Budgets and Money

Gross Income and Adjusted Gross Income Differences

Knowing what you earn before taxes and deductions is an important figure to be familiar with, but it is also important to know what that number is after taxes and deductions.

Personal Financial Planning: Understanding the Differences Between Gross Income and Adjusted Gross Income

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 or other deductions. If you're a business, your annual gross income would be your company's revenue, less any business expenses (it may also be referred to as your gross profit).

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 deductions that you may qualify for. These deductions or “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 deductions include contributions to your traditional IRA, student loan interest, medical and health insurance expenses, 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.

1. http://www.irs.gov/publications/p501/ar02.html#en_US_2014_publink1000220698
2. http://www.irs.gov/uac/Definition-of-Adjusted-Gross-Income

 

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Personal Financial Planning

Personal financial planning encompasses many different elements, including taxes and tax planning. Whether your personal financial plan includes doing your own income taxes, or if it includes enlisting the help of a tax professional, it's a good idea to know the difference between your gross income and your adjusted gross income. For more information, visit the Protective learning center.

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