To explain the difference between income and taxable income, let's break down the terms step-by-step:
1. Income:
- This is the total amount of money a person earns. In the provided chart, the income is [tex]$50,000.
2. Deductions:
- These are specific expenses or allowances that can be subtracted from the total income to reduce the taxable amount. In the chart, the deductions are $[/tex]8,950.
3. Taxable Income:
- This represents the amount of income that is subject to taxes after all allowable deductions have been subtracted. In the chart, after subtracting the deductions of [tex]$8,950 from the income of $[/tex]50,000, the taxable income is [tex]$41,050.
4. Taxes:
- This is the amount of money calculated based on the taxable income. For a taxable income of $[/tex]41,050, the taxes calculated are [tex]$7,090.
5. Tax Credit:
- This is an amount that directly reduces the tax owed. In the chart, the tax credit is $[/tex]1,500, which reduces the amount of taxes owed.
6. Taxes Owed:
- This is the final amount a person must pay after deducting any tax credits from the taxes calculated. Here, the taxes owed are $5,590.
Considering these explanations, let's focus on the options provided:
- Income is what a person earns, while taxable income reflects deductions subtracted for relevant expenses:
This statement correctly matches the definitions we have outlined. Income is the total earnings, and taxable income is what remains after deducting relevant expenses (deductions).
- Income is what a person earns, while taxable income reflects what is left after paying federal taxes:
This is incorrect because taxable income is determined before federal taxes are applied.
- Income is what a person earns, while taxable income reflects what is left after paying local and state taxes:
This is also incorrect because taxable income is calculated before any taxes, including local and state, are deducted.
- Income is what a person earns, while taxable income reflects what is received from the IRS in a tax refund:
This is incorrect as well. Taxable income does not deal with refunds; it is the amount on which taxes are calculated.
The correct explanation is:
Income is what a person earns, while taxable income reflects deductions subtracted for relevant expenses.
