How is taxable income determined?

Taxable income is determined by subtracting allowable deductions from total income. Total income includes all forms of revenue, such as wages, interest, dividends, and other income sources. Allowable deductions can include expenses that the tax code permits, such as mortgage interest, educational expenses, and certain business expenses. By deducting these allowable expenses from the total income, individuals arrive at their taxable income, which is the amount upon which federal and state taxes are calculated.

This method ensures that the tax system is equitable, allowing individuals to reduce their taxable income based on certain expenditures that reflect their ability to pay. It also helps in accurately assessing how much tax a person owes to the government.