When tax time comes around, Americans are often required to become better acquainted with certain tax terms — even if they are not accountants. Thankfully, most of us leave the majority of the tax prep work to the tax experts. However, when it comes to the different ways in which your taxable income can be described, things can get confusing. For this reason, it's a good idea to get to a better understanding of the difference between your gross income and adjusted gross income and how it impacts your personal financial planning.
Your annual gross income
For an individual, annual gross income equals the amount of money that you earned in a year before taxes. If you're a business, your annual gross income would be your company's revenue, less any business expenses.
Because it's your gross income that reflects how much money you made during the year, it becomes an important figure in determining whether you will be required to file a tax return. According to the Internal Revenue Service (IRS), if you're a U.S. citizen, whether or not you must file a federal income tax return depends on your gross income, your filing status, your age, and whether you are a dependent.1 For additional details on who is required to file a tax return, visit the IRS website at www.irs.gov.
Your adjusted gross income
Your adjusted gross income (AGI) is equal to your gross income minus any eligible adjustments that you may qualify for. These adjustments to your gross income are specific expenses the IRS allows you to take that reduce your gross income to arrive at your AGI. Some of these adjustments to income include contributions to your traditional IRA, student loan interest and alimony payments.2 If you're doing your own taxes, you can determine your AGI with an online calculator from a source you trust or there are DYI tax programs that can also help you to determine this figure and guide you through preparing and filing both your federal and state tax returns.
Your AGI is an important calculation not only because it influences your tax bracket, but may determine your eligibility to claim additional deductions and credits that may be available to you when you file your tax returns. Moreover, there are some states that may use your AGI as a base for calculating your state taxable income. For more information on credits and deductions for taxpayers, visit the IRS Website at www.irs.gov.
Disclaimer: This article is meant to be an overview of the difference between the terms gross annual income and adjusted gross income, and is not meant to present or imply any tax advice or guidance. For specific information on taxes, consult with a Certified Public Accountant or other qualified tax professional.