Taxable income refers to the base upon which an
income tax
An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income). Income tax generally is computed as the product of a tax rate times the taxable income. Tax ...
system imposes
tax
A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or n ...
. In other words, the income over which the government imposed tax. Generally, it includes some or all items of income and is reduced by expenses and other deductions. The amounts included as income, expenses, and other deductions vary by country or system. Many systems provide that some types of income are not taxable (sometimes called non-assessable income) and some expenditures not deductible in computing taxable income. Some systems base tax on taxable income of the current period, and some on prior periods. Taxable income may refer to the income of any taxpayer, including individuals and corporations, as well as entities that themselves do not pay tax, such as partnerships, in which case it may be called “net profit”.
Most systems require that all income
realized (or derived) be included in taxable income. Some systems provide
tax exemption
Tax exemption is the reduction or removal of a liability to make a compulsory payment that would otherwise be imposed by a ruling power upon persons, property, income, or transactions. Tax-exempt status may provide complete relief from taxes, redu ...
for some types of income. Many systems impose tax at different rates for differing types (e.g., capital gains or salaries) or levels of income (e.g.,
graduated rates). In the United States,
gross income includes all income realized from whatever source but excludes particular tax-exempt items, such as municipal bond interest. In 2010, the United Kingdom and the United States both provided reduced rates of tax for capital gains and dividends.
Most systems and jurisdictions allow businesses to reduce taxable income by
cost of goods or other property sold, as well as
deductions for business expenses. Many systems limit some sorts of business deductions. For example, deductions for automobile expenses are limited in the United Kingdom and the United States.
Some systems allow
tax deductions
Tax deduction is a reduction of income that is able to be taxed and is commonly a result of expenses, particularly those incurred to produce additional income. Tax deductions are a form of tax incentives, along with exemptions and tax credits. T ...
for certain nonbusiness expenses (sometimes called personal or domestic expenses).
Sec. 1.212-1 Nontrade or nonbusiness expenses
Retrieved December 4, 2013 Such outlays may include personal expenses, such as a home mortgage interest deduction
A home mortgage interest deduction allows taxpayers who own their homes to reduce their taxable income by the amount of interest paid on the loan which is secured by their principal residence (or, sometimes, a second home). The mortgage deduc ...
, and vary widely by jurisdiction. In addition, many systems only levy taxes on earnings above an income tax threshold, allow deductions for personal allowance
In the UK tax system, personal allowance is the threshold above which income tax is levied on an individual's income. A person who receives less than their own personal allowance in taxable income (such as earnings and some benefits) in a give ...
s or a minimum deemed amount of personal deductions. The United States federal tax system allows a deduction for personal exemptions, as well as a minimum standard deduction in lieu of other personal deductions. Some states in the United States allow few personal deductions.
See also
*Income tax
An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income). Income tax generally is computed as the product of a tax rate times the taxable income. Tax ...
*Income tax in Australia
Income tax in Australia is imposed by the federal government on the taxable income of individuals and corporations. State governments have not imposed income taxes since World War II. On individuals, income tax is levied at progressive rates, ...
*Income tax in Canada
Income taxes in Canada
constitute the majority of the annual revenues of the Government of Canada, and of the governments of the Provinces of Canada. In the fiscal year ending 31 March 2018, the federal government collected just over three times m ...
* Income tax in Hong Kong
*Income tax in the United Kingdom
Taxation in the United Kingdom may involve payments to at least three different levels of government: central government (HM Revenue & Customs), devolved governments and local government. Central government revenues come primarily from income ...
* Income tax in the United States
* Taxable wages
References
{{reflist
Income taxation
Tax terms