Accounting Certification Practice Test 2025 – Complete Online Preparation

To determine taxable income, you start with gross income and then subtract allowable deductions. Allowable deductions are specific expenses that the tax law recognizes can reduce the amount of income that is subject to taxation. These can include things like mortgage interest, student loan interest, certain business expenses, and contributions to retirement accounts. By subtracting these deductions from gross income, you arrive at the figure known as taxable income, which is the basis for calculating the income tax owed.

Non-taxable income, capital gains, and investment revenue do not directly contribute to the calculation of taxable income as deductions do. Non-taxable income is not included in gross income at all, capital gains are generally considered part of gross income and may have their own specific tax treatments, and investment revenue is typically included in gross income before deductions are applied. Thus, allowable deductions are specifically the reductions you apply to gross income in order to arrive at taxable income.