What Is Taxable Income?

If you’re trying to make sense of your taxes, one of the most important things to understand is taxable income—the amount of income the IRS and your state tax agency use to calculate how much tax you owe.

What Counts as Taxable Income?
Taxable income starts with your gross income, which includes:

Wages and salaries
Tips and bonuses
Business income (if you’re self-employed)
Interest and dividends
Capital gains (like profits from selling investments)

But not everything you earn is automatically taxed. You can lower your taxable income with deductions, tax credits, and—depending on the year—exemptions.

Step-by-Step: How Taxable Income Is Calculated
Start with Gross Income
This is all the money you earned from all sources during the year.

Subtract Deductions
Deductions reduce how much of your income is taxed. You can take the:

Standard deduction (a fixed amount based on your filing status)

Itemized deductions (specific expenses like mortgage interest, charitable donations, and medical expenses)

Apply Tax Credits
Tax credits reduce the amount of tax you owe—dollar for dollar.
Examples include:

Child Tax Credit
Earned Income Tax Credit
Education credits

Some credits are nonrefundable (they reduce your tax to zero), while others are refundable (you get money back even if you owe nothing).

Consider Filing Status
Your tax rate depends on how you file:

Single
Married filing jointly
Head of household


Each has its own income thresholds and standard deduction.

Why Understanding Taxable Income Matters
Your taxable income determines your tax bracket, which sets the percentage of tax you pay. The U.S. uses a progressive tax system, meaning the more you earn, the higher the rate applied to your upper levels of income.

Not knowing your true taxable income can lead to overpaying—or underpaying—and cause problems with the IRS.

Need Help? Walker Tax Relief Can Guide You
Tax laws change frequently, and navigating taxable income rules can be tricky. That’s why small business owners and individuals across Michigan and beyond trust Jennifer Walker, an experienced Enrolled Agent, to help them file accurately and plan smart.

At Walker Tax Relief, we don’t just prepare your return—we help you understand it.

Based in Northville, Michigan, serving clients nationwide
Need help understanding your taxable income? Contact Jennifer Walker today.