Gross income refers to the total earnings or revenue generated by an individual, business, or entity before subtracting any deductions or expenses. It includes income from all sources, such as 

Gross income measures overall income generation but does not reflect the net profit or disposable income. 

What is Adjusted Gross Income?

Adjusted Gross Income (AGI) represents their total gross income minus specific deductions, known as “adjustments to income.” These adjustments can include contributions to retirement accounts, certain healthcare costs, student loan interest, and alimony payments. 

AGI is crucial in determining eligibility for various tax credits, deductions, and benefits. It also serves as a starting point for calculating taxable income, providing a clearer picture of an individual’s financial situation for tax purposes.

Why is it important to know your Gross Income and Adjusted Gross Income?

Knowing your Gross Income and Adjusted Gross Income (AGI) enables better financial planning and tax management, ensures compliance with tax laws, and facilitates accurate reporting to the IRS.  

Knowing your Gross Income

  • Provides a comprehensive view of total earnings before deductions and taxes.
  • Helps assess your overall financial situation and income sources.
  • Helps in creating realistic budgets and financial plans.
  • Determines borrowing capacity and repayment ability for loans.

Knowing your AGI

  • Factors in deductions and adjustments.
  • Provides a clearer picture of taxable income.
  • Determines eligibility for tax credits, deductions, and benefits. 

Understanding these figures facilitates tax management and compliance and plays a significant role in various aspects of financial decision-making and planning.

How to calculate Gross Income

There are two ways to calculate Gross Income depending on whether you’re calculating for a business or individual. 

Gross Income for Businesses

To calculate a business’s Gross Income, subtract the total cost of goods sold (COGS) from total revenue. COGS includes direct expenses associated with producing goods or services sold. 

Gross Income = Total Revenue – Cost of Goods Sold (COGS)

Gross Income for Individuals

Calculate an individual’s gross income by adding all forms of income, including wages, salaries, tips, bonuses, rental income, interest, dividends, capital gains, and self-employment earnings.

Gross Income = Total Earnings + Other Sources of Income

How to calculate Adjusted Gross Income

Calculate adjusted gross income by subtracting certain deductions and adjustments from your gross income. These can include contributions to retirement accounts, student loan interest payments, self-employment taxes, and other eligible deductions. The resulting amount is your AGI.

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