1) your monthly salary before taxes or (2) the number of hours you will work in a given month multiplied by your hourly pay rate.
How much federal tax should I pay on $50000? ›
If you are single and a wage earner with an annual salary of $50,000, your federal income tax liability will be approximately $5700. Social security and medicare tax will be approximately $3,800. Depending on your state, additional taxes my apply.
What is your gross pay mean? ›
Subscribe now. Gross pay is what employees earn before taxes, benefits and other payroll deductions are withheld from their wages. The amount remaining after all withholdings are accounted for is net pay or take-home pay.
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.
Is adjusted gross income after taxes? ›
Our gross income is subject to taxes and often other deductions, which reduce gross income to arrive at net income: our take-home pay. Adjusted gross income (AGI) also starts out as gross income, but before any taxes are paid, gross income is reduced by certain adjustments allowed by the Internal Revenue Service (IRS).
What income is not taxable? ›
Nontaxable income won't be taxed, whether or not you enter it on your tax return. The following items are deemed nontaxable by the IRS: Inheritances, gifts and bequests. Cash rebates on items you purchase from a retailer, manufacturer or dealer.
Is Social Security considered gross income? ›
Additionally, a portion of your Social Security benefits is included in gross income for tax, in any year the sum of half your Social Security benefit plus all of your taxable gross income, plus all of your tax-exempt interest and dividends, exceeds $25,000 if filing single, or $32,000 if you are Married Filing Jointly ...
What is taxable income on w2? ›
Box 1 "Wages, tips, other compensation": This is federal, taxable income for payments in the calendar year. The amount is calculated as YTD earnings minus pre- tax retirement and pre-tax benefit deductions plus taxable benefits (i.e., certain educational benefits).
What is the difference between gross income and taxable income quizlet? ›
In the United States income tax system, adjusted gross income (AGI) is an individual's total gross income minus specific deductions. Taxable income is adjusted gross income minus allowances for personal exemptions and itemized deductions.
Is modified adjusted gross income the same as taxable income? ›
Modified adjusted gross income can be defined as your household's AGI after any tax-exempt interest income and after factoring in certain tax deductions.1 Knowing your MAGI can help reduce an individual's taxable income (to account for your retirement account contributions), factor in the eligibility for benefits like ...
How do you calculate gross income? ›
Again, gross income refers to the total amount you earn before taxes and other deductions, which is how an annual salary is typically expressed. Simply take the total amount of money (salary) you're paid for the year and divide it by 12.
