[1] The formula begins with the taxpayer's gross income, as defined by the Internal Revenue Code § 61(a).
From gross income, the taxpayer may subtract the amount of any deductions listed in § 62(a) ("above-the-line deductions") to arrive at an adjusted gross income.
The taxpayer then subtracts the appropriate amount for personal exemptions under § 151(d)(1) (as adjusted annually for inflation under § 151(d)(4)).
Finally, the taxpayer subtracts either the appropriate standard deduction under § 63(c) or the total of itemized deductions under § 63(d) to arrive at the taxpayer's taxable income for that tax year.
Taxable income serves as the base against which the taxpayer's tax rate is applied.