What Is the Difference Between Taxable Income & Reported?
The amount of your reported income and taxable income can vary significantly depending on your allowable deductions. In some instances, a taxpayer may show considerable reported income, yet when it comes time to pay taxes, his taxable income is zero, thereby he pays no taxes. For many taxpayers, maximizing deductions and taking advantage of legal tax loopholes is part of their financial strategies.
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Reported Income
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When preparing your income tax returns, the Internal Revenue Service expects you to report all of your income, from all sources and from all countries. Only income the United States tax code explicitly exempts is not included. Therefore, gross income is not necessarily the same as reported income, as gross income might include income exempt by the tax code. Reported income includes money earned from part-time jobs, barter exchanges, contest winnings, prizes, awards and gambling winnings, along with your regular source of income.
Barter
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Not all reported income involves cash. When you barter for services, the fair market value of the goods exchanged factor into the reported income for the year in which you received the goods or services. This applies to both parties involved in the barter. For example, if you groom your neighbor’s dog in exchange for the neighbor mowing your yard, and the fair market value of dog grooming is $50, you add $50 to your reported income.
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Gambling
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While you must include your gambling winnings with your reported income, you can also deduct gambling losses, yet the losses cannot exceed the winnings. Therefore, if you only have gambling losses for the tax year and no gambling winnings included with your reported income, you can’t write off gambling losses.
Deductions
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While your reported income is subject to taxation by the IRS, this doesn’t mean reported income is the same thing as your taxable income. Your allowable deductions -- such as dependent deductions, mortgage interest, medical expenses and business expenses -- factors into the equation, lowering your tax liability.
Taxable Income
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The amount of income you pay taxes on is your taxable income. For example, if your reported income is $100,000 for the tax year, yet you have $40,000 in deductions, you only pay taxes on $60,000, which is your taxable income.
Deduction Savings
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When calculating your taxable income, the amount of deductions is not how much money you save in taxes. If you have $10,000 in deductions, this doesn’t save you $10,000, it simply lowers your taxable income. For example, if your tax rate is 20 percent, you pay $2,000 in income tax for every $10,000 you have in taxable income. This means a $10,000 deduction saves you $2,000; it does not save you $10,000.
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