You might be surprised to learn that there’s a variety of different kinds of income. Most people just use the word income for the money they bring home from doing their jobs each week and year.
Yet, both your employer and the IRS have different terminology for your income. Your employer focuses on your gross income and your net income. The IRS wants to know about your gross income and your adjusted gross income.
So, what is adjusted gross income vs. gross income? How are they different, and how does each number matter at tax time?
Read on for a full tutorial on gross income, adjusted gross income, and when each matters most.
What Is Adjusted Gross Income Vs. Gross Income?
While both gross income and adjusted gross income share the word income, you actually need to know gross income to get to your adjusted gross income.
You will find your gross income on your W-2 at the end of the year. You can also see it on your paystub at the end of the year when you look at your year-to-date column.
Your adjusted gross income gets calculated on Form 1040 from the IRS when you do your taxes.
You can look at pay stub information and find your income. Your gross income is the amount of money you make before any taxes, or deductions get taken.
On your paystub, you can see your pay period gross income. It will show the amount you made in that pay period; then, the taxes get taken out by your employer along with other deductions.
After all taxes and deductions get removed, you have your net income or the amount of money you bring home in a pay period.
Gross income can also be the amount you make in a year before anything gets removed from the pay.
Adjusted Gross Income
Your total gross income for the year is used to calculate your adjusted gross income. You can get this number from your W-2. But you can also get it from the last paystub for the year. You would look at the year-to-date column.
Adjusted gross income is the amount of taxable income the IRS thinks you have.
You start with your gross income, then subtract common deductions like:
- Educator expenses
- Business expenses
- Alimony payments
- Health savings account deductions
- Student loan interest
Once you subtract these deductions, you get your adjusted gross income, which is the amount the IRS expects you to pay taxes on for the year.
Calculating Adjusted Gross Income
As you consider calculating AGI, you’ll need to know what deductions you’re eligible to take with the IRS.
The calculation is pretty simple. You start with your gross income, subtract deductions, then you have your AGI. The important thing for the IRS is that you’re eligible for the deductions, and you can prove it.
Your AGI is important to you because that’s the amount the IRS bases your taxable income on. If you’re curious about your adjusted gross income, you can find an AGI calculator from various online sources.
Gross Income Vs. Adjusted Gross Income, Know the Difference
Understanding what is adjusted gross income vs. gross income is key to understanding how to read both your paystub and your W-2. It can also incentivize you to look for deductions to lower that AGI number at tax time.
If your company wants to create a custom paystub for your employee information, definitely check out the pay stub maker today!