Taxable Income vs. Gross Income: What’s the Difference?

Rate this post
Taxable Income vs. Gross Income: What’s the Difference?

Taxable Income vs. Gross Income: An Overview

Gross income is any income that is not expressly excluded from taxes under the Internal Revenue Code (IRC).The part of your gross income that is subject to taxes is referred to as taxable income. Deductions are removed from gross income to determine your taxable income.

Key Takeaways

  • Gross income includes any income that is not explicitly tax-exempt under the Internal Revenue Code.
  • Taxable income is calculated by subtracting certain permissible deductions from gross income to arrive at the amount of income that is actually taxed.
  • Tax brackets and marginal tax rates are determined by taxable income rather than gross income.

Taxable Income

In layman’s terms, taxable income is your adjusted gross income (AGI) minus any itemized deductions you are allowed to claim or your standard deduction. Your AGI is the result of some “above-the-line” income adjustments, including as contributions to a qualified individual retirement account (IRA), student loan interest, and certain contributions to health savings accounts.

Taxpayers may then choose between using the standard deduction for their filing status and itemizing their deductible costs for the year. You cannot itemize your deductions and take the standard deduction at the same time. As a consequence, your taxable income is calculated.

Because the Tax Cuts and Jobs Act (TCJA) almost quadrupled these deductions from what they were prior to 2018, using the standard deduction frequently decreases an individual’s taxable income more than itemizing.

The standard deduction for married couples filing joint returns in 2021 is $25,100, up $300 from 2020; $12,550, up $150, for single taxpayers’ individual returns and married persons filing separately; and $18,800, up $150, for heads of households.

  Tax Refund Missing? Reasons You Never Received One

These deductions will be somewhat increased for the 2022 tax year:

  • The standard deduction for single taxpayers and married persons filing separately is increased to $12,950, up $400 from the previous year.
  • The standard deduction for married couples filing jointly is now $25,900, an increase of $800.
  • The standard deduction for heads of households has increased by $600 to $19,400.

To exceed these basic deduction limits, a taxpayer would require a considerable amount of medical expenses, charitable donations, mortgage interest, and other eligible itemized deductions.

Gross Income

The Internal Revenue Service (IRS) assesses an individual’s tax due based on gross income. It is your total revenue from all sources before any permissible deductions. This covers both earned and unearned income, such as dividends and interest gained on investments, royalties, and gaming profits.

Some retirement plan withdrawals, such as required minimum distributions (RMDs) and disability insurance income, are included in the computation of gross income.

For self-employed persons, company owners, and enterprises, gross business income is not the same as gross revenue. Rather, it is the sum of the firm’s entire revenues less permissible business expenses—in other words, gross profit. For company owners, gross revenue is referred to as net business income.

Some individuals mix up their gross income and wages. Wage earnings often account for the majority of an individual’s gross income, although gross income also includes unearned income.

Gross income, on the other hand, might include a lot more—basically everything that isn’t specifically classified as tax-exempt by the IRS. Child support payments, most alimony payments, compensatory damages for bodily harm, veterans’ benefits, welfare, workers’ compensation, and Supplemental Security Income are all examples of tax-exempt income. Because they are not taxable, these sources of income are not included in your gross income.

  What Is Medicare Tax?

Taxable Income vs. Gross Income Example

Joe Taxpayer makes $50,000 per year from his employment and has another $10,000 in unearned income from investments. His annual salary is $60,000.

Joe claimed an above-the-line adjustment to income for $3,000 in contributions to an eligible retirement account for the 2020 tax year. He subsequently claimed the standard deduction of $12,400 for his single filing status. His taxable earnings are $44,600. While he earned a total gross income of $60,000, he will only pay taxes on the smaller amount.

You are looking for information, articles, knowledge about the topic Taxable Income vs. Gross Income: What’s the Difference? on internet, you do not find the information you need! Here are the best content compiled and compiled by the team, along with other related topics such as: Tax.

Similar Posts