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Taxable Income: Definition, How to Calculate It
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do not influence our editors’ opinions or ratingsTaxable Income: Definition, How to Calculate It
Most forms of income count as taxable — but not all. Here’s how to calculate yours and some ways to reduce your liability.
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9 years of experience Expertise Stocks ETFs economic newsSam Taube writes about investing for NerdWallet. He has covered investing and financial news since earning his economics degree from the University of Maryland in 2016. Sam has previously written for Investopedia, Benzinga, Seeking Alpha, Wealth Daily and Investment U, and has worked as an editor for Investment U, Wealth Daily and Haven Investment Letter. He is based in Brooklyn, New York.
Sam Taube writes about investing for NerdWallet. He has covered investing and financial news since earning his economics degree from the University of Maryland in 2016. Sam has previously written for Investopedia, Benzinga, Seeking Alpha, Wealth Daily and Investment U, and has worked as an editor for Investment U, Wealth Daily and Haven Investment Letter. He is based in Brooklyn, New York. Published in Lead Writer + more + more
Editor & Content Strategist
Expertise Taxes InvestingSabrina Parys is an editor and content strategist on the taxes and investing team at NerdWallet, where she manages and writes content on personal income taxes. Her previous experience includes five years as a copy editor and associate editor in academic and educational publishing. She is based in Brooklyn, New York.
Sabrina Parys is an editor and content strategist on the taxes and investing team at NerdWallet, where she manages and writes content on personal income taxes. Her previous experience includes five years as a copy editor and associate editor in academic and educational publishing. She is based in Brooklyn, New York. Published in Editor & Content Strategist + more + moreUnderstanding how much you may owe in taxes means keeping track of many different numbers and terms. One of the most important numbers is taxable income: the amount of money on which you have to pay income tax.
Understanding how much you may owe in taxes means keeping track of many different numbers and terms. One of the most important numbers is taxable income: the amount of money on which you have to pay income tax.Here’s what to know about taxable income, how to calculate it and some basic strategies for reducing it.
Here’s what to know about taxable income, how to calculate it and some basic strategies for reducing it.What is taxable income?
What is taxable income?According to the IRS, most income is taxable unless it is tax-exempt by law
According to the IRS, most income is taxable unless it is tax-exempt by law Internal Revenue Service. Taxable income. Accessed Sep 10, 2024. . Taxable income can take the form of earned income, such as wages and salaries, as well as unearned income, such as profits from the sale of investments or property.Some common types of taxable income include, but are not limited to:
Some common types of taxable income include, but are not limited to:Employment income (i.e., wages reported on Form W-2).
Employment income (i.e., wages reported on Form W-2 ).Freelance or independent contractor income reported on Form 1099.
Freelance or independent contractor income reported on Form 1099.Rental income.
Rental income.Business income.
Business income.Investment income, including capital gains, dividends and interest.
Investment income, including capital gains , dividends and interest.Benefit payments such as distributions from traditional retirement plans, unemployment benefits and Social Security payments (depending on income).
Benefit payments such as distributions from traditional retirement plans, unemployment benefits and Social Security payments (depending on income).Some types of canceled debt (the amount forgiven is treated as income).
Some types of canceled debt (the amount forgiven is treated as income).Alimony payments (for the beneficiary).
Alimony payments (for the beneficiary).Tax refunds and rebates.
Tax refunds and rebates.Gambling winnings.
Gambling winnings.» MORE: What are the differences between 1099 and W-2 income?
» MORE » MORE : What are the differences between 1099 and W-2 income ? AD Owe $10,000+ or More? This Tax Season Could Be Your Chance to Qualify Each year the IRS writes off millions in tax debt, yet few have applied. Learn moreon Anthem Tax Services' website
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Taxable income vs. nontaxable income
Taxable income vs. nontaxable incomeCertain types of income are federally nontaxable by law. A nonexhaustive list of types of nontaxable income generally includes:
Certain types of income are federally nontaxable by law. A nonexhaustive list of types of nontaxable income generally includes:Life insurance payouts.
