Legal Definitions - Taxable income

Taxable income

Taxable income is the amount of money an individual or business has to pay taxes on. It is calculated by subtracting all allowable deductions from the gross income. Taxable income is also known as adjusted gross income. The deductions for taxable income are all above the line deductions. After calculating the taxable income, the individual or business may have further tax exemptions or tax credits.

Example 1: John earns $50,000 a year. He has $10,000 in allowable deductions. His taxable income is $40,000.

Example 2: ABC Company earns $500,000 in revenue. They have $100,000 in allowable deductions. Their taxable income is $400,000.

In Example 1, John's gross income is $50,000. After subtracting his allowable deductions of $10,000, his taxable income is $40,000. This is the amount he will have to pay taxes on.

In Example 2, ABC Company's gross income is $500,000. After subtracting their allowable deductions of $100,000, their taxable income is $400,000. This is the amount they will have to pay taxes on.