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

Oct 26, 2023 By Triston Martin

The recent tax reform has made it a lot more complicated for people to understand how much money they make, as the government has shifted towards a new system of taxation. In order to calculate your taxable income, you have to factor in both the gross amount of money you earn through pre-tax deductions and your average expenses. Finding out exactly who falls under this category can be tricky, so we've put together this guide on what you should know about taxable income vs. gross income.


What is "gross income"?


Gross income means the amount of money you earn before taking into account any deductions. It also includes interest, rental properties, social security and family support, charitable donations, and business income. This is generally the amount a person earns after deducting for his or her expenses such as taxes and retirement contributions.


What is Taxable Income?


Taxable income is your total amount of money you earned during a specific year, minus your exemptions and deductions. If you make $100,000 but claim $8,400 in exemptions as a single individual, then your taxable income would be $92,600 (not including any additional taxes or federal taxes). It's important to remember that this is just one year's worth of taxable income; it doesn't take into account how much you made the previous year or how much you earned annually over time. As a result, the average American has several years of earnings in addition to the one year of taxable income.



What's the difference?


In simple terms, taxable income is the amount of money you actually take home in your pocket. If you get the standard deduction, it's the same as your taxable income. For example, if you have $40,000 of disposable income in 2021 but $40,000 of deductions and tax credits, then it would be considered as taxable income.


Gross income also includes things like rental properties, investments, and business net earnings (this means profits without taking into account expenses such as taxes and cost of goods sold).


Example


Taxable Income: Let's take a look at an example to better explain this concept. If your gross income was $100,000 and you claimed $8,400 in exemptions as a married filing jointly couple, then your taxable income would be $92,600. But what if you had no deductions? How much money would it take before it became advantageous to itemize rather than rely on the standard deduction? The answer is $120,000; that's how much you'd need in gross income before it starts becoming worthwhile to itemize.


Gross Income: Gross income is your total earnings before any taxes are taken out. This includes all of the money you earn from various sources, such as your job, investments, and other forms of income. Your gross income is used to calculate your tax liability.


Take, for example, John and Mary. John earns $50,000 in his job, while Mary earns $10,000 from her part-time retail job. If the couple's combined gross income is $60,000 this will be their taxable income. However, if they are adults with no children and earn less than a certain amount of money per year ($13,950 in 2016), then they are eligible to file taxes as head of household. In this case, instead of combining their incomes together when determining tax liability, they would be considered individuals filing jointly as head of household; their joint taxable income is $50,000 (half of the total gross income).



When do I have taxable income?


Taxable income can apply to anyone who files their taxes. This includes people who are married and those who are single, as well as taxpayers who file using the head of a household status. It also applies to people filing a joint return together and those that are head of household. There's also the option for non-wage earners to use the standard deduction based on their marital status to reduce their taxable income and even more if they're able to itemize their deductions.


Dependents can be claimed on someone else's tax return, but they will still have their own gross income (income prior to taxes).


When do I have gross income?


Gross income includes things like rental properties, investments, and business net earnings (profits without taking into account expenses such as taxes and cost of goods sold). This is separate from taxable income because the government only wants to tax people who aren't part of an independent business. This is also the amount a person earns after taking into account his or her expenses such as taxes and retirement contributions.


How is my taxable income calculated?


Taxable income is the amount of gross income that's left over for you, taking your specific deductions into account. Your taxable income will be higher if you're able to itemize your deductions and take any additional credits. This is why it's important to understand how each deduction works in order to reduce your taxable income.


What is business income tax?


Business owners pay taxes on their personal taxes, but they also pay taxes on the revenue their business makes. This is known as a corporate tax or corporation tax. The first $50,000 of income that a married couple makes from a corporation would be taxed at 12 percent, and then it would be taxed at 25 percent for anything above that amount.


The change to the corporate tax rate would bring it down to 20 percent for corporations and partnerships making more than $5 million in revenue. On the corporate side, it would start at $11 million.


What is a pass-through entity?


Pass-through entities are businesses such as S corporations, partnerships, and LLCs. They don't pay corporate taxes; instead, their owners are taxed on the business income at their individual tax rate. So if you're a doctor and you own medical practice, you wouldn't be taxed on a corporate level if your practice makes more than $5 million each year; instead, you would be taxed on your personal income. Right now, these entities are taxed at the same rate as corporations.

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