To understand the difference between income and taxable income, we'll go through each term and examine what it means:
1. Income: This is the total amount of money earned by an individual within a certain period, usually a year. In the chart provided, the income is \[tex]$50,000.
2. Deductions: These are specific amounts that can be subtracted from the income to arrive at the taxable income. Deductions might include items such as mortgage interest, charity donations, and certain work-related expenses. In the chart, deductions amount to \$[/tex]8,950.
3. Taxable Income: This is the income amount that is subject to taxes, determined by subtracting the deductions from the total income. According to the chart, the taxable income is \[tex]$41,050 (\$[/tex]50,000 income - \[tex]$8,950 deductions).
4. Taxes and Tax Credit: Taxes owed are calculated based on the taxable income. Tax credits are amounts that can reduce the amount of taxes owed directly. The chart indicates that taxes totaled \$[/tex]7,090, and after applying a tax credit of \[tex]$1,500, the taxes owed were \$[/tex]5,590.
Given these explanations:
- Income is the total amount earned.
- Taxable Income is what remains after relevant deductions are subtracted from the income.
Now, let's analyze the options provided:
1. Income is what a person earns, while taxable income reflects deductions subtracted for relevant expenses.
- This option correctly defines that deductions are subtracted from the total income to obtain the taxable income.
2. Income is what a person earns, while taxable income reflects what is left after paying federal taxes.
- This is inaccurate because taxable income is calculated before taxes are paid.
3. Income is what a person earns, while taxable income reflects what is left after paying local and state taxes.
- Similarly, this is incorrect because taxable income is calculated without considering the payment of any taxes.
4. Income is what a person earns, while taxable income reflects what is received from the IRS in a tax refund.
- This is incorrect. A tax refund refers to the amount returned to a taxpayer after taxes have been calculated and paid, not to the concept of taxable income.
Thus, the correct explanation is:
Income is what a person earns, while taxable income reflects deductions subtracted for relevant expenses.
