Gross income. Adjusted gross income. Earned income. Net income. Taxable income.
When you’re trying to do your taxes, they all sound the same. And like all things in the world of taxes, it’s the small differences between them that power your return.
Think of income categories as bags of money.
Gross income has potential to be the biggest bag because it includes all the ways you get paid throughout the year.
So that’s your paycheck, sure. Tips, yup. Commissions, bonuses, and — if you’re self-employed — business income minus expenses.
What sets gross income apart is that it also includes more passive income, like earnings from investments and retirement. That big bag of money is full of traditional earnings along with take home money from Interest and dividends, Social Security, and Social Security Disability.
Two more categories to familiarize yourself with that directly relate to gross income: adjusted gross income and earned income.
Let’s start with earned income.
Keeping with the idea of big bags of money, earned income has much of the same stuff as gross income, but without the passive revenue streams. It is the money you’re paid for working, along with certain pre-retirement disability benefits. Think of earned income as gross income, minus the investments and retirement.
If you work for someone else, work for yourself or run a farm, the taxable money you pull in automatically qualifies as earned income. See the full IRS list here.
AGI, or adjusted gross income, is a different animal.
This is your gross income with above the line deductions applied. Above the line deductions are available to everyone, regardless of whether you’re itemizing or taking a standard deduction.
These deductions (known as “adjustments to income”) make your gross income amount smaller. When your gross income is smaller, you pay fewer taxes on it — and fewer taxes are a very good thing.
Here are a few common AGI deductions that many people claim:
- Certain retirement plan contributions
- Half of the self-employment tax
- Healthcare savings account (HSA) deductions
- Some alimony payments
- School tuitions, fees, and student loan interest
- Jury duty pay turned over to a filer’s employer
Think of adjusted gross income as gross income, minus above the line deductions. See the full IRS list here.
Before you decide to itemize or take a standard deduction, apply above the line deductions to your gross income. The number you’re left with is your AGI.
You don’t have to master tax terminology to maximize your refund: You have TaxAct. And we’ll help you find each deduction, crunch the numbers, and keep more money in your pocket. It’s already yours: you’ve earned it.
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Source : TaxAct Blog