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Gross Income and Adjusted Gross Income: What’s the Difference?

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What we’ll cover:

  • Gross income and adjusted gross income are some common income tax terms that you may come across on your federal tax return
  • Gross income is the total amount of money you make in a year before taxes 
  • Adjusted gross income is your gross income minus any deductions you’re eligible to claim 

Come tax season, you’re reminded of just how many different terms the IRS has when it comes to describing your hard-earned money. 

Let’s take income, for example. There’s gross income, which is the total amount of money you make in a year before taxes. And then there’s adjusted gross income (AGI), which is your gross income minus any deductions you’re eligible to claim. 

Figuring out your gross income and AGI is one of the first steps to calculating how much tax you may have to pay to the federal government (and state, if applicable) for the year. Fun times. 

Then there are also terms like taxable income and modified adjusted gross income. (Don’t worry, we’ll break these down for you later.)

Ahead, we’ll go over some of these basic income tax terms and learn why the difference between them matters. Even if you have an accountant to help you sort all this out, it’s still a good idea to have a basic understanding of these terms. That way, when you review your tax return, you can make sure the numbers actually make sense. 

And if you’re already familiar with them, consider this a refresher – hey, it might just help you win that tax argument at the dinner table (no need to invite us over). 

What is gross income?

Before we can talk about AGI, we have to start with your annual gross income. This is the total amount of income you make in a year before taxes. It can include your salary, bonuses, interest income, capital gains and other sources of income, like retirement distributions. 

Wouldn’t it be nice if our gross income was actually the amount of money we took home? But for many people, their take-home pay (or net income) is usually less than their gross income.

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That’s because gross income is subject to taxes (like Social Security and Medicare) and other deductions (such as retirement contributions), which your employer usually subtracts from your gross pay before sending you your paycheck.

If you’re curious to see how much is taken out of your gross pay and where it’s going, take a look at your old pay stubs. 

What is adjusted gross income?

Once you know your gross income, you can calculate your adjusted gross income or AGI.

When it’s time to prepare your federal tax return, your AGI is an important number. That’s because it’s the starting point to determining your taxable income – which is basically the amount of income that you’re expected to pay taxes on. 

So how do you arrive at your AGI? According to the IRS, you take your gross income and subtract certain “adjustments to income.” 

Adjustments to income can include retirement contributions, alimony payments and student loan interest. We could go on, but we don’t want you to fall asleep before you finish this article. See IRS Schedule 1 (Form 1040) for a list of adjustments you could claim.

Deductions and credits could help lower the amount of tax you owe, but certain ones are subject to AGI limitations. 

This may sound obvious, but because of these adjustments (or subtractions) to your gross income, your AGI will never be more than your gross income on your return. In fact, if you are able to claim adjustments, your AGI may be lower than your gross income. 

Your AGI is also important because it helps determine which tax deductions and credits (and how much of them) you may be eligible to claim. 

Remember, deductions and credits could help lower the amount of tax you owe, but certain ones are subject to AGI limitations. 

For example, when it comes to the deduction for medical and dental expenses, you’re only allowed to deduct the amount of your total expenses that exceed 7.5% of your AGI. 

See IRS Topic No. 500 for the eligibility rules to some common tax deductions. 

This is important: Eligibility for some deductions and credits is based on your modified adjusted gross income or MAGI – instead of your AGI. We’ll go over this in the next section.

Good to know: If you file your federal taxes electronically, you typically need to know your AGI from the previous year in order to sign and validate your return for the IRS.

Wait, what is modified adjusted gross income?

Broadly speaking, to calculate your MAGI, you start with your AGI and add back certain deductions and adjustments. 

Now, get excited: The IRS has different tax worksheets to help you out, depending on what you need to calculate your MAGI for. For instance, there’s Worksheet 1-1 to help you determine your MAGI for traditional IRA purposes. Or you could use Worksheet 2-1 to figure your MAGI for Roth IRA purposes.

Because everyone’s financial and tax situation is different, consult a tax professional.

If you contribute to an IRA, you may already be familiar with the MAGI contribution or deduction tables.

Figuring out your MAGI can help you determine things like how much of your IRA contribution is deductible (if you’re eligible to claim a deduction) and how much you can contribute to a Roth IRA (if at all). 

The bottom line

Gross income, AGI and MAGI are some common income tax terms that you may come across while working on your federal tax return. 

Although they may sound similar, these terms have different definitions and purposes in the eyes of the IRS. Together, they can help you figure out things like your taxable income, tax liability and eligibility for certain deductions and credits. So, it’s a good idea to get comfortable with these concepts. (We hope this rundown has been helpful!) 

Bear in mind that what we’ve covered today are just the basics. Because everyone’s financial and tax situation is different, consult a tax professional if you have any questions or concerns about the numbers on your tax return. 

This article is for informational purposes only and is not a substitute for individualized professional advice. Individuals should consult their own tax advisor for matters specific to their own taxes and nothing communicated to you herein should be considered tax advice. This article was prepared by and approved by Marcus by Goldman Sachs, but does not reflect the institutional opinions of Goldman Sachs Bank USA, Goldman Sachs Group, Inc. or any of their affiliates, subsidiaries or division. Goldman Sachs Bank USA does not provide any financial, economic, legal, accounting, tax or other recommendation in this article. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice.  Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA or any its affiliates. Neither Goldman Sachs Bank USA nor any of its affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of the statements or any information contained in this document and any liability therefore is expressly disclaimed.