Most income is taxable, unless it’s specifically exempted by law. Income can be money, property, goods, or services. Even if you don’t receive a form reporting income, you should report it on your tax return.
Income is taxable when you receive it, even if you don’t cash it or use it right away. It’s considered your income even if it’s paid to someone else on your behalf.
Let’s break down three different types of income!
Gross Income
- Gross income is the total amount of money you earn before any taxes or deductions are taken out. This includes wages, salaries, bonuses, tips, rental income, and investment income. Think of it as your “full paycheck” before anything is subtracted.
Adjusted Gross Income (AGI)
- AGI is your gross income minus certain adjustments, such as student loan interest, retirement contributions, or educator expenses. AGI is important because it determines your eligibility for many tax credits and deductions.
Taxable Income
- This is the amount of income that’s actually taxed. You get taxable income by taking your AGI and subtracting either the standard deduction, or itemized deductions (whichever is larger.)
- Standard Deduction – A fixed amount the government allows everyone to subtract from their income, reducing how much tax they owe, is a standard deduction. The amount changes each year and depends on your filing status (single, married filing jointly, etc.).
- Itemized Deductions – Rather than taking the standard deduction, you can list (“itemize”) specific deductible expenses—such as mortgage interest, charitable contributions, and medical costs.
You typically only itemize if these expenses are greater than the standard deduction
As always, remember that everyone’s tax situation is different! Be sure to consult with your CPA.