Taxation officers are required to compute the taxable income for the purpose of determining income tax. For this purpose, all incomes are typically added up. No matter what the source of the income is, the taxation office will take the sum of all your income to calculate the final income tax.
After calculating the total income (sum of all income) the taxation officer takes into account the deductions and expenses which were made as part of generating income. Depending on the country you reside in, the deductions or expenses are subtracted from the net value to give a figure which will be used to find tax at rates defined by the federal government.
Large companies and even small scale businesses enjoy the luxury of paying reduce income tax as the investments and operational expenses are subtracted from the total value to arrive at taxable income. Expenses such as interest on home loans, business loans and education of children are also deducted from taxable income.
Adjusted gross income:
As discussed before, adjusted gross income is always more than your taxable income. Some specific items are subtracted from net income to determine the adjusted gross income. Income tax is calculated by taking into account the adjusted gross income and not the taxable income. Profits made from selling or renting property, cars and other similar objects fall under this category.