How is taxable income calculated?

Taxable income is indeed calculated using the method described in the correct choice. It involves taking the adjusted gross income (AGI) and subtracting either itemized deductions or the standard deduction. The adjusted gross income includes all sources of income minus specific deductions, which are provisions in the tax code that reduce the amount of income for tax purposes.

Once the AGI is established, taxpayers can then either choose to itemize their deductions, which includes things like mortgage interest, charitable contributions, and certain medical expenses, or they can opt for the standard deduction, which is a fixed amount set by the IRS each year.

This process ensures that individuals are taxed on their actual income after considering these deductions, reflecting their capacity to pay taxes more accurately. Therefore, choosing to itemize or take the standard deduction can significantly affect the amount of taxable income, and in turn, the final tax liability.

The other options do not correctly describe how taxable income is determined. Sales income less business expenses pertains to determining net income for a business rather than an individual's taxable income. Gross income minus tax credits does not apply because tax credits are not a subtraction from gross income to arrive at taxable income but a direct reduction from the tax owed. Adjusted gross income plus personal exemptions is