We’d all like to be the kinds of people who take tax preparation seriously year-round, but that’s easier said than done. If it’s tax season, you may be sweating to figure out how much tax you owe this year or how big your tax refund will be.
To make matters more complicated, once you crunch the numbers you may be surprised to find that you and the IRS disagree on your precise income. To prevent that surprise, you need to know about taxable income.
Taxable income is, simply put, the portion of your income that's subject to tax after subtracting allowable deductions, exemptions, and adjustments from your gross income. It determines your federal income tax rate, which in turn determines precisely how much money you owe the government in tax.
How do I calculate my taxable income?
Your taxable income is determined by taking your adjusted gross income (AGI) and subtracting any allowable deductions.
What are allowable deductions? You may know them as the standard deduction or itemized deductions (also known as itemizing your return).
Taxable income = adjusted gross income – (standard deduction or itemized deductions)
The standard deduction is a flat number. For 2025, the standard deduction was:
Single: $15,750
Married filing jointly: $31,500
Married filing separately: $15,750
Head of household: $23,625
For the 2026 tax year, the standard deductions are:
Single: $16,100
Married filing jointly: $32,200
Married filing separately: $16,100
Head of household: $24,150
Or, you can itemize your return and add up all the deductions you qualify for. Common deductions include:
State and local taxes (SALT), including property tax and either income or sales tax—up to a cap of $40,000 for 2025 and $40,400 for 2026 (up from just $10,000 in prior years)
Charitable contributions
Interest on your home mortgage
Medical and dental expenses that exceed 7.5% of your AGI
Generally, people take the standard deduction, unless their itemized deductions are higher or they’re not eligible for the standard deduction. That said, the higher SALT cap means more taxpayers than before—especially homeowners in high-tax states—may find that itemizing pays off now.
You may also be wondering where tax credits fit into the equation. A deduction reduces your taxable income before your tax rate is applied, while a tax credit (for example, the Child Tax Credit) reduces your actual tax bill dollar-for-dollar after your taxable income and tax rate are already calculated. That makes credits generally more valuable than deductions of the same dollar amount. To illustrate: $1,000 deduction only saves you a fraction of $1,000 in tax, depending on your tax bracket, while a $1,000 credit saves you the full $1,000.
So let's say your AGI for the year is $78,000, and you're filing as the head of household. You realize the standard deduction is higher than your itemized deductions, so you choose to take the standard deduction for a head of household, which is $23,625 for 2025. That makes your taxable income $54,375 for the year.
$78,000 (AGI) – $23,625 (standard deduction) = $54,375 (taxable income)
What types of income are taxable?
Income that is taxable includes both earned and unearned income.
Earned income is true to its name: it is money you earned. Examples include:
Long-term disability benefits
Salary and wages
Union strike benefits
Bonuses and commissions
Freelance income earned as an independent contractor
Unearned income includes other forms of money you receive, such as:
Investment income (capital gains from selling stocks, property, or other investments)
Alimony from agreements executed before 2019 (post-2018 agreements are not taxable — see below)
Interest and dividends
Retirement income
Rental income
Royalties
Social Security benefits (up to 85% may be taxable, depending on your income)
Unemployment benefits
Prizes, awards, and gambling winnings
Cancelled debt or forgiven debt
A note on tips and overtime
New deductions on tips and overtime were introduced in 2025 under the One Big Beautiful Bill Act (OBBBA) that affect workers who accept tips and work overtime hours—and the impact is already showing up in paychecks. According to Gusto's analysis of its own payroll data, over 99% of tipped and overtime workers examined qualify for some tax savings under these new rules, with almost no one phased out due to high income.
While tips are still taxable income, many tipped workers can now reduce how much of that income actually gets taxed. Employees and self-employed workers in eligible tipped occupations can deduct up to $25,000 of qualified tips from their federal taxable income each year.
Similarly, while overtime pay is still considered taxable income, a portion of it can now be deducted. Eligible workers can now deduct up to 12,500(25,000 for married couples filing jointly) of qualified overtime pay from their federal taxable income each year.
You can find more information on each of these deductions here, and both are currently scheduled to run through 2028.
Is any of my income nontaxable?
Yes! Not all sources of income are taxable.
Nontaxable income can be complicated, and the best way to sort out the particulars is to consult your accountant. But here are a few situations where income may not be taxable:
Child support
Alimony payments from agreements executed on or after January 1, 2019
Educational assistance provided by your employer, up to $5,250
Fringe benefits provided by your employer, such as health insurance premiums, adoption expenses, or qualified transportation benefits (transit passes, parking, or bicycle commuting reimbursements)
Retirement planning services provided by your employer
Quick note: This is not to be taken as tax advice. Since tax rules change over time and can vary by location and industry, consult a CPA or tax advisor for specific guidance. Find an accountant
FAQs
What's the difference between gross income and taxable income?
Gross income is all the money you earn or receive before any adjustments or deductions—wages, tips, interest, and more. Taxable income is what's left after subtracting adjustments (like student loan interest, and HSA contributions, which lower your AGI) and then your standard or itemized deduction. Think of it this way: gross income is the starting point, and taxable income is what the IRS actually applies your tax rate to.
Is Social Security income taxable?
It can be, depending on your total income. Once your combined income (AGI plus nontaxable interest plus half your Social Security benefits) passes $25,000 for single filers or $32,000 for joint filers, up to 50% of your benefits becomes taxable; above $34,000 or $44,000, up to 85% can be taxable. Below those thresholds, benefits aren't taxed at all.
Are tips and overtime pay completely tax-free now?
No. They're both still considered taxable income, but with a new deduction attached. Eligible workers can deduct up to $25,000 of qualified tips, or up to 12,500(25,000 if married filing jointly) of qualified overtime pay, from their federal taxable income through 2028. Employers still withhold taxes from every paycheck as usual, and you claim the deduction when you file your return.
Do I have to pay taxes on money I receive as a gift?
No. The person receiving a gift generally never owes income tax on it, regardless of the amount. Instead, it's the giver who may owe gift tax, and only after exceeding the annual exclusion ($19,000 per recipient in 2025 and 2026) or their lifetime exclusion. One exception: gifts from foreign sources over $100,000 must be reported by the recipient.
Should I take the standard deduction or itemize?
Take whichever gives you the bigger deduction. Add up your itemized deductions, including SALT, mortgage interest, charitable donations, and qualifying medical expenses. Then compare the total to your standard deduction based on filing status. If itemizing comes out higher, use it. If not, the standard deduction is simpler and requires no extra paperwork.
