Net income provides a more accurate account of the financial status. Here’s why.
What is taxable income?
Taxable income is the amount of income used to calculate the taxes owed by an individual or a company. Taxable income is frequently referred to as adjusted gross income or adjusted income minus deductions or exemptions.
Taxable income is more than just wages and salary. It includes bonuses, tips, unearned income, and investment income. Unearned income can be government benefits, spousal support payments, cancelled debts, disability payments, strike benefits, and lottery and gambling winnings. Investment income may include income from interest earned on investments, dividend payments, and earnings from assets that have appreciated and been sold during the year.
Taxable income also includes fringe benefits provided by employers as a part of compensation, income from virtual currency, and services or goods received in barter.
Income that is not considered taxable includes child support, proceeds from life insurance policies, inherited money, worker’s compensation payments, compensation from injuries, welfare benefits, scholarships or grants for school, and income paid into the earner’s retirement account up to a specific amount.
Taxable income example
Dagny is preparing her taxes. She will claim her wages from her job as a corporate vice president as taxable income, but her stock options are not taxable until exercised. Her grandfather recently passed away and left Dagny a great deal of money and a stake in his railroad company. Dagny does not have to include the inheritance as taxable income, as estate taxes have already been paid. Both Dagny and her employer — her grandfather’s railroad — contribute money to her 401(k) retirement plan. Dagny won’t claim this money as taxable income either.
Want to lower your tax bill? Here are 13 ways to cut your taxes without itemizing.