How is the taxable income calculated for taxpayers who itemize their deductions?

The taxable income for taxpayers who itemize their deductions is calculated by taking the adjusted gross income (AGI) and subtracting both the total itemized deductions and total exemptions. This method captures all allowable deductions that a taxpayer may claim, which results in a more precise measure of income that is subject to taxation.

To break this down, the calculation begins with the AGI, which can include various adjustments to gross income, such as contributions to retirement accounts or student loan interest. From the AGI, the taxpayer then subtracts their itemized deductions, which may consist of expenses like mortgage interest, medical expenses, and state and local taxes. Additionally, personal exemptions (depending on tax law, as these have been eliminated for tax years 2018-2025 by the Tax Cuts and Jobs Act) would also be deducted to reach the taxable income figure.

This calculation is essential as it determines the income upon which tax rates will be applied, ensuring that taxpayers pay tax only on the income that exceeds their deductions and exemptions. Understanding this process is key for tax preparers to ensure accurate filings and advise clients effectively.