refers to the base upon which an income tax
system imposes tax. Generally, it includes some or all items of income and is reduced by expenses and other deductions. The amounts included as income, expenses, and other deductions vary by country or system. Many systems provide that some types of income are not taxable and some expenditures not deductible in computing tax. Some systems base tax on taxable income of the current period, and some on prior periods. Taxable income may refer to the income of any taxpayer, including individuals and corporations, as well as entities that themselves do not pay tax, such as partnerships.
Most systems require that all income realized be included in taxable income. Some systems provide tax exemption
for some types of income. Many systems impose tax at different rates for differing types (e.g., capital gains
or salaries) or levels of income (e.g., graduated rates). In the United States, gross income
includes all income realized from whatever source, but excludes particular tax exempt items, such as municipal bond
interest. In 2010, the United Kingdom and the United States both provided reduced rates of tax for capital gains and dividends.
Most systems and jurisdictions allow business
taxpayers to reduce taxable income by cost of goods or other property sold, as well as deductions for business expenses. Many systems limit some sorts of business deductions. For example, deductions for automobile expenses are limited in the United Kingdom and United States.
Some systems allow tax deductions for certain nonbusiness
expenses. Such deductions may include personal expense items, such as a home mortgage interest deduction
, and vary widely by jurisdiction. In addition, many systems only levy taxes on earnings above an income tax threshold, allow deductions for personal allowances or a minimum deemed amount of personal deductions. The United States Federal system allows a deduction for personal exemptions, as well as a minimum standard deduction in lieu of
other personal deductions. Some states in the United States allow few personal deductions.