For tax purposes, "gross income" is all the money a person receives in a given year from any source. But income taxes are levied on "taxable income" rather than gross income. The difference between the two is the result of many exemptions and deductions. Suppose you made $75,000 last in wages and $12,00 from investments, and were given $3,000 as a gift by your grandfather. Also assume that you are married and are filing a joint return. What is your gross income? Gifts of up to $14,000 per year from any person are not counted as taxable income. Also, the "personal exemption" allows you to reduce your taxable income by $4.050 for each member of your household. Given these exemptions, what is your taxable income? Next, assume you paid $900 in interest on your student loans last put $3,000 into a health savings account (H S A), and deposited $500 into an individual retirement account (IRA). These expenditures are all tax exempt, meaning that any money spent on them reduces taxable income dollar-for-dollar. Knowing that fact, what is now your taxable income? Next, you opt for the standard deduction that allows you as a married couple to exempt another $12, 600 from your taxable income. Taking that into account, what is your taxable income? Apply the tax rates below to your taxable income. How much federal tax will you owe? What is the marginal tax rate that applies to your last dollar of taxable income? Married Filing Jointly or Qualifying Widow(er) What is your average tax rate relative to your taxable income? (to 2 decimal places) What is your average tax rate relative to your gross income? (to 2 decimal places)