What is meant by the term "taxable income"?

Taxable income refers specifically to the portion of income that is subject to taxation by the federal government after accounting for various deductions and exemptions. This means that it is derived from total income by subtracting eligible deductions—such as standard deductions or itemized deductions—and exemptions, which can reduce the overall amount of income considered for tax purposes.

Understanding taxable income is crucial because it directly impacts an individual's or a business's tax liability. By identifying what constitutes taxable income, taxpayers can better plan their finances and tax strategies to minimize tax burdens while remaining compliant with tax laws. In contrast, the total income earned before deductions does not reflect the amount on which taxes will ultimately be calculated. Similarly, the terms relating to exempt income or any income received during the tax year do not pertain specifically to the amount that will be taxed, which is why they do not describe taxable income accurately.