Gross Income

What is Gross Income?

Gross income means the total income a person earns from all sources before any taxes or deductions are taken out. This includes wages, profits, interest, rental income, and other earnings.

For example, if an individual's total income from consulting services totals $300,000, the figure represents the person's gross income. Creditors and landlords use a person's gross income to determine whether they are trustworthy borrowers or tenants. Gross income is the starting point for calculating the amount of tax owed when submitting state and federal tax returns, with allowances subtracted.  

When preparing financial reports for businesses, gross earnings, also known as gross margin, are defined as the revenue from selling goods or services less the cost of goods sold.

A company calculates its gross earnings to assess how well the part of its business dealing with a certain product performs. Organizations can determine what is resulting in success or causing failure more precisely by using gross earnings and limiting the expenses for their business analysis.

The income from leasing properties, selling goods and services, intellectual property, capital gains from investments, and other sources could be among the revenue streams. The statement of earnings and losses includes a component called gross margin.

What is AGE (Adjusted Gross Earnings)?

Your entire gross income, less some adjustments, is the adjusted gross earning. The annual income tax obligation is determined by the Internal Revenue Service (IRS) using an organization’s adjusted gross earnings (AGE). Being a business owner, the amount represents your whole taxable income for the year, minus any applicable special adjustments. Deposits into health savings accounts, educator expenses, and deductible conventional IRS installments are common instances of qualifying reductions that lower adjusted gross earnings.  

What is Adjusted Gross Income?

The number one figure in your financials is the Adjusted Gross Income (AGI). It determines a range of financial choices and opportunities and is the basis for calculating your tax liability.

1. Tax Calculation: 

The first step in determining your taxable income is to determine your AGI. Your taxable income can be calculated by deducting the usual or specified deductions from AGI. The federal tax rate and total tax liability are calculated by the IRS rules using the taxable income.

2. Qualification for Tax Benefits and Reductions: 

If you qualify for particular tax credits and deductions, it also depends on AGI. The eligibility for certain benefits, including education credits, credits for retirement savings contributions, or deductions for medical expenses, etc., increases with a decrease in your adjusted gross income (AGI). This can directly lower your total tax liability or possibly raise your refund.

3. Affordability Requirements for Financial assistance and other possibilities: 

Your AGI is utilized for purposes other than taxes to establish your eligibility. Lenders or landlords, for example, may use your AGI when you apply for a mortgage to determine your ability to pay back the loan and make rent. Similar considerations are made when requesting government assistance, student loans, or financial help. The likelihood that your case(es) will be approved for financial assistance, and/or get favorable loan conditions can both be increased with a high AGI.

How to calculate AGI? 

Because it encompasses more than simply your pay, your Adjusted Gross Income isn't shown on papers such as your W-2 or 1099. You must total up all of your income sources, including wages, savings account interest, and any additional income that might not be shown on your W-2, to determine your AGI.
Establish your gross revenue first to calculate your AGI. This covers earnings from rental properties, capital gains, interest, wages, retirement distributions, stock dividends, alimony, and unemployment payments. Subtract any applicable deductions after that, including self-employment taxes, teacher costs, student loan interest, contributions to retirement or health savings accounts, and qualifying alimony payments. Your After-Deduction Income. The calculation is as follows:

Gross Income – Deductions = Adjusted Gross Income

For the 2024 tax year, the standard deduction for married couples filing joint tax returns is $29,200, while for single taxpayers it is $14,600. The standard deduction is usually taken by taxpayers who do not exceed that threshold, whereas those who do so typically choose to itemize. On its website, the IRS lists all itemized deductions along with the conditions that must be met to file claims. Your eligibility, for several of these rebates and deductions, is also affected by your AGI.
The amounts of credits and deductions you may typically claim, and the amount of money you can use to lessen tax liability, increase with AGI.

How to Calculate Adjusted Gross Income

To calculate Adjusted Gross Income (AGI), you should subtract certain eligible adjustments from total gross income. The formula is:

Adjusted Gross Income (AGI) = Gross Income - Adjustments

Here’s a breakdown:

• Gross Income is the total income you earn from all sources. This includes:
  • Wages from a job
  • Income from rental properties
  • Earnings from part-time work or freelancing
  • Interest income (e.g., from bonds or savings accounts)
• Since they are deemed non-taxable, adjustments are specific costs that you are permitted by the government to deduct from your gross income. These consist of:
  • Education costs
  • Interest on student loans
  • Contributions to retirement plans
  • Contributions to health savings accounts (HSAs).

Example:

Let's take the income of a taxpayer named ABC to calculate AGI:

ABC's Gross Income: $ 50,000 salary

$12,000 rental income

$8,500 from working part-time as an Uber driver

$500 bond interest

Total Gross Income = $71,000

ABC’s Adjustments:

$ 250 in educator expenses

$ 2,500 in student loan interest

Total Adjustments = $ 2,750
 
Now, to calculate ABC's AGI, subtract the adjustments from the gross income:

AGI = $ 71,000 (Gross Income) - $ 2,750 (Adjustments) = $ 68,250

So, ABC's AGI is $ 68,250.

Gross income vs. Net income

An employee’s gross income is earnings before benefits, taxes, and additional wage deductions. And, net income or take-home pay is the sum that remains after every deduction is taken out.