How is taxable income calculated?

Taxable income is calculated by taking gross income and subtracting exemptions and deductions. Gross income encompasses all income received in the form of money, goods, and services that are not excluded from taxation. The next step is to deduct any allowable exemptions, which reduce the amount of income subject to tax, and deductions, which can include standard deductions or itemized deductions.

This method reflects the principle of assessing an individual's ability to pay tax, as it accounts for necessary living expenses and personal circumstances that may lower the overall tax liability. By applying exemptions and deductions to gross income, the calculation arrives at a more equitable representation of an individual's taxable income.

Other choices do not align with this definition. Total assets are not relevant to taxable income calculations, as they encompass all that a person owns rather than income earned. Net income does not incorporate the correct approach to computing taxable income, and gross income plus exemptions does not follow the legitimate formula for determining taxable income.