Define "taxable income."

Taxable income is defined as gross income minus allowable deductions and exemptions. This calculation reflects the amount of income that is subject to taxation after considering all permissible deductions that reduce overall income. These deductions may include expenses such as mortgage interest, student loan interest, and contributions to retirement accounts, among others. By subtracting these deductions from gross income, the taxpayer arrives at an amount that the Internal Revenue Service (IRS) will use to determine tax liability.

Understanding taxable income is vital because it directly influences how much tax one is required to pay. This definition highlights the importance of tax planning, where individuals and businesses can optimize their tax situations legally by considering all available deductions.

In contrast, only considering gross income or net income after tax credits does not give a complete picture of what constitutes taxable income. Thus, focusing on the relationship between gross income and deductions provides clarity on how taxable income is calculated and reported.