Comprehending what is the taxable income is necessary if you wish to manage your finances with respect to the tax obligations of your country.
Taxable income determines the exact portion of your earnings that is actually subject to income tax. Besides, knowing how to calculate it correctly is a smart move. Doing so decreases legal liabilities. You will also stay compliant with tax regulations.
Therefore, L&Y Tax Advisors further explains what is the taxable income and its difference from non-taxable income.
What Does Taxable Income Mean?
Taxable income refers to the exact chunk of your income that is subject to tax after accounting for allowable:
- Deductions
- Exemptions
- Adjustments
Generally, taxable income is lower than your gross income. Gross income comprises the entire income you receive during the year. But, taxable income is the portion that remains after subtracting:
- Non-taxable items
- Deductions (applied by law)
What is the Taxable Income?
Taxable income is the total income on which you are legally responsible to pay income tax. Until a particular law excludes the income from taxation, taxable income includes both:
- Earned income (like wages)
- Unearned income (such as investment gains or interest)
Read: What is a VAT number in the US?
How to Calculate Taxable Income?
To compute taxable income:
- Start with your gross income.
- Subtract eligible deductions and exemptions.
- The result will be your taxable income, which is the amount used to determine your tax brackets and liabilities.
What is Non-Taxable Income?
Non-taxable income refers to types of income that, by law, are exempt – fully or partially 0 from being taxed. You may receive the money. But, you do not have to pay income tax on it Some common examples of non-taxable income include:
- Gifts
- Inheritances
- Certain disability or welfare benefits
- Employer-provided health insurance (in certain cases)
- Life insurance (proceeds under specific conditions)
Read: What is tax yield?
Taxable Income vs. Non-Taxable Income
The core differentiating point on taxable income vs. non-taxable income is simple.
| Taxable Income | Non-Taxable Income |
| Counted for tax purposes. | Legally exempt from taxation. |
| Most income is taxable until explicitly excluded by law. | Does not contribute to your tax liability. However, some of it may still need to be reported on your tax return for informational purposes. |
Sources of Taxable Income
Here are some of the key categories of taxable income:
Employee Compensation
All forms of employee compensation are taxable. For instance:
- Wages
- Salaries
- Commissions
- Tips
- Bonuses
Income From Business and Investments
Profits from the following are also taxable:
- Business activities
- Self-employment income
- Rental income
- Earnings from investments (such as dividends or interest)
Income from Partnerships
If you are a partner in a partnership, your share of the partnership’s profits – gains or losses – passes through to you. So, it becomes part of your taxable income.
Income from S Corporations
Similar to partnerships, income passed through from an S corporation to its shareholders is taxable to the individual shareholder.
Bartering
Even if no cash changes hands, the fair market value of goods or services received through bartering is taxable income at the time of receipt.
Digital Currencies
Gains from the sale, exchange, or use of virtual currencies (cryptocurrency) are taxable.
Royalties
Royalties are taxable as ordinary income. Such as, for:
- Copyrights
- Patents
- Mineral/oil/gas properties
Read: What is the meaning of lieu in income tax?
The Bottom Line
Learning what is the taxable income shows that it is an amount on which tax authorities levy income tax. Knowing the sources of taxable income and which are exempt is important for accurate tax planning.
Whether you earn through a job, run a business, invest, or receive royalties, it will likely be taxable – if the income does not qualify for a statutory exclusion.
