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What is the difference between taxable income and gross income?

A:

Gross income includes all of the income a person receives during a year that is not explicitly exempt from taxation, whereas taxable income is the amount of income that is actually subject to taxation, after all allowable deductions or exemptions have been subtracted from the gross income.

Gross Income

Gross income is the starting point from which the IRS calculates an individual’s tax due. Gross income includes any income not explicitly designated by the IRS as tax-exempt. Gross income essentially includes any source of income (earned or unearned) that an individual might have – wages, bonuses, commissions, capital gains or dividends from investments, or income from property rentals. Some withdrawals from retirement accounts, Social Security benefits or disability insurance income may also qualify to be included in the calculation of gross income.

For a self-employed individual or a business owner, gross income is the total revenue obtained from the business, minus any allowable business expenses. Gross income for business owners is referred to as net business income.

Taxable Income

Taxable income is the part of an individual’s gross income that is actually subject to taxation. There are numerous items that significantly reduce the gross income figure for an individual to the actual taxable income.

One of the first deductions from gross income is the appropriate personal exemption for an individual and his spouse and dependents. In addition to the personal exemption, taxpayers can take further deductions, either in the form of a standard deduction or by itemizing.

Itemizing deductions often reduces an individual’s tax liability more than the standard deduction if he has a significantly large amount of medical costs, charitable contributions or other itemizable expenses. Contributions to a qualifying individual retirement account (IRA) further reduce an individual’s taxable income.

For more detail, see What is the difference between AGI (adjusted gross income) and gross income? and What are the differences among gross income, adjusted gross income and modified adjusted gross income?

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Cobi Jones writes about the blockchain community in the US. He is an entrepreneur and private investor in blockchain projects