Difference between Gross Income and Adjusted Income

When preparing a tax return, what is the difference between gross income and adjusted income?

Gross income includes all taxable income from whatever source derived. (There are many exceptions to what is included in gross income and I won’t delve into it here). Adjusted gross income is your gross income adjusted by certain expense/credits. For example, if you contributed to a traditional IRA/401k you can reduce your gross income by some of these payments. So, while you may have earned 100K in 2013 as gross income, your AGI (adjusted gross income) may only be 90K after adjusting for certain expenses/credits.


Gross Income

Your gross income includes all of your income that you received that isn’t exempt from income taxes. It does not include any losses. For example, if you have $60,000 in wage income and $3,000 in net stock losses, your gross income would be $60,000. Gross income does include your net business income. For example, if you’re self-employed and have gross receipts of $90,000 and business expenses of $50,000, your gross income would be $40,000.


Adjusted Gross Income (AGI)

Your adjusted gross income equals your gross income minus your adjustments to income. Sometimes adjustments to income are informally referred to as above-the-line deductions, because you can take them without itemizing. Examples include your deductible traditional IRA contributions, alimony paid, health insurance if you’re self-employed and student loan interest.


Difference between Gross Income and Adjusted Income

Other deductions, such as the standard deduction, itemized deductions including mortgage interest and charitable deductions and exemptions aren’t used to figure your adjusted gross income.