Glossary
Taxable income
Definition
Taxable income is the amount federal income tax brackets apply to: adjusted gross income minus the standard deduction or itemized deductions (and certain other deductions). It is usually well below gross income, which is why effective rates look low.
How taxable income works
The path runs gross income, minus above-the-line adjustments, equals adjusted gross income; minus deductions, equals taxable income. Tax is figured on taxable income, then credits reduce it.
Many planning moves work by lowering taxable income at the marginal rate.
Why it matters to a firm
Clients often confuse gross and taxable income; clarifying it improves every estimate they run.
Questions about taxable income
Where is it on Form 1040?
On the taxable income line, after deductions.
Do credits reduce taxable income?
No, they reduce the tax.
Do 401(k) contributions reduce it?
Pre-tax contributions do.
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Related terms: Adjusted gross income · Standard deduction · Itemized deductions
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