Difference Between Assessable Income & Taxable Income

Taxes. Nobody likes paying them, but governments rely on them to fund the services you use every day. If that's not a motivating factor, the government makes it illegal not to pay them. However, this doesn't mean you can't use all the information in the tax code to shrink your assessable income into a much smaller taxable income.

Your assessable income is the amount of money you've made that is subject to the income tax. This is the sum of all the money you've made from your job, selling property, selling certain investments or any side work that you've done during a given year. Certain items are exempt from taxation, such as allowances for food and living expenses that the government pays military personnel in addition to their base salaries. Some pensions, such as pensions for individuals who were medically retired from the military, are also exempt from taxation.

Your taxable income is the portion of your assessable income that is actually used to calculate how much you need to pay in income taxes. You can decrease the amount of your assessable income that will be used for taxes by subtracting different tax writes-offs from that amount. For example, as of 2011, if you have a student loan you are still paying off, you can deduct the interest on that loan from your assessable income to get a smaller taxable income.

The government allows individuals and businesses to write off expenses that help fuel the economy. As mentioned above, individuals can write off the interest on student loans. Education helps individuals get better jobs and fill the more advanced needs of firms, so it is beneficial for the government to encourage individuals to pursue a higher education. Businesses can also write off the costs of growing their operations, such as the amount they paid for new machines and computers. The more a business grows, the more people it can employ.

The system of different tax write-offs and other aspects of the current tax code are not universally popular. For example, many of the tax write-offs are only available to very large businesses and are outside the reach of individuals or small businesses. This leads many, such as Daniel J. Mitchell of the Cato Institute, to support replacing the current system with one that has everyone, regardless of how much they make, pay the same flat percentage of their income in taxes.