What does the term “taxable income” refer to?

Taxable income refers to the portion of an individual's or entity's income that is subject to income tax. It is calculated by taking total income and then subtracting any applicable deductions and exemptions. This definition is aligned with the concept that taxable income is what remains after permissible deductions, such as certain expenses, contributions to retirement accounts, and other allowable adjustments are accounted for.

Total income represents all sources of income received, but not all of this income is taxable. Deductions reduce the total income to arrive at taxable income. Therefore, understanding taxable income is crucial for effective tax planning and management, as it determines how much tax an individual or organization will ultimately pay.