Life insurance payouts.Qualified Roth IRA and Roth 401(k) distributions.
Qualified Roth IRA and Roth 401(k) distributions.Health savings account (HSA) withdrawals for qualified medical expenses.
Health savings account (HSA) withdrawals for qualified medical expenses.Employer-provided insurance benefits.
Employer-provided insurance benefits.Most municipal bond interest.
Most municipal bond interest.Gifts are something of a special case: They are not taxable income for the recipient, but the giver may be subject to gift tax if they’ve exceeded their lifetime gift tax exclusion.
Gifts are something of a special case: They are not taxable income for the recipient, but the giver may be subject to gift tax if they’ve exceeded their lifetime gift tax exclusion. ? Nerdy TipCertain kinds of nontaxable income, such as municipal bond interest, may not be taxed but can be included in the calculation of modified adjusted gross income (MAGI), a number that helps the IRS determine whether you're eligible for certain tax credits or benefits.
Certain kinds of nontaxable income, such as municipal bond interest, may not be taxed but can be included in the calculation of modified adjusted gross income (MAGI) , a number that helps the IRS determine whether you're eligible for certain tax credits or benefits.» Learn more: 14 types of nontaxable income
» » Learn more: Learn more: 14 types of nontaxable incomeHow to calculate taxable income
How to calculate taxable incomeDetermining your taxable income starts with knowing your gross income, which is the sum of all the money you received throughout the year. You’ll then have to figure out which of the five tax statuses applies to you. Choosing the right one is important because your status dictates your tax brackets and rates, which tax benefits you may be eligible for, and how much you may be able to subtract from your income via certain deductions.
Determining your taxable income starts with knowing your gross income , which is the sum of all the money you received throughout the year. You’ll then have to figure out which of the five tax statuses applies to you. Choosing the right one is important because your status dictates your tax brackets and rates , which tax benefits you may be eligible for, and how much you may be able to subtract from your income via certain deductions.Once you have your gross income, you’ll need to figure out what your adjusted gross income (AGI) is. Your AGI is equal to your gross income minus certain “above-the-line” deductions that are available to all taxpayers.
Once you have your gross income, you’ll need to figure out what your adjusted gross income (AGI) is. Your AGI is equal to your gross income minus certain “above-the-line” deductions that are available to all taxpayers.Some examples of above-the-line deductions:
Some examples of above-the-line deductions:Contributions to traditional IRAs and 401(k)s.
Contributions to traditional IRAs and 401(k)s.Student loan interest payments.
Student loan interest payments.Alimony payments (for the payer).
Alimony payments (for the payer).After this, taxpayers can further reduce their taxable income in one of two ways — via the standard deduction or itemizing. Most taxpayers claim the standard deduction, a set amount they can subtract from their AGI.
After this, taxpayers can further reduce their taxable income in one of two ways — via the standard deduction or itemizing. Most taxpayers claim the standard deduction , a set amount they can subtract from their AGI.Itemized deductions, on the other hand, are deductions you can take for specific IRS-approved expenses. If a taxpayer has enough of these expenses that the value exceeds what they would get through the standard deduction, they can consider this option.
Itemized deductions, on the other hand, are deductions you can take for specific IRS-approved expenses. If a taxpayer has enough of these expenses that the value exceeds what they would get through the standard deduction, they can consider this option.What’s left over after this process is your taxable income.
What’s left over after this process is your taxable income.» Estimate your bill or refund with our income tax calculator.
» Estimate your bill or refun » Estimate your bill or refun d with our d with our income tax calculator . AD Owe $10,000+ or More? This Tax Season Could Be Your Chance to Qualify Each year the IRS writes off millions in tax debt, yet few have applied. Learn moreon Anthem Tax Services' website
AD Let’s resolve your tax issues: Tax Relief & Resolution Services for IRS Tax Debt Certified Enrolled Agents, CPAs, and Tax Attorneys on your case. Learn moreon TaxRise's website
How to reduce taxable income
How to reduce taxable incomeYou can reduce your taxable income by contributing to certain tax-advantaged accounts or by claiming additional deductions.
