In the general formula for taxation, what term describes what remains after deducting eligible expenses from gross income?

• A. Taxable income
• B. Net income
• C. Gross income
• D. After-tax profit

Answer: (A)

Taxable income is the amount left after subtracting eligible deductions from gross income. It’s the figure used to determine how much tax you owe, because tax rates apply to that net amount rather than to gross income. For example, if gross income is $100,000 and deductions total $25,000, taxable income would be $75,000. Credits may reduce the final tax bill, but the base for calculating liability is taxable income. By contrast, gross income is the total before deductions, net income is the accounting term for income after expenses, and after-tax profit is what remains after taxes are paid.