What is Gross Income

Several times you've heard people, mainly accountants, while calculating taxes, using the terms 'gross profit', 'net income', 'gross annual income', etc. Many, who do not come from an accounting background, do not follow these terms. They keep wondering what is gross income? So for them, here is a simple explanation of what we actually mean by gross income.

Definition

When you get your salary, you will notice that the word gross income is mentioned in your pay slip. It is the total amount that you make before all the taxes have been deducted. Gross income can also be called gross profit. In order words, you can also say that gross income is the sum total of all the income, that a person or company makes. The source of the income, is not that important. The various things this income usually includes are:

• Rents
• Royalties
• Interest
• Dividends
• Any gains that you or the company has derived after making dealings in property
• Pensions
• Any income related to decedent
• Any income from life insurance
• Income from endowment contracts
• Annuities
• Income from any interest in an estate or maybe trust
• Some sort of compensation for any services which includes fees or commissions or fringe benefits
• The gross profit that has been derived from business
• The gains derived from any dealings in property
• Alimony
• Separate maintenance payments

Many people do not know the difference between gross income and net income. Now, no longer will you be confused about the difference between gross and net income. So, net income of a business is what remains from the gross profit, after you have deducted all the costs of the business such as the depreciation, interest, tax deductions, etc. For a person however, the net income is simply what remains, after, from the gross profit, you deduct the allowances and the deductions. This is done to find out what is the amount of income tax the person has to pay. Thus, now I hope, you no longer will be confused between gross income and net income. So, now that you know what is gross profit, let us now see some other terms which are also related to gross income; gross annual income and adjusted gross income.

Gross Annual Income

It is pretty clear from the name itself, what gross annual income can actually mean. It is the total gross income that you have made over the entire year. It is your total yearly income before any sort of deductions such as tax. Suppose, I earn a monthly salary of USD 3000, then my yearly salary will be USD36000. This is the gross income before deducting all the taxes and the figure of USD 36000 is my gross annual. The amount that I will take home by the end of the year after deducting my taxes from the gross income, is the total net income.

Adjusted Gross Income (AGI)

The Internal Revenue Service or the IRS uses the AGI in order to find out whether the tax payer is eligible for some of the tax benefits. If you want to know how to calculate the AGI, here's how. First you have to find out your gross income and then from that, you have to deduct the qualified deduction i.e. moving expenses, and alimony, 50% of the self employment tax, health insurances, interest on student loans, etc. All these have to be subtracted from the gross income. The adjusted income is also called the net income. If you see the first page of the IRS form 1040 and 104A, you will see that the entire section deals only with the adjusted gross income. Some people tend to confuse AGI with the modified adjusted gross income, which is almost similar to the adjusted gross profit, except for certain factors which are not included in the former. They are passive income and losses, student education fees, interest on student loans, taxable social security, etc. Modified gross income is higher than AGI, but always lower than the gross profit.

So, now you are clear as to what is meant by gross income. Henceforth, while calculating taxes or your annual salary, you will not find it confusing any more in following these terms. So, next time, when you see the accountant calculating something using terms like gross profit or profit etc, you can join in and help him too!