You can reduce your taxable income by contributing to certain tax-advantaged accounts or by claiming additional deductions.For example, if a 401(k) account is available to you via an employer, you can contribute up to $24,500 of your income in 2026 to this retirement savings vehicle if you're under the age of 50. This, in turn, will lower your taxable income by $24,500 if you contribute the maximum amount. Even if you’re not a W-2 worker, there are plenty of self-employment retirement accounts available with similar tax advantages.
For example, if a 401(k) account is available to you via an employer, you can contribute up to $24,500 of your income in 2026 to this retirement savings vehicle if you're under the age of 50. This, in turn, will lower your taxable income by $24,500 if you contribute the maximum amount. Even if you’re not a W-2 worker, there are plenty of self-employment retirement accounts available with similar tax advantages.Another option for reducing your taxable income is to consider itemizing. This deduction strategy might be a good fit for taxpayers who have enough specialty deductions to make passing up the standard deduction worthwhile. Some of the most well-known itemized deductions include:
Another option for reducing your taxable income is to consider itemizing. This deduction strategy might be a good fit for taxpayers who have enough specialty deductions to make passing up the standard deduction worthwhile. Some of the most well-known itemized deductions include:SALT deduction: Up to $40,000 ($40,400 in 2026) in state and local income, sales or property tax payments.
SALT deduction : Up to $40,000 ($40,400 in 2026) in state and local income, sales or property tax payments.Mortgage interest deduction: Interest payments on up to $750,000 of mortgage debt from their first or second home ($375,000 if married filing separately).
Mortgage interest deduction : Interest payments on up to $750,000 of mortgage debt from their first or second home ($375,000 if married filing separately).Charitable donations deduction: Money or goods donated to qualified organizations worth up to 60% of AGI.
Charitable donations deduction : Money or goods donated to qualified organizations worth up to 60% of AGI.» Tax planning basics: 7 strategies to consider
» » Tax planning basics: Tax planning basics: 7 strategies to considerBottom line
Bottom lineIn short, taxable income is equal to adjusted gross income (AGI) minus standard or itemized deductions. Here is a slightly more detailed formula:
In short, taxable income is equal to adjusted gross income (AGI) minus standard or itemized deductions. Here is a slightly more detailed formula:Taxable income = gross income - (nontaxable income + above-the-line deductions + standard deduction or itemized deductions).
Taxable income = gross income - (nontaxable income + above-the-line deductions + standard deduction or itemized deductions). Taxable income = gross income - (nontaxable income + above-the-line deductions + standard deduction or itemized deductions).If this feels too hard to do by hand, don’t worry. There’s a variety of tax-filing software out there that can make these calculations easier.
If this feels too hard to do by hand, don’t worry. There’s a variety of tax-filing software out there that can make these calculations easier.ON THIS PAGE
What is taxable income? What is taxable income? Taxable income vs. nontaxable income Taxable income vs. nontaxable income How to calculate taxable income How to calculate taxable income How to reduce taxable income How to reduce taxable income Bottom line Bottom lineON THIS PAGE
What is taxable income? What is taxable income? Taxable income vs. nontaxable income Taxable income vs. nontaxable income How to calculate taxable income How to calculate taxable income How to reduce taxable income How to reduce taxable income Bottom line Bottom line More like this Taxes How to File Taxes: A 2026 Tax Filing Guide Whether you're a first-time filer or just need help learning how to file taxes on your own, here's a quick guide that covers how, when and where to file your return. 2 By Sabrina Parys, Tina Orem How to Find the Best Tax Preparer Near You Ask for credentials, do a background search and compare fees to find the right tax preparer near you. 2 By Tina Orem, Bella Avila TurboTax vs. H&R Block: Which Software Is Best For You? TurboTax is popular, but it isn't the clear choice for all. Our opinion: Take a hard look at H&R Block before deciding how to file. Sabrina Parys Get started Get startedon Anthem Tax Services's website
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