Gross Income vs. Adjusted Gross Income: What's the Difference?

By Indeed Editorial Team

Published July 7, 2021

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Understanding terms related to income and their various uses is important for both individuals and businesses to ensure legal and financial compliance with tax laws and other regulations. There are different ways to measure income, such as gross income and adjusted gross income, that can affect benefits eligibility, the deductions a person might receive and how business owners report their company and individual incomes. If you want to maintain proper financial records and ensure you pay the proper amount in taxes, it may be beneficial to understand the differences and similarities between gross income and adjusted gross income.

In this article, we discuss the definitions of and differences and similarities between gross income and adjusted gross income.

What is gross income?

Gross income, or annual gross income, is the total amount of money a person earns in a year before paying taxes. This includes:

  • Wages and salaries reported on W-2s

  • Tips and bonuses

  • Money from items sold

  • Alimony received

  • Rental property payments

  • Pension

  • Unemployment

  • Capital gains

Federal and state governments often automatically collect taxes and certain deductions from a person's gross income amount.

Read more: Gross Income: Definition and How To Calculate It

What is adjusted gross income?

Adjusted gross income is the portion of a person's gross income that is taxable. There are certain itemized deductions and exemptions on a person's income that decrease the amount of gross income on which a person owes taxes. For example, student loan interest rates and educator expenses are two amounts subtracted from a person's income to calculate their adjusted gross income. To calculate an adjusted gross income, simply subtract all qualified deductions from your gross income.

Related: How To Calculate Adjusted Gross Income for Taxes, Step by Step

Differences between gross income and adjusted gross income

Understanding the relationship and differences between gross income and adjusted gross income can help you understand when a person might use each figure and why they're both important. Here are some areas in which it's helpful to compare these two types of income:

Taxes

Taxes are the amount of money individuals and businesses pay to fund state and federal revenue programs, and individuals pay a percentage of their gross income each pay period in taxes. The dollar amount difference between gross income and adjusted gross income can vary based on your available tax deductions, but your adjusted gross income is always a lower dollar amount than your gross income. Sometimes, the difference between these two can lead to placement in different tax brackets.

For example, if someone earns $100,000 before taxes and deductions, they might be in a tax bracket where they pay 25% annually in taxes, or $25,000. However, if this person paid $10,000 in student loan interest and $5,000 in education expenses, their adjusted gross income would be $85,000. This might drop them into a lower tax bracket where they may only owe 23% in taxes, or $19,550.

Program eligibility

Loan providers, mortgage lenders and landlords often analyze a person's gross income to determine eligibility for certain loans or ability to pay monthly rent. Gross income is a figure with which most borrowers are familiar and is often optimal for highlighting financial reliability. Some factors that affect an individual's adjusted gross income can change, so gross income is a more stable figure. They also might consider other factors such as credit score or debt when determining a person's eligibility for programs or tenancy.

Other programs, such as retirement programs or health spending accounts, might consider eligibility by viewing an individual's adjusted gross income.

Related: Q&A: What's the Difference Between a Pension and 401(k)

Businesses

Businesses report their gross income in a similar fashion to individuals. However, while individuals have both gross and adjusted gross incomes, a company has a gross and a net income. A business's gross income is the total amount it earns in a given period, and its net income is the amount of profit it makes after expenses. For businesses, the primary figure considered in tax returns is their net income.

Deductions

A deduction decreases the amount of money for which state and federal governments can tax an individual. Some of the most common deductions individuals can claim include:

  • Self-employment taxes: If a person is self-employed, they can likely claim up to half of their taxes they might pay.

  • Health insurance: If a person is self-employed, they can often deduct the amount they spend on health insurance.

  • Student loan interest: If someone pays a certain amount in student loan interest, they can usually subtract that amount from their taxable income.

  • Alimony: If someone pays spousal support after a divorce, they can typically deduct a portion of what they pay.

  • Property taxes: Depending on location, a person might qualify to deduct a portion of their property tax to lower their taxable income.

The total income after an individual subtracts all their deductions is the amount that the Internal Revenue Service (IRS) considers taxable.

Related: What Are Itemized Deductions? (With Examples)

Exemptions

An exemption is a person's right to exclude income from their taxable income. Exemptions, like deductions, are ways people can lower their taxable income. These can be personal exemptions such as government revenue, bonds or disaster relief or dependent exemptions such as children. Tax-exempt businesses, such as charitable organizations, or standard businesses still only report their gross income.

Other common income terms to consider

There are a few additional income figures that individuals might report on their tax forms. Here are some others that individuals might encounter:

Annual net income

Annual net income is a third category of income that describes the money a person receives after deductions, including taxes. While an adjusted income is the amount earned before taxes, net income is lower once a person pays taxes. Besides individuals, businesses also calculate their net income by subtracting gross income from expenses and any deductions.

Related: Gross Pay vs. Net Pay: Definitions and Examples

Modified adjusted gross income

An individual might change their adjusted gross income if there are certain deductions they can add back into their income total. For example, though someone might not pay taxes on this higher, modified number, programs might use it to determine eligibility for certain programs. Modified adjusted gross income is important because it can provide accounts such as individual retirement accounts (IRAs) or Medicaid with income figures prior to deductions, giving them information on how much an individual earns despite how much they pay in taxes.

Please note that none of the companies mentioned in this article are affiliated with Indeed.

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