Taxable Income vs. Gross Income: What's the Difference?

Taxable Income vs. Gross Income: An Overview

Gross income includes all income you receive that isn't explicitly exempt from taxation under the Internal Revenue Code (IRC). Taxable income is the portion of your gross income that's actually subject to taxation. Allowable deductions are subtracted from gross income to arrive at your taxable income.

Taxable Income

Taxable income is your gross income; all of the income you earn that qualifies to be taxed, including wages, dividends, capital gains, rental income, royalties, and more. Taxpayers are allowed to make adjustments to their taxable income, such as deductions, which leads to your adjusted gross income (AGI), which is the number the IRS uses to determine your taxes for the year.

Your AGI is the result of taking certain "above-the-line" adjustments to income, such as contributions to a qualifying individual retirement account (IRA), student loan interest, and some contributions made to health savings accounts (HSAs).

Taxpayers can then take either the standard deduction for their filing status or itemize the deductible expenses they paid during the year. (You're not permitted to both itemize deductions and claim the standard deduction.) When you subtract either your standard deduction or your itemized deductions from your AGI, the result is your taxable income.

Claiming the standard deduction often reduces an individual's taxable income more than itemizing because the Tax Cuts and Jobs Act (TCJA) virtually doubled these deductions from what they were prior to 2018.

For the 2024 tax year, the standard deduction increased slightly over what it was in 2023 for the various tax filing statuses:

• For single taxpayers and married individuals filing separately, the standard deduction is to $14,600, up $750 from the prior year.
• The standard deduction for married people filing jointly is $29,200, up $1,500.
• For heads of households, the standard deduction is $21,900, up $1,100.

A taxpayer would need a significant amount of medical costs, charitable contributions, mortgage interest, and other qualifying itemized deductions to surpass these standard deduction amounts.

Gross Income

Gross income is the starting point from which the Internal Revenue Service (IRS) calculates an individual's tax liability. It's all your income from all sources before allowable deductions are made. This includes both earned income from wages, salary, tips, and self-employment as well as unearned income, such as dividends and interest earned on investments, rent, royalties, and gambling winnings.

Some withdrawals from retirement accounts, such as required minimum distributions (RMDs), as well as disability insurance income, are included in the calculation of gross income.

Gross business income is not the same as gross revenue for self-employed individuals, business owners, and businesses. Rather, it's the total revenues obtained from the business minus allowable business expenses—in other words, gross profit. Gross income for business owners is referred to as net business income.

Gross income, however, can incorporate much more—basically anything that's not explicitly designated by the IRS as being tax-exempt. Tax-exempt income includes child support payments, most alimony payments, compensatory damages for physical injury, veterans' benefits, welfare, workers' compensation, and Supplemental Security income. These sources of income are not included in your gross income because they're not taxable.

Taxable Income vs. Gross Income Example

Joe Taxpayer earns $50,000 annually from his job, and he has an additional $10,000 in unearned income from investments. His gross income is $60,000.

For the 2023 tax year, Joe claimed an above-the-line adjustment to income for $3,000 in contributions he made to a qualifying retirement account. He then claimed the $13,850 standard deduction for his single filing status. Therefore, his taxable income is $43,150. While he had $60,000 in overall gross income, he will only pay taxes on the lower amount.

The Bottom Line

Taxable income and gross income are not the same thing, but it's easy to get confused about the difference.

Fortunately, not all of your gross income—which includes both earned (wages, salary, tips, bonuses, etc.) and unearned (interest, dividends, rents, royalties, etc.) income—is taxable, thanks to any deductions and credits that you can legitimately claim. To keep more of your money, it also makes sense to take advantage of as many deductions and credits as you are legally entitled to.