How to calculate taxable income
Editorial staff, J.P. Morgan Wealth Management
- Taxable income is the amount of income that is used to calculate how much an individual or a company owes in income taxes.
- Taxable income generally includes all types of income, including wages, salaries, tips and bonuses. It also includes investment income, which is income gained from investments like taxable interest, dividends and capital gains, as well as unearned income.
- To calculate taxable income, the following steps need to be taken: Determine filing status, collect the applicable income documents, calculate your adjusted gross income (AGI) and then subtract eligible deductions from your AGI.
What is taxable income?
Generally, for individuals taxable income equals gross income, subject to adjustments, minus applicable deductions. Taxable income is the amount of income that the government will tax. However, it’s not always as simple as being the number on your W-2 form. Subject to exclusions, gross income means all income from whatever source derived, and so it may include many more items than just your wages, tips and other compensation. Taxable income includes wages, salaries, tips and bonuses. It also includes investment income and unearned income.
Investment income can come from dividends, interest, assets that have appreciated and been sold or other sources. Unearned income can come from a variety of sources including unemployment compensation, retirement income, annuities, canceled debts and government benefits.
With the enactment of the One Big Beautiful Bill Act (OBBBA) on July 4, 2025, taxpayers that work jobs who have historically “customarily and regularly” received tips (e.g., bartenders or servers) may be eligible to deduct a portion (generally up to $25,000 for employees) of their tip income for tax years 2025-2028. In addition, under the OBBBA, certain wage earners may be entitled to a deduction of up to $12,500 (or $25,000 for joint filers) for qualified overtime compensation, which generally is an amount of overtime compensation that exceeds their regular rate of pay (i.e., the “half” portion of “time-and-a-half” compensation). Note that these deductions phase out for single taxpayers who make more than $150,000 a year and married taxpayers who jointly make over $300,000 a year.
Eligible deductions can be claimed. These are subtracted from your adjusted gross income (AGI) to determine taxable income. To determine taxable income, follow these five steps.
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Calculating taxable income
Below are five general steps to calculate taxable income for individuals:
1. Figure out your filing status
The first step in calculating taxable income for an individual tax return is determining filing status. Unmarried people can file as a “single filer” or as a “head of household.” Heads of household are people who pay more than half of the support and housing costs for another person. For married couples, it may make sense to file as “married filing jointly,” though in some instances it’s better to file as “married filing separately.”
2. Collect documents for all sources of income
Next, depending on filing status, collect documents showing sources of income for yourself/the taxpayer and any applicable dependent(s). Some of the most common forms include: W-2s for work as an employee, 1099-NEC forms for work as a contractor, 1099-MISC forms for income from other miscellaneous sources and 1099-INT forms for interest you may have earned. You may also need Forms 1099-B for capital gains and 1099-DIV for dividends. Collecting this information will assist you in determining your overall gross income. Recall that gross income means all income from whatever source derived so your income may include items not reported to you on a tax form, such as cash received from sale of personal property.
3. Determine your AGI
The next step is calculating your AGI. To do this, you will need to make certain “above-the-line” adjustments to your gross income. This includes taking out contributions to a qualifying IRA account, student loan interest and certain other expenses like contributions to health savings accounts. These expenses come out of your income as “adjustments” before you subtract itemized or standard deductions or the standard deduction.
4. Calculate deductions
When calculating your deductions, you have a choice between taking the standard deduction or itemizing your deductions. The standard deduction is a specified fixed dollar amount that people may claim if their itemized deductions are less than the standard deduction.
For example, for 2024 individual tax filers are allowed to claim a $14,600 standard deduction, and for 2025 they can claim a $15,750 standard deduction., For the 2025 tax year, the standard deduction is $31,500 for married couples filing jointly.
If you decide to itemize your deductions instead of taking the standard deduction, you will need records of deductible expenses including property taxes and mortgage interest, charitable donations, educational expenses and unreimbursed medical bills.
If you are a business owner, you may also be eligible for what is called a qualified business income deduction if you operate a qualifying business in a qualifying pass-through entity and if certain other requirements are met.
Standard deduction | Itemized deduction |
|---|---|
Time commitment | |
May be convenient and time-saving | May be time-consuming |
Complexity | |
May be more straightforward | May be more complicated and may require professional guidance |
Limitations | |
There are a few limitations around who can take a standard deduction, which can be helpful to review with a tax professional. | There are limitations and caps to consider, so consult a tax professional with any questions you may have. |
Factors to consider | |
Depending on certain factors, some individuals may be eligible for a larger standard deduction. | Includes five main categories (i.e., medical/dental expenses, taxes paid, interest paid, charitable contributions, casualty, theft losses and miscellaneous itemized deductions) |
Potential savings | |
May ultimately provide less of a deduction versus an itemized approach | You can claim more expenses and may be able to save more money. |
Availability | |
Available to everyone | Limited for taxpayers with an adjusted gross income (AGI) above a certain threshold |
5. Calculate your taxable income
Finally, subtract all deductions from your AGI. This number is your taxable income. Calculating your AGI can be complicated, so consider speaking with a tax professional if you need assistance.
What’s the importance of knowing your taxable income?
Understanding how to correctly calculate your taxable income will make filing your taxes easier. You can also use a calculator to help you calculate your taxable income. If you have questions about your taxable income or filing your taxes, consider talking to a tax professional.
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Editorial staff, J.P. Morgan Wealth Management
