How is Taxable Income calculated?

Taxable Income is calculated by taking Adjusted Gross Income (AGI) and subtracting the smaller of the Standard Deduction or Total Itemized Deductions. This approach reflects the tax structure in which individuals are allowed to reduce their AGI by a certain deduction amount, which aims to relieve some tax burden based on their filing status and other criteria.

The Standard Deduction provides a fixed deduction based on the taxpayer's filing status, while Itemized Deductions allow taxpayers to list and deduct certain eligible expenses, such as mortgage interest, state taxes, and charitable contributions. The purpose of using the smaller amount is to ensure that taxpayers benefit from the deduction method that offers them the greatest tax advantage.

In contrast, other options do not accurately represent the process of calculating Taxable Income. For instance, subtracting exemptions from AGI does not align with current tax law, as personal exemptions were eliminated under the Tax Cuts and Jobs Act for tax years 2018 through 2025. The option mentioning Gross Income minus tax credits is incorrect because taxable income is determined before tax credits are applied; tax credits directly reduce the amount of tax owed but do not factor into the computation of taxable income. Lastly, using AGI plus Standard Deduction